Pri­vate-eq­uity se­crets re­vealed

Pri­vate-eq­uity deals come with con­di­tions

Modern Healthcare - - FRONT PAGE - Me­lanie Evans

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.

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