Caritas hospitals could carve niche under new owner
By Steven Syre and Robert Gavin, Globe Staff | March 30, 2010
The New York private equity firm that last week struck a deal to buy Caritas Christi Health Care could build the chain of six Catholic community hospitals into a competitive lower-cost provider of medical services in Massachusetts, touting it as a profitable national business model in the age of health care reform, analysts say.
Cerberus Capital Management plans to invest $830 million to acquire Caritas Christi and turn the charity into a for-profit venture. The investment, which includes money to reduce debt and invest in renovations and upgrades, would appear to be a steep price for the Caritas business as it exists today.
But the hospitals could emerge as an attractive lower-cost alternative to Boston’s big teaching hospitals as health care reform moves forward soon in Massachusetts and later across the country. And, as reforms aimed at controlling costs take effect, an increasing number of health insurance policies may well offer patients a choice: Go to a famous teaching hospital and pay more or go elsewhere and spend less.
That could drive additional business to the Caritas network and make it more profitable.
“Caritas is completely committed to pay ment reform,’’ said Ralph de la Torre, Caritas’s chief executive. “A vast majority of our hospitals are on the low end of pay, and we made a profit last year. We are going to lower costs in Massachusetts.’’
If the ambitious plan works, it could eventually mean a sizable payoff for Cerberus and its investors, said Howard Anderson, senior lecturer at MIT’s Sloan School of Management. With a successful health care business, Cerberus could cash out by taking the company public and selling stock to investors, or by selling the chain to another for-profit health care firm.
But don’t expect Cerberus to exit quickly, said Anderson. Caritas would provide the classroom for the buyout firm as it learns the health care business, develops a financial model for hospitals, and builds a reputation that would allow the firm to make other acquisitions. That would take time, Anderson said, and require Cerberus to maintain good relations with employees, communities, and political leaders.
“This is not a one-off. They won’t be trying to wring every ounce of profit out of it,’’ Anderson said. “Caritas becomes the template for elsewhere, and if it works, they can expand it.’’
Massachusetts has a three-year headstart on the nation in expanding health care coverage and appears to be leading the country again in its attempt to tackle rapidly rising costs. Governor Deval Patrick favors a so-called global payment system in which health care providers are paid fixed amounts of money to care for patients rather fees for individual medical services.
Caritas, which also includes a physicians network, could become a new cost-conscious option for more patients under such a system.
“They seem very interested in working with us on what we’re trying to do,’’ Patrick said of Caritas and de la Torre.
As health care reform evolves, analysts say, some patients will still spend what it takes to receive care at prestigious Boston teaching hospitals, such as Massachusetts General Hospital and Brigham and Women’s. But others will choose the more affordable option, said Andrew Dreyfus, an executive vice president at Blue Cross and Blue Shield of Massachusetts.
“If you go to a big academic medical center, you might pay $1,000, but if you go to a low-cost hospital you pay $100,’’ said Dreyfus. “These kinds of [global payment] products are going to become more common in the market, so health plans can offer employers something that doesn’t look like a 15 percent [annual premium] increase. Caritas will be able to capitalize on that situation.’’
For many common procedures, such as childbirth, there’s no evidence that Caritas doesn’t do it as well as Massachusetts General, said Jonathan Gruber, a Massachusetts Institute of Technology professor who specializes in health care economics. “It’s a good bet for the Cerberus guys,’’ Gruber said. “It’s pretty likely people would be willing to pay less, even if it means restricting their choices.’’
For investors like Cerberus, Massachusetts is an ideal place to experiment with a health care model that can profit in more cost-conscious times. The exceptionally high cost of health care in Massachusetts would also make any lower-cost operation stand out, analysts say.
“They knew what they were doing when they came to Massachusetts,’’ said Marc Bard, a health care specialist at Navigant Consulting. “You have some of the highest-cost producers dominating the market, so there’s a real opportunity to capture that second tier of the market. I think they’re using this as a prototype and essentially saying, if it can work here we can certainly make it work in Cleveland or Chattanooga.’’