The Curious Case of Caritas Christi's Sellout to Hell Hound Cerberus

The largest nonprofit community hospital system in Massachusetts fought before it switched to Cerberus Capital Management in a proposed sellout. The battle of consultants started in 2008. The skirmish pitted Massachusetts Attorney General Martha Coakley's Health Strategy Solutions vs. Caritas Christi's Accretive Health and Wellspring Partners.

Coakley made her report public. Caritas Christi tried to spin it positively, but their reply read acrimony between the lines. Caritas blamed insurance companies for not sending patients their direction. They cited storied teaching hospitals as monopolistic competitors. Caritas would be a market leader, if accountable care organizations were in place . Against the recommendations of the Coakley report, Caritas announced Carney Hospital would remain full service.

Caritas' 2008 990 shows a $33 million payment to Accretive Health for consulting services (source: Guidestar). The distinguished George P. Schultz, former Secretary of Treasury and Secretary of State, sits on the Accretive board as it readies for an independent public offering. Their top three shareholders are two private equity underwriters (PEU's) and the largest Catholic hospital system in America, Ascension Health. Who knew nuns were in bed with the PEU boys prior to the Cerberus deal? Caritas Christi planned to merge with Ascension Health in 2007, but the deal never consummated.

In 2009 Caritas backed out of an insurance joint venture with CeltiCare, due to Catholic teachings. CeltiCare is a division of Centene Corporation, which has Tommy Thompson and Dick Gephardt as board members. A major Centene shareholder is BlackRock. A week before Caritas backed out of the Centene/CeltiCare deal, the state stopped automatically assigning low income residents who hadn’t chosen a plan to the lowest price option, CeltiCare.

Oddly, Catholic ethics prevented Caritas from putting capital into an insurance company, but allowed the sell out of the whole system. Similarly unusual, the state Attorney General spent millions on consultants to reorganize a nonprofit healthcare system. Did Martha have a role in pulling the plug on automatic assignment to CeltiCare, a looming partner for Caritas?

The week before the merger announcement, Caritas CEO Dr. Ralph de la Torre told state officials:

Without proper reform, a wave of consolidation is likely to hit the health sector, given long-standing distortions in pricing and insurance reimbursement.

Nearly three years of Massachusetts reform couldn't save Caritas Christi health system. As most Obama reforms don't start until 2014, expect more sellouts. Private equity underwriters salivate over the prospect of 30% annual returns in the health arena.

Cerberus' new division will be called Steward Healthcare Services LLC. How did Caritas' current stewards shepherd the deal? News report mention an "extensive process to identify, evaluate and select a capital investor."

Will Caritas senior management or board members receive an equity stake in Steward Healthcare? Surely ex-Treasury Chief John Snow and Vice President Dan Quayle will hold a chunk. How will leaders be compensated in the future, i.e. what promises were made on executive and board compensation?

Nonprofit community hospitals are a public asset. Many prior sales created well funded foundations that benefit the community in their absence. The Carney Foundation is listed as an exempt subsidiary, one of 52 Caritas corporations (12 of which are taxable). What will happen to it?

The announcement said Cerberus would provide $400 million in capital improvements. Projects listed include:

• Increasing the size of our overcrowded EDs (originally built between 1954 and 1972)
• 60% of all inpatients come through the ED
  
  • 103 ED treatment bays serving 150,000 patients per year (an increase of 22 bays)

Wasn't health reform supposed to decrease Emergency Room utilization? Certainly, Massachusetts wouldn't need a 20% increase in ED bays, now that citizens have a medical home. Investing millions in the "most expensive avenue of care" fits with PEU's.

Despite management's angelic pronouncement, it's not clear how those served by Caritas Christi's facilities will benefit from the sale to hell hound Cerberus.

Martha Coakley's office will have to decide. Will a Coakley fundraiser at the home of Caritas' CEO have an impact?

P.S. Martha Coakley's Health Strategy Solutions is now advising First Lady Michelle Obama's employer. Accretive Health's founder sits on the University of Chicago board of directors. It's a cozy, but contentious bunch.

Update 11-14-10:  Martha Coakley and the Vatican approved Caritas Christi's sellout. 

Update 1-26-24:  American Prospect summarized the damage Cerberus and Steward Healthcare did to Massachusetts hospitals.  Steward hired a restructuring advisor and may be headed to bankruptcy.