Why Acquisition of Caritas Christi HealthCare System is Not Likely To Lower Overall Health Care Costs

(Part One of Three)
I thought my first post back from vacation would be about the passage of health care reform – but the news from Boston that Caritas Christi, a six-hospital system which has been owned by the Catholic Archdiocese of Boston announced that it intended to sell itself to Cerberus Capital Management.  Many commentators have weighed in on the possibility that this would increase provider competition in the greater Boston area, and that the investment from Cerberus would lower overall health care costs.  The initial Boston Globe article  even said that the acquisition would “turn what had been debt and pension payments into cash flow.” The Globe editorialized in favor of the move, although with a small amount of caution.

In today’s post, I’ll examine the transaction, and hypotheses for how this would lower overall health care costs. The second post will concentrate on how hospital systems make money, and the final post will examine different ways Cerberus could benefit from its investment in Caritas Christi over time.

First, the transaction itself:
Cerberus will put up $830 million, which will allow the system to retire its debt, fund its pension plan, and make some investments and repairs to make Caritas hospitals more attractive to patients.   In exchange, Cerberus will gain ownership of the capital assets of Caritas Christi, which it says it wants to make the nidus for acquiring additional hospitals across the country.    Cerberus has pledged to honor existing labor contracts, continue existing programs, and maintain existing facilities for at least three years, during which time it will not receive any return on its investment (although presumably will be able to pay itself management fees).  The facilities will continue to honor Catholic precepts, and not offer full reproductive services.  As for-profits, the facilities will pay local property taxes (worth $7 million per year to Boston alone according to Mayor Tom Menino.) After the three year period, Cerberus will no longer be obligated to maintain programs, and would be free to ‘cash out’ of its investment.

Ralph de la Torre is quoted as saying “We are committed to being a regional, community-based system that lowers costs.’’  

How could this sale to Cerberus lower costs?

1. Substitution of capital for labor
Cerberus’ new dollars could mean that the system could make investments that would allow it to lower the resource cost of medical care in the future.  However, Caritas’ labor costs are fixed through the end of a four year set of union contracts, so the labor savings will at best be minimal.  Therefore, I conclude that it’s not likely that this new capital influx will lead to lower labor costs at Caritas.

2. Use of capital to decrease other input costs
de la Torre specifically notes that capital to deploy electronic medical records can decrease duplication of services.  That’s true – and much remarked upon – but the marginal costs of duplicated services are quite low, and there is an emerging consensus that EMRs make health care better, but don’t really decrease costs a lot.
3.    Better management
Private equity firms often pick up underperforming companies and impose new, highly disciplined management.   In this case, Cerberus says it will maintain the current leadership team, which has been credited with turning Caritas around.  If there is no change, this is not one of the ways the Cerberus investment will lower overall health care costs.
4.    Make Caritas’ facilities more attractive to patients who would otherwise go to more expensive facilities This is the “we’ll take the business from Partners” argument. The Attorney General’s recent report shows huge cost differentials from high cost to low cost providers, without substantial quality differences.  That report confirms that Caritas is a relative low-cost provider.  If patients choose St Elizabeth’s over Mass General in light of these new investments, costs are likely to be lower.  However, if Caritas Norwood Hospital takes business from nearby Milton Hospital (instead of more expensive South Shore or Brigham and Womens), costs for the overall system will instead rise.

My conclusion is that it’s wildly optimistic to suggest that this capital influx will lead to overall cost savings in Massachusetts.  Undercapitalized hospitals generally have lower costs, while well-capitalized hospitals generally have higher costs.  However, it will be very difficult to turn the application down, as an underfunded Caritas clearly cannot compete against the other health care delivery systems, and the system is an important safety net provider and an important source of jobs in many communities.

Next Post: Improving hospital profitability