Psychiatric Solutions and Bain Capital
The first story was in BusinessWeek in early March:
Psychiatric Solutions Inc., the operator of psychiatric facilities in 32 states, said it has been approached by a potential buyer.
A special board committee will consider possible responses and Goldman, Sachs & Co. has been hired as a financial adviser, the Franklin, Tennessee-based company said today in a statement.
Earlier today, the Wall Street Journal reported the company was in buyout talks with Bain Capital LLC.
Boston-based Bain manages about $65 billion in assets under management, according to the firm’s Web site.
The significance of this story was not initially clear. The proposed deal had not been consummated. Although there may be something jarring about a private equity firm running psychiatric clinics, the clinics were already run by a for-profit corporation.
Detroit Medical Center, Vanguard Health, and the Blackstone Group
About a week later, the Detroit News published a story about another deal,
The Detroit Medical Center is expected to announce today it will be acquired by a private Nashville-based health system that is to invest $850 million in improvements, The Detroit News has learned.
The nonprofit DMC, with nine general and specialty hospitals in Metro Detroit, will be acquired by Vanguard Health Systems, which has 15 hospitals in four states, several sources said. No money is changing hands in the transaction, but Vanguard will assume $300 million in DMC pension obligations and $200 million in bond debt obligations, a source said.
The article further noted,
Vanguard is majority-owned by The Blackstone Group, one of the nation's largest private equity firms, which gives it access to capital for improvements.
This did seem to be a done deal, and one that inspired all sorts of optimism. For example, Tom Walsh, a columnist wrote in the Detroit Free Press,
Just as the bankruptcies of General Motors and Chrysler marked the end of an unsustainable business model for Detroit's auto industry, Friday's deal to sell the Detroit Medical Center to a big for-profit hospital system is a game-changer for the funding and delivery of health care in metro Detroit.
Walsh felt,
three DMC leaders made a bold move -- before it was too late -- to secure access to the money needed to invest in critical technology and top talent.
because,
'We were being choked to death by the nonprofit business model,' Duggan, the DMC CEO, said Friday.
Walsh enthused,
Vanguard's proposed purchase of DMC for $417 million and a promised investment of $850 million more gives DMC a legitimate shot at survival and growth without anywhere near the pain and suffering that the GM and Chrysler retrenchment brought to the region.
It's hard to overstate what a godsend this deal could be for a wobbly city and state where the public sector is in no shape to help a major employer like DMC, if the banks and Wall Street are unwilling to provide capital.
Similarly, Detroit News' editors opined that Vanguard Health
owned by the investment group Blackstone ... promises to plow $850 million into the DMC facilities over 10 years. The cash will modernize all of the hospitals and provide for a major expansion of Children's Hospital.
The upgrades should enable DMC to compete with the best-appointed hospitals in Metro Detroit, and set a new competitive bar for health care in the region.
The most significant news for Detroit is that Vanguard will maintain the DMC's commitment to treat all patients, whether or not they have private insurance.
Caritas Christi Health Care and Cerberus Capital Management
But third time is the charm. Today, the Boston Globe reported,
Caritas Christi Health Care, the state’s second-largest hospital group, is set to disclose today that it has agreed to be acquired by New York private equity firm Cerberus Capital Management in an $830 million deal that hospital officials say will allow the chain to shed debt and make major improvements.
Under the agreement, Cerberus’s first investment in hospitals, Caritas Christi’s management in Boston will continue running the Catholic community hospitals. In addition, Cerberus has pledged to keep the system’s 12,000 employees and won’t sell the hospitals or take them public for at least three years.
The firm said it hopes to expand its hospital holdings nationally and in Massachusetts, potentially making Caritas a more formidable competitor with large Boston hospitals for many routine procedures.
All six Caritas hospitals, including the flagship St. Elizabeth’s Medical Center in Brighton, will remain open and follow the Catholic Church’s ethical and religious directives, among them a ban on abortions. But they would convert from nonprofit to for-profit businesses and begin paying taxes to state and local governments.
This deal is so new that it has not yet generated the sort of breathless enthuisiasm fostered by the Detroit Medical Center/ Vanguard Health/ Blackstone Group deal. But the Fall River (MA) Herald-News did note,
Officials with the Caritas Christi Health Care system and St. Anne's Hospital say an agreement to sell the system to Cerberus Capital Management will have a significant impact on improving services locally.
The agreement with Cerberus, announced Thursday, will not only ensure the system maintains religious and ethical directives, but also infuse the system with millions of dollars in capital to make infrastructure improvements in the system's facilities.
