For-profits see opportunity in struggling hospitals

Despite the red ink that’s poured out of some community hospitals in the Providence area in recent years, competition to buy them has been strong.
In the latest hospital acquisition, CharterCare Health Partners chose between at least two California-based for-profit suitors before agreeing to merge with Prospect Medical Holdings Inc. State regulators were expected to approve the deal last week.
Prospect, which owns seven hospitals in the Los Angeles and San Antonio areas, plans to invest $95 million over the next four years in CharterCare, which controls Roger Williams Medical Center in Providence, Our Lady of Fatima Hospital in North Providence and Elmhurst Extended Care nursing home in Providence.
Prime Healthcare Services of Ontario, Calif., which purchased Landmark Medical Center in Woonsocket last year, said it had agreed to top Prospect’s purchase price by $10 million and asked the state to investigate why that offer was turned down.
Unlike other states, for-profit hospitals are still a relatively new phenomenon in Rhode Island. Prime’s $60 million acquisition of Landmark, which was completed last year, made it the first for-profit hospital owner in the state.
Both Prospect and Prime cast themselves as a lifeline for CharterCare, whose hospitals appeared to be heading down a similar dim financial path as Landmark and, before it was acquired by a nonprofit last year, Westerly Hospital.
In February, Moody’s Investors Service downgraded the bond rating of St. Joseph Health Service of Rhode Island, the CharterCare subsidiary that owns Our Lady of Fatima, to Caa3 with a negative outlook.
The rating agency said given the hospital’s weak cash position and large pension obligations, its ability to pay debt service would continue to decline without “operational improvement.”
Under those circumstances, the most crucial thing Prospect is offering CharterCare is cash. In exchange for an 85 percent stake in the organization, Prospect will put $45 million into CharterCare to retire debt and then contribute another $50 million over the next four years to capital improvements.
CharterCare and Prospect officials declined to be interviewed, but in an email response to questions, spokesman Brett A. Davey said after the first four years of ownership Prospect would invest an additional $10 million annually for further capital improvements.
Davey wouldn’t say how the investment would be divided between Roger Williams and St. Joseph, which includes St Joseph School of Nursing as well as Our Lady of Fatima.
Under the agreement, CharterCare President and CEO Kenneth H. Belcher will continue to lead the organization, Davey wrote, and the St. Joseph entities “will continue to abide by the ethical and religious directives of the Catholic Church.”
The current 12-member board of trustees will be reduced to eight members, with four representatives each from CharterCare and Prospect.
As for how Prospect intends to turn around the hospitals’ finances, Davey wrote that it would start by eliminating debt service and taking advantage of economies of scale.
“In addition to the investments in retiring the bonds and strengthening the pension plan, Prospect will invest money in facilities and infrastructure throughout the organization,” Davey wrote. “Upgrades will be directed to a number of clinical areas, including emergency departments, operating rooms, cancer care and digestive-disease programs.”
Reducing costs, consolidating and taking advantage of economies of scale are typically the primary strategies large hospital managers, both for-profit and nonprofit, use to try to turn around struggling facilities.
Asked about consolidation of services under Prospect, Davey would not identify any future areas for cuts, but acknowledged that in-patient overcapacity was a major issue in Rhode Island health care. “Across the region, there is redundancy in regards to inpatient capacity,” Davey said. “At our hospitals, this has allowed us to convert our hospital floors into private rooms, which was a top priority expressed by our patients. … This ability to pivot and adapt to the changing landscape has enabled CharterCare to reduce expenses by $31 million over the past four years.”
Combining the CharterCare facilities with Landmark to create a larger regional health care system was what attracted Prime.
“The greater number of facilities you own, the greater opportunities for economies of scale and savings that can be realized,” said Robert G. Flanders Jr., a partner with law firm Hinckley Allen representing Prime. “In a state as small as Rhode Island, does it make policy sense to have more fragmentation of health care delivery among more providers? We need more consistency and consolidation instead of fragmentation.”
Dr. Vincent Mor, professor of health-services policy and practice at Brown University, said large hospital chains are rushing in to gobble up struggling facilities so they can be the ones to consolidate them into something stronger.
“One of the underlying [issues] in Rhode Island and New England, because it is more community oriented than other areas, we are over-bedded relative to demand and so some beds have got to close,” Mor said. “For-profits are moving in because they believe if they get in early enough, they can make sufficient capital to compete aggressively and drive the others out of business.”
That might not sound like an attractive scenario for communities that rely on hospital jobs, but it is not something small hospitals are in a good position to fight.
“Any nonprofits that have converted were in significant financial trouble,” Mor said. “The conversation would not have started if they had not been. It is, be bought or close.” •