MASS. MARKET: Steward’s interest in QMC isn’t that odd after all

MASS. MARKET: Steward’s interest in QMC isn’t that odd after all

By Jon Chesto

Posted Jul 02, 2011 @ 06:58 AM

Last update Jul 02, 2011 @ 07:19 AM

QUINCY —

For sale: A business with as much as $6 million a year in losses, a mountain of debt and a track record of giving up customers to the shiny, big competitors up the road.

With an ad like that, you wouldn’t think there would be any potential buyers banging on the door – let alone a spirited bidding among rivals.

But that’s apparently what happened after the cash-strapped Quincy Medical Center put itself on the block. Steward Health Care System ended up the victor this week, beating out another for-profit company, Vanguard Health Systems.

Steward’s big bet on a money-loser like QMC might seem strange for a firm financed by private equity investors eager for a return. But this isn’t the first time. In fact, Steward has reached deals to buy a number of struggling hospitals since its formation last year. Steward executives hope their unusual approach will take these institutions off life support and revive them to be reliably profitable again.

At a time when nearly every nonprofit hospital in Greater Boston seems to be seeking new dance partners, Steward’s arrival has certainly livened up the party.

To understand why an investor-supported firm would spend good money on troubled hospitals when federal and state reimbursements are getting squeezed, it helps to look at the unique topography of the state’s hospital industry.

The dominance of Boston’s giant academic medical centers makes this market different from almost any other in the country. Many suburban residents trek into Boston for routine procedures, cruising past the lower-cost hospitals that are closer to home.

Until now, nearly all of these hospitals – big and small – have been nonprofit institutions. A year ago, Vanguard had a limited presence here, with just MetroWest Medical Center and St. Vincent in Worcester. Essent Healthcare was the only other for-profit player, with only two hospitals, in Haverhill and Ayer.

Then Steward came along. Private equity giant Cerberus Capital Management bankrolled this for-profit company as a bet on the Caritas Christi executive team, led by CEO Ralph de la Torre, and on the future of community hospitals, in general, in this new world order for health care. The six Caritas hospitals were the first to go. Their conversion in November from nonprofit status generated little opposition. Many of the employees were just simply overjoyed that someone was going to invest in their hospital again.

The scenario played out over and over, in city after city. Essent’s two hospitals were the first to join Steward’s fold. Then there were deals signed in Taunton, Lowell, Woonsocket, R.I. And, of course, Quincy.

Steward spokesman Chris Murphy says Steward officials remain confident these hospitals can turn a profit. Steward’s projections are based on convincing more local residents to get medical care in their hometowns and reversing the market share losses to the Boston behemoths.

Murphy says in most cases, the quality of care is indistinguishable between the big teaching hospitals and the local ones. A small gain in market share, Murphy says, and these hospitals could be in the black again. Some work will be needed, to be sure, to persuade consumers. That’s one reason why Steward commits to making millions of dollars in upgrades at each hospital it plans to buy.

Then there’s the economies of scale that can come with owning what will soon represent nearly one-seventh of the state’s acute-care hospitals. Buying everything from complex computer systems to new linens gets cheaper when you can do it in bulk. Such size also could give Steward more clout when it’s time to hammer out new rates with the health insurers.

Steward is in a good position as the state’s insurers increasingly look to reward patients for picking low-cost hospitals. Nearly all of its hospitals, for example, are on Blue Cross Blue Shield of Massachusetts’ new low-cost tier. Steward is also in a good position as the state shifts toward a global payment model in which health care providers get a set level of reimbursements for their patient populations each year. Murphy says more than 70 percent of privately-insured people coming to Steward hospitals are already part of one of these cost containment plans.

Murphy likes to point out that even nonprofit hospitals are answerable to investors. Because the nonprofits typically obtain capital by issuing bonds, they’ve always had to provide returns to bondholders and keep them satisfied. In a for-profit’s case, Murphy says the shareholders simply fulfill the role that the bondholders played.

The approach still has its skeptics. Deborah Socolar, co-director of the health reform program at the Boston University School of Public Health, says that gap between revenues and expenses isn’t an easy one to close at some hospitals. She says promises of short-term infusions of capital could eventually give way to shareholder demands for substantive returns.

For-profit companies have a longer track record elsewhere in the country, but Socolar says there’s little evidence that they can run hospitals more effectively than their nonprofit counterparts.

That means, at some point, we could be looking at more hospital closures – within Steward’s empire and among the nonprofits. In the Caritas Christi conversion, Steward pledged to keep all six of those hospitals open for at least five years – although it can decide to shutter the consistently unprofitable ones after three. Socolar says she’s doubtful these investors will still be as friendly if the hospitals are losing money five years from now. As a Quincy resident, though, Socolar says she hopes she’s wrong about her concerns.

We know that Quincy values its hospital, judging from everything that has been done to keep it open for the past 100 years or so. Quincy Medical Center will need to stay equally as valuable to Steward and its financial backers for it to survive well into this new century.

Jon Chesto, The Patriot Ledger’s business editor, may be reached at jchesto@ledger.com.

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