At St. Anne's that will mean vastly expanding the facility's emergency room, and allow for construction of planned operating and recovery rooms. The change will also allow St. Anne's to convert the recently acquired former St. Anne's School into a medical office complex.
'There will be more construction and expansion of the facility than any time in the history of the hospital,' Caritas Christi Chief Operating Officer Robert Guyon said.
It certainly does look like a trend now. In fact, today a Wall Street Journal blogger suggested that this trend may be an immediate, although perhaps unintended result of the health care (insurance) reform legislation that just passed in the US Congress:
Cerberus is planning to turn the Caritas Christi Health Care chain into a for-profit corporation in what it is likely the first sizable M&A bet on the newly minted Obama health-care overhaul law. [seemingly ignoring the Detroit Medical Center/ Vanguard Health/ Blackstone deal - ed]
Hospitals that serve the poor and previously uninsured are expected to benefit from Obama’s plan, which is expected to extend insurance to 32 million previously uninsured Americans. That means such hospitals are likely to have more patients who can actually pay their bills. It is hard not to see how that new cash-flow stream wouldn’t have private equity licking its chops.
That's funny, I did not think that a major reason to pass the bill was to benefit private equity. Also, somehow the image of private equity honchos licking their chops over cash flow does not seem to fit with the breathless pronouncements above about improving quality, serving poor patients, etc.
Will Private Equity and Health Care be Good for Each Other?
In fact, it is not clear that these sorts of deals in the long run will be good for private equity, hospitals and health care providers, or patients. Barely mentioned in the coverage of the Caritas Christi / Cerberus deal was that at least one major past Cerberus deal, ironically located mainly in Detroit, home of the Detroit Medical Center/ Vanguard Health/ Blackstone deal, started with similar enthusiasm, but ended in disaster.
As the New York Times reported in 2009, Cerberus' buy-out of Chrysler was once also heralded with breathless enthusiasm.
'I thought, wow, this really signals a real change in the landscape here,' recalls a person who attended a Cerberus session who asked to remain anonymous because of agreements he signed. 'I guess it gave me hope. The auto companies needed an enormous amount of capital, and where else was it going to come from?
John W. Snow, a former Treasury secretary in the Bush administration and Cerberus’s chairman, also heralded Cerberus as Chrysler’s savior, likening the firm’s investment to the government rescue of Chrysler in 1979.
'Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,' Mr. Snow said at a National Press Club meeting in 2007. 'Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much-needed support.'
However, the end results never did live up to the hype:
For [Cerberus Capital Management CEO] Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.
Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April.
One problem in retrospect seems to be the hubris of the private equity leaders:
Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size.
Even after the beautiful plan turned to ashes, it is still not clear that these leaders realized their limits:
But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. 'I don’t know what we could have done differently,' he says, crossing his arms on his chest. 'From the day we bought it, we worked hard to improve it.'
One wonders if Mr Feinberg has learned more about his previous failure as he now grasps Massachusetts' second biggest hospital system.
Summary
The Chrysler debacle, however, suggests there should be concerns about private equity firms buying out hospitals and other health care providers, for example:
- Will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs? For-profit leaders tend to expect even larger compensation that not for-profit CEOs. Their decisions tend to driven by their short-term compensation, rather than the good of the organization. For-profit corporations are supposed to generate profits for investors which may reduce re-investment in the corporation.
The thirst for more executive compensation may be a driving factor in the deal, as hinted in the Boston Globe coverage of the Caritas Christi/ Cerberus deal:
While [current Caritas Christi CEO Ralph] de la Torre and other senior executives will retain their current salaries and benefits, they would be eligible for additional compensation from Cerberus based on the financial performance of the hospitals, Caritas officials said. They said the details of those financial incentives have yet to be worked out.
- Can private equity cost-cutting techniques and other turn-around techniques really work in the health care environment? The Chrysler/ Cerberus case reveals how private equity leaders may get out of their depth in complex business contexts. Health care is even more complex than the automobile industry.
- Finally, and more important, are for-profit hospitals and health care providers run by private equity really likely to be better at fulfilling their health care missions than they were when they were not-for-profit? I doubt there is any evidence that previous conversions of not-for-profit health care organizations to for-profit status improved health care, much less while simultaneously lowering costs and improving access. (Remember that many big health care insurance companies were once not-for-profit Blue Cross plans. Does Angela Braly's WellPoint provide better care to more people at lower cost?
But then again, when a Catholic charity teams up with an organization named for the three-headed dog that guards the entrance to Hades, maybe they will need to put ski lifts in there too.