How Can Caritas Increase Its Profit (And How Will It Likely Increase Its Profit?)

In yesterday’s post, I reviewed the proposed transaction whereby a private equity firm would acquire Caritas Christi HealthCare System in Massachusetts.  Today, I’ll discuss approaches to improve profitability at any health care facility. Tomorrow, I’ll examine some potential exit strategies for Cerberus Capital, which proposes to acquire Caritas.

By the way, yesterday's Boston Globe had another article accepting the premise that the Caritas acquisition would lead to overall health system cost savings.  

All the benevolent talk of lower overall costs notwithstanding, successful delivery systems have to make money, whether they are for-profit or nonprofit.  Without a bottom line, hospitals can’t make investments in new technology, can’t offer the amenities patients demand, and often can’t even keep up with plant depreciation.  So – profit margin is absolutely necessary – for nonprofits OR for for-profts.

There are two ways for health care systems to improve their profit margin:

1.    Decrease costs
a.     Decrease labor cost through substituting less expensive labor (non-union for union employees; physician assistants for physicians)
b.    Eliminate or downsize programs with negative margin.  
c.     Eliminate or scale back money-losing facilities
d.    Fail to make new capital investments

2.    Increase revenue
a.     Increase number of patients seen
b.    Do more procedures on the patients already in the system
c.     Offer a mix of higher margin services
d.    Demand higher unit prices at the negotiating table
e.    Improve rates of collection
f.     Dissuade patients with “poorly paying” insurance from coming to your facility (and use this capacity for patients with “better paying:” insurance.

Decreasing the input costs of health care is the best way to drive increased margin.  Hospitals which figure out how to offer equally good (or better) health care with fewer resource inputs SHOULD gain a competitive advantage.   Increasing efficiency in any business is good – because it increases the overall value delivered to the customer.
However, in health care (and many other fields), it’s a lot more attractive to increase revenue than to decrease costs. Further, through multi-year labor contracts and commitments not to cut back on existing services and facilities --  Caritas has fixed many of its costs over the first years of this new arrangement.  So, to be profitable the system will need to increase revenue.  Many of de la Torre’s changes at Caritas have tilted toward increased revenue capture, including increasing cardiac surgery, use of robotic surgery, and investment in high cost imaging equipment (that once in place tends to be highly utilized.)  Even the new construction at Good Samaritan which will embed a CT scan in the emergency department will clearly raise overall collections for Caritas (thus increasing health care costs.)   Capital will largely be deployed where businesses like to deploy capital – where it will lead to surging revenue.

Increased revenue for the new Caritas system either means that overall health care costs climb further, or that other health care systems will see lower revenue.  Lower revenue is a terrible hardship for hospital systems, which have high fixed costs and therefore must make deep cuts if they suffer relatively small revenue declines.  Some have suggested that an invigorated Caritas will put more downward pressure on prices at the big Boston teaching hospitals. I believe that an invigorated Caritas will make strategic investments that will lead to higher revenue – some of this would be new revenue altogether, which raises overall costs.  Therefore, I’m skeptical that the new ownership is likely to lead to a diminution in the rate of health care inflation.

On the positive side, Caritas has engaged in a number of global payment (capitation-like) contracts - and these are payment methods where lower resource inputs lead to financial success.

In my next post, I’ll discuss Cerberus’ potential exit strategies, and implications for managing health care costs.