Delivery of Care/Opinion

Outrunning the beasts of hell

How one community hospital avoided the fallout of private equity’s investments in health care

Image courtesy of Milbank Memorial Fund

Christopher Koller, the president and CEO of Milbank Memorial Fund, revisits the behind-the-scenes story about how Rhode Island narrowly escaped efforts by the private equity forces of Steward Health Care to purchase Landmark Medical Center, in an essay entitled: "Outrunning the Beasts of Hell: How One Community Hospital Avoided the Fallout of Private Equity's Investments in Health Care."

By Christopher Koller
Posted 6/3/24
As the bankruptcy court is attempting to unravel what happened with the demise of the Steward Health Care and its relationship with private equity and its real estate deals with Medical Properties Trust, Christopher Koller, the head of Milbank Memorial Fund, offers his insights in a story he entitled, “Outrunning the beasts of hell.”
How will the upcoming regulatory decision about the pending decision on the sale of Roger Williams Medical Center and Our Lady of Fatima Hospitals change the health care landscape in the state? How does the decision by legislative leaders to fully fund the Medicaid rate reform recommended by OHIC Commissioner Corey King back in September of 2023 and to implement those increases in rates for Medicaid providers immediately in the FY 2025 budget signal the growing power by community advocates to fight back against the policies of Gov. Dan McKee? When will the victims of the Steward Health Care ponzi scheme be willing to put their careers on the line and speak out about what actually happened? How will the guilty verdicts on 34 separate felony charges change the willingness of some media outlets to serve as willing flunkies for retelling the lies of the former President?
There is a scene in Sesame Street from 2010 where Oscar the Grouch and Danny Devito engage in a kind of one-upmanship, where they “heh heh heh” back and forth at each other. [See link to YouTube video below.]
It is a bit reminiscent of a scene played out at the State House in 2012 when ConvergenceRI, then a reporter for Providence Business News, attempted to question the lobbyists for Steward Health Care, who were trying to influence legislative changes to the law governing the acquisition of non-profit hospitals by for-profit enterprises.
Now that post-mortems are finally emerging about what actually happened with Steward Health Care’s failed attempt to buy Landmark Medical Center and with the acquisition of Landmark by Prime Healthcare, here is what ConvergenceRI wrote for his files about his encounters with lobbyists from Steward Health Care and then an interview with Prime’s Prem Reddy, where “heh heh heh” became an important part of the dialogue.
“Even before any documents are signed finalizing the Landmark sale, it’s not too early for the state to consider putting together a comprehensive post-mortem on the saga.
“For more than five years, Landmark was run by Special Master Jonathan Savage, who was appointed by Superior Court Judge Michael A. Silverstein. There are voluminous records of how Savage and his law firm spent millions of dollars to keep Landmark open. Rhode Island taxpayers deserve a thorough accounting of how the money was spent, and not just an analysis spun by Bill Fischer, who served as Savage’s public relations consultant at $9,000 a month, or $108,000 a year.
“The twists and turns of Landmark’s attempts to find a suitor – often resulting in the hospital being jilted at the last moment – would make compelling reading in any report, should the state – or the R.I. General Assembly – commission someone to write it. Why Steward Health Care decided to pull the plug at the last moment is still unknown – and worthy of examination.
“As a reporter who covered the Landmark story for about four years, what stays with me most when I recall the numerous hearings and courtroom proceedings is the sound of powerful men chuckling, heh heh, heh heh heh, a condescending kind of laughter that Jon Stewart captured so well when he did his impression of former President George W. Bush on “The Daily Show.”
I heard it when I tried to question two of Rhode Island’s top lobbyists, Joseph Walsh and Robert D. Goldberg, at a hearing in early 2012 at the State House, when I asked them about their lobbying efforts on behalf of Steward Health Care to push through legislation that would change the three-year waiting period required for for-profit hospitals to acquire additional nonprofit hospitals in Rhode Island. Both Walsh and Goldberg, standing next to each other, declined to answer my questions, referring me to Steward spokesman Christopher Murphy, who, in turn, said he couldn’t answer any questions, because he was “unaware” of Walsh’s and Goldberg’s lobbying activities. They all joined in together. Heh, heh. Heh, heh heh.”

