Private-equity secrets revealed
Private-equity deals come with conditions
Nearly one year ago, the nation’s largest Catholic health system said it would buy Catholic hospitals with private-equity backing. That joint venture, between Ascension Health and Oak Hill Capital Partners, has yet to name its first acquisition, but the partners have already planned for the private-equity firm’s eventual exit.
Whether Ascension and Oak Hill take the company public or sell, Ascension Health will remain an owner to ensure the joint venture’s Catholic hospitals remain Catholic indefinitely.
“The Catholics take perpetuity very seriously,” Harry Eichelberger, a principal with Oak Hill Capital, said in Miami this month at a conference on not-for-profit hospital capital that featured speakers from private-equity hospital operators.
Private-equity healthcare deals in recent years have included a string of hospital acqui- sitions, and investors have said more deals will follow. But with an influx of private equity comes the inevitable exit of those very same investors, often within three to seven years. And those investors seek to leave with healthy profits, raising concerns that whatever profit they take could come at the expense of companies they own.
Recent deals have included stipulations by regulators or not-for-profit dealmakers that seek to set conditions on hospital operations long after transactions close.
In Boston, the sale of the Catholic Caritas Christi Health System to Cerberus Capital Management in November 2010 required the private-equity buyers to hold onto the system for at least three years.
Terms of the $895 million deal prohibit Cerberus from an initial public offering, sale or closure of the system or any hospital for three years, said James Karam, former board chairman for Caritas Christi, now Steward Healthcare Care System. Karam said the stipulation was intended to protect the health system from private-equity buyers who would rapidly exit the investment and the public outcry that would follow.
David Spackman, formerly director of the division of public charities for the Massachusetts attorney general, said regulators and the public question how private equity can deliver a return on distressed hospitals without service cuts or layoffs. “People won’t invest without a return.” Spackman is now counsel with Mcdermott Will & Emery, which hosted the conference where Oak Hill’s Eichelberger was a speaker.
Regulators seek to protect access and jobs with stipulations on the deal, Spackman said, and the Massachusetts attorney general required Cerberus to invest $1 million for an independent study of how the private-equity deal affected healthcare costs, treatment patterns and consumer choice. “We did not want to approve the transaction and lose the opportunity to learn from it,” he said.
Cerberus proposed a business model that would boost community hospital margins and lower overall healthcare spending by stemming the flow of patients to more costly teaching hospitals for care that could be received closer to home, Spackman said. Whether the private-equity owned health sys-
After owning Metrosouth Medical Center, above, Falcon’s CEO says he found private-equity firms don’t have the expertise to run hospitals.