WOOING WOONSOCKET
Capital and system needs breaking down long-standing barriers to entry
Dr. Ralph de la Torre, Steward Health Care System’s CEO, has long seen something of value in Landmark Medical Center, a small hospital near Rhode Island’s border with Massachusetts. He first expressed interest in acquiring the 133-bed financially distressed hospital during his tenure at Beth Israel Deaconess Medical Center in Boston.
Later, as CEO of Caritas Christi Health Care, de la Torre brokered a deal to buy Landmark. However, the transaction fell apart in late 2010, about the same time the six-hospital Catholic system was acquired by Cerberus Capital Management.
With de la Torre installed as the CEO of Steward, the now for-profit health system backed by privateequity funding, the deal stuck.
Steward and Landmark announced their second asset-purchase agreement in June 2011, saving the Woonsocket hospital from closure and positioning the Boston-based system to become a significant player in the Rhode Island hospital market.
What makes the acquisition unusual is the lengths that Landmark’s court-appointed special master, Steward, and state and city officials have gone to ensure the success of the deal. But the story of how it was accomplished (assuming it is, as expected, this summer) shows how communities once averse to for-profit hospital operators are changing their minds.
The financial desperation of Landmark found a perfect fit with Steward, a privateequity-backed system that is heavily spending on deals, staffing and technology.
In the past year, Steward has acquired five hospitals in Massachusetts and considered a bid to buy the foundering Jackson Health in Florida. It is one of two for-profit systems the CMS Innovation Center selected to participate in the Pioneer accountable-care model and recently hired Drexel DeFord as chief information officer, luring the prominent health IT figure from Children’s Hospital in Seattle.
The deal has yet to close, but most of the pieces are in place. The Rhode Island attorney general and health department conditionally approved the transaction in May.
In June, lawmakers passed legislation that amended the state’s long-standing Hospital Conversions Act, which prohibited for-profit companies from acquiring more than one hospital in the state every three years.
Changing the law was a condition of Steward’s agreement to buy Landmark.
The deal was put in jeopardy when Gov. Lincoln Chafee this month threatened to veto the legislation, although he later allowed the bill to become law without his signature.
A Steward spokesman, who declined to provide interviews with de la Torre or other executives for this story, said in an e-mail that the deal is expected to close at the end of July if the remaining conditions in the asset-purchase agreement are reached. A spokesman for Landmark’s special master confirmed that negotiations on the remaining conditions are ongoing.
“We are happy that elected officials in Rhode Island amended the Hospital Conversion Act to eliminate the barrier to out-ofstate investment in their healthcare system,” Steward said in a statement. “This change in legislation was not just about Steward. There are a number of financially distressed hospitals in Rhode Island that should have every option available to them as they look for different ways to access capital.”
Rhode Island lawmakers say they have considered amending the Hospital Conversions Act for years, but Steward’s bid for the nearly bankrupt Landmark prompted immediate action.
A spokesman for Rhode Island Rep. Nicholas Mattiello, a Democrat, said Steward provided “significant input” on the bills, which were introduced in the General Assembly in January. He also said that Lifespan Corp., the state’s largest health system, and other hospitals also provided input. “Times have changed and the law needed to be amended,” the spokesman said.
The legislation was introduced seven months after Steward and Landmark signed the asset-purchase agreement. Mattiello and Sen. Roger Picard, a Democrat who represents Woonsocket, sponsored the legislation.
Landmark had entered receivership in mid2008. In the petition for special mastership, then-CEO Gary Gaube wrote that Landmark “has experienced a level of financial distress that is unique among Rhode Island hospitals and is the only Rhode Island hospital in a negative net asset position.”
For its fiscal 2008, the hospital reported $132.3 million in revenue, declining from
$135.4 million the previous year, with an operating loss of $5.1 million.
More than two years passed before Caritas Christi emerged as a potential buyer. In the months before the system and Landmark announced their asset-purchase agreement, state lawmakers passed a law exempting Landmark and future owners, including for-profit companies, from paying sales and use tax for 12 years.
A spokesman for Landmark’s special master told a newspaper at the time that Landmark could save about $735,000 a year as a result of the law.
State documents say there were several other entities interested in Landmark from 2008 to 2010, although none was disclosed.
Beth Israel Deaconess Medical Center, the Partners HealthCare System-affiliated Brigham and Women’s Hospital, and Lifespan had all considered investing in Landmark, said Dr. Frank Sellke, a professor of cardiothoracic surgery at Brown University and a former chief of cardiothoracic surgery at Beth Israel.
However, the concern was that acquiring Landmark would be too expensive and involve too much risk, Sellke noted. De la Torre, during his time at Beth Israel—he was president and CEO of its Cardiovascular Institute—reportedly discussed his interest in Landmark.
“When he worked here, the current CEO of the Caritas Christi system would often look wistfully to the south and ask us to consider taking over the troubled Landmark Medical Center,” former Beth Israel CEO Paul Levy wrote in a July 2009 blog post. “We put the kibosh on that idea faster that you can say, ‘State of Rhode Island and Providence Plantations.’”
When the deal between Caritas Christi and Landmark failed in 2010, other bidders emerged. RegionalCare Hospital Partners, a Brentwood, Tenn.-based for-profit health system, and Landmark announced they had signed a letter of intent in February 2011.
Other systems—all for-profit companies— to place bids included Capella Healthcare in Franklin, Tenn.; Prime Healthcare Services in Ontario, Calif.; and Transition Healthcare Co., also based in Franklin, Tenn. HealthSouth, based in Birmingham, Ala., offered to buy the rehabilitation hospital.
During bid hearings in April and May of last year, Caritas Christi, now Steward