WOONSOCKET – Landmark Medical Center sits not far from the Blackstone River and its waterfalls’ “thundering mists,” which translates in Algonquian to “Woonsocket,” the northern Rhode Island city the medical center serves.

Like the hospital itself, Woonsocket is old and under-resourced. Filled with cavernous textile mill buildings that once attracted thousands of French Canadians immigrants to produce woolen goods, the city now struggles with a median family income less than half the state average, a child poverty rate over twice as high, and a school system where one-third of the students fail to graduate from high school on time.

Licensed for 230 beds, with a separate inpatient rehabilitation facility, the medical center’s fortunes have waxed and waned with the city’s. Founded by proud and wealthy town leaders in 1873 as part of the first wave of private hospitals in the country, Landmark saw its resources and ability to meet the demands for evermore complex and sophisticated acute care services diminish in last quarter of the last century. By 2008, saddled with high Medicaid caseloads, diminished patient volumes and debt from an ill-advised foray into complex cardiac care, the medical center entered into receivership in anticipation of possible bankruptcy.

Showing up at the fire sale and looking for a bargain was none other than Steward Health Care, the for-profit hospital chain then backed by private equity giant Cerberus Capital – named after the three-headed beast who watches over the gates of hell.

Dangled promises.  
Steward dangled promises of more services and more revenue for an impoverished hospital and community with few other options. Armed with lots of new capital, it was the same plan they were offering many other communities in similar straits at the time.

Sixteen years later, having executed the private equity playbook of cutting costs (namely staffing and supplies), extracting financial assets, and loading its hospitals with capital debt and rent payments – all in the name of generating outsized returns for impatient investors – Steward has declared bankruptcy, casting doubt on the future of 30 hospitals, including eight in neighboring Massachusetts.

However, in Woonsocket, Steward was sent packing and the community staved off the private equity beast. The process was not elegant, and the result has been less than universally satisfying, but as states and communities struggle with health system consolidation, health care affordability, and difficult resource allocation decisions, this story of how the private equity wolves were thwarted may offer lessons.

Deal or no deal    
In a receivership, the court appoints a special master to help a financially-troubled business meet its obligations to its creditors.

[Editor’s Note: The judge overseeing the bankruptcy proceedings was Judge Michael Silverstein; the special master appointed in June of 2008 was Jonathan N. Savage. Landmark petitioned the special master to preserve Landmark’s assets.]

In 2008, Steward looked like a pretty good option for the special master of Landmark’s receivership. The head of the company, Dr. Ralph de la Torre, a brash cardiac surgeon, had money and ambitions. The track record for private equity-backed health care of higher prices and poorer quality had not yet been established. And prospective suitors were not exactly beating down the special master’s door.

Weak finances and a lack of options for the Caritas Christi Health System in Boston had given Steward its initial foothold in Massachusetts. Now it was expanding by targeting smaller, financially weak community hospitals and their communities such as Landmark and Woonsocket.

Like many hospital boards desperate to keep the lights on and politicians eager to avoid a shutdown on their watch, the special master and public officials in northern Rhode Island were willing to look past their concerns and do a deal with Steward to save Landmark.

But there were problems. First, Rhode Island had a long and complex process for reviewing changes in health system control that called for approval by both the Department of Health and the Attorney General. The review was even more extensive for an entity converting from not-for-profit control to for profit. Could such scrutiny be avoided?

There were also concerns about the quality of obstetrical care at Landmark. As a result, a local community health center, the largest source of deliveries at Landmark, had moved all its maternity cases to another hospital.

[Editor’s Note: Thundermist Health Care, the city’s primary community health center, had contracted with Women & Infants Hospital in Providence for its labor deliveries, even agreeing to pay for transportation for its patients to Providence.]

