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Steward Health Care reshaping state’s hospital industry

Steward Health Care reshaping state’s hospital industry

By Steve Adams
The Patriot Ledger
Posted Apr 28, 2012 @ 07:00 AM

QUINCY – A wave of acquisitions is reshaping ownership of Massachusetts hospitals, and one company has emerged as the driving force behind much of this activity.

Steward Health Care System, a for-profit company created in 2010, announced its latest acquisition last month of New England Sinai Hospital in Stoughton for $40 million. The pending purchase – which requires state approvals – follows Steward’s acquisition of the Caritas Christi hospital system, Quincy Medical Center, Taunton’s Morton Hospital and others in the last two years. The company now owns 10 hospitals in the state. “Hospitals view (ownership change) as a game of musical chairs,” said Martin Gaynor, a economics professor at Carnegie Mellon University in Pittsburgh. “If they don’t take it up now, they may get left out in the cold once the music stops.”

Steward is not alone. For example, Milton Hospital merged with Beth Israel Deaconess Medical Center in January, and another independent hospital, Weymouth’s South Shore Hospital, is in talks to be acquired by Partners HealthCare, a nonprofit group of eight hospitals.

The transaction activity reflects hospitals executives’ desire to ally themselves with larger institutions as federal health care reforms’ effects sink in, Gaynor said. “We think there’s anticipation of a brave new world once the affordable care act comes fully online,” he said. “Being big will be important.”

Steward’s acquisition of financially-troubled hospitals such as Quincy Medical Center and Carney Hospital in Dorchester has put the spotlight on the company’s strategy. Both hospitals have lost money for years, in part because they serve urban populations that have been affected by cuts in public health insurance, executives say. Carney Hospital President Bill Walczak was terminated by Steward on April 13, said Stephen Weymouth, a Boston attorney and president of the Codman Square Health Care Center board of directors. Walczak is not permitted to comment under the terms of his severance agreement, Weymouth said. “Steward fired Bill Walczak, plain and simple,” he said.

The parting of ways highlights the disconnect between Walczak’s commitment to low-income patients and Steward’s for-profit approach, Weymouth said. Walczak supported a plan for Carney and the health care center to acquire a property near the Ashmont MBTA station as a walk-in medical clinic, Weymouth said. “Bill wanted to develop that as a joint venture and we were not opposed to that at all,” Weymouth said. Walczak’s termination came after just 14 months at the helm at Carney.

“Bill would never have taken the job if he had known he had to turn it around in one year,” Weymouth said. Walczak has since been replaced by Andy Davis, a hospital executive who most recently ran a North Carolina hospital and will join Carney on May 7. One of Davis’ priorities will be improving community access to health care, Steward spokesman Chris Murphy said. “That’ll be something that I’m sure he’ll take a close look at – to work with the community health care systems in Dorchester to meet the significant needs of the community,” Murphy said. Two months after acquiring Quincy Medical Center in September, Steward replaced president Mark O’Neill with its chief restructuring officer, Daniel Knell. O’Neill had been at the job since August.

QMC employees are relieved to have a financially-stable owner in place, said Paula Ryan, chairwoman of the nurse’s bargaining unit. In 2010, the year before Steward acquired Quincy Medical Center, the hospital lost $6 million and was in technical default on some of its debt. So far, Steward has improved the hospital’s appearance by repainting common areas and refurbishing equipment, Ryan said.

Construction of a maternity unit – which had closed in 1998 – will address a strategic mistake made by a previous administration, she said. The union is in negotiations with Steward on a new contract that will address issues including nurse and technician staffing levels. Ryan declined to discuss specifics, but in general she said the union and the company “have a good relationship right now.”

Making sure hospitals’ balance sheets are in the black is expected to be a priority for Steward, which is backed by New York private equity giant Cerberus Capital Management. If it follows the typical private equity model, Cerberus will seek to sell the hospital chain in five to seven years or take it public, said George Moran, a business lecturer at Northeastern University.

New owners will be looking to increase revenues and cut costs through group purchasing and other economies of scale. Larger hospital groups hope they can negotiate better reimbursement rates from insurers, who pay the bulk of health care costs, than independent properties. Some, such as Steward, are experimenting with fixed-payment plans designed to reduce costs. Steward also has launched new insurance products designed to cut premium increases. In conjunction with Tufts Health Plan, Steward this month launched a plan for health care coverage for businesses with premiums up to 30 percent less than typical Tufts Health Plan costs. The plan will be available to all small businesses in Steward’s coverage area.

But some experts worry that a focus on profits could chip away at patient care. Hospitals may refuse to admit patients with certain diagnoses or who use certain insurers, said Stephen Davidson, a professor at the Boston University School of Management.

“While this is a challenge for all systems, I worry particularly about for-profit companies. Their first allegiance is to their shareholders who want generous returns so the share price grows,” Davidson said. The last wave of hospital mergers in the late 1990s led to increasing health care costs, Carnegie Mellon’s Gaynor said. Hospitals’ increased bargaining power with insurers was partly responsible for the increase, he said. “If medical expenses go up, premiums go up, employers pay more and that gets passed on to the workers,” he said. Steward’s deep-pocketed backers enable it to make major investments in its new holdings. Already, more than $100 million has been spent on electronic health record-keeping, Steward spokesman Chris Murphy said. But there’s no guarantee that new technology will improve patient care, Davidson said. The key to improving patient care is leveraging the expertise of medical staff, he said.

Steve Adams may be reached at