Steward would need that volume back to make its finances work, and the health center and its providers were skeptical that Steward could make good on its many promises to turn things around at Landmark.

Finally, Landmark needed significantly higher commercial insurance rates from its largest commercial insurance payer, Blue Cross and Blue Shield of Rhode Island. Steward made the case that it could attract volume from other hospitals that were even more highly paid. But under the terms of the Rhode Island Health Insurance Commissioner’s Affordability Standards, Blue Cross could not raise its rates higher than inflation. The insurer pointed to those standards and held firm.

Disgusted, Steward walked away from the deal and subsequently, in a fit of pique, sued Blue Cross, alleging monopsony [a market dominated by a single buyer] practices. [The case was settled out of court.] Efforts by some public and private sector leaders to quietly broker an arrangement in which Landmark would become part of the state’s largest health system foundered.

The special master went back to the health care equivalent of and struck a deal with another for-profit hospital chain [without private equity backing, Prime Health Care, which was quickly approved. [Editor’s Note: The deal was consummated on Dec. 31, 2013, after more than five years in receivership.]

As of today, Landmark is surviving if not exactly thriving. The medical center has 140 staffed beds, about 450 deliveries a year, an active residency program, and an emergency room that is often crammed. Prime Health Care – not ruled by the private-equity-sized return demands of its investors – has converted the Medical Center back to a nonprofit and made it part of a foundation it controls.

[Editor’s Note: The changeover from for-profit to not-for-profit status was not without its problems. On Oct. 30, 2017, Prime Healthcare was fined $1 million for hiding its transfer of Landmark to its nonprofit foundation in December of 2016 without state approval. See link below to the ConvergenceRI story.]

Health system architects point out that Rhode Island still has excess inpatient beds, and with Woonsocket only 20 miles from much larger inpatient facilities, Northern Rhode Island would be well served by a smaller facility focused on emergency room, outpatient, and behavioral health services. But Woonsocket has a solvent hospital that is a source of local pride and employment, which is more than its neighbors in similar towns in Massachusetts with Steward hospitals can say.

The consolidation pack.  
Private equity investors are industry agnostic. They put their money where there is money to be made – quickly. And, with multiple cross subsidies among payers and services, little financial transparency, and numerous market failures, there is money to be made in health care. Buyers employ tactics like increasing service volume, negotiating higher commercial rates, going out-of-network and charging patients list prices, and monetizing assets like land and buildings. Meeting patient needs, maintaining the quality of services, and responding to the community are not aspirations or even obligations, but the costs of doing business.

Such a philosophy may be acceptable for other industries but should not be for health care, where private equity’s fundamental strategy is not to create value but to extract it [emphasis added].

It is the job and the responsibility of public and private sector leaders to make health care a less attractive investment opportunity for private equity investors by leveraging admittedly clumsy and often bureaucratic tools like those used in Rhode Island: transaction review, commercial insurance oversight, and responsible nonprofit governance.

Private equity is, however, only the hungriest of the wolves in the health system consolidation pack. Even as policy actions to make private equity in health care a less attractive investment are debated and sometimes implemented, health care is becoming ever more unaffordable for people. Costs are driven primarily by health systems that are growing in size and power and commanding higher prices, as well as pharmaceutical companies using patent law to stifle competition. Impoverished communities across the country like Woonsocket deserve a broader discussion about how best to confront these growing threats to their health and health care.

Christopher Koller is the President and CEO of the Milbank Memorial Fund. He served as the first commissioner at the RI Office of the Health Insurance Commissioner.   

Koller was responsible for shepherding the creation in 2008 of the CSI-RI, the Chronic Care Sustainability Initiative in Rhode Island, a pilot program consisting of five primary care practices, an experimental, all-payer, patient-centered medical home model of care.  

Today, known as the Care Transformation Collaborative RI, or CTC-RI, it includes 128 primary care practices, involving some 800 providers.

The story is reprinted with permission of Christopher Koller. It first appeared in the Milbank Quarterly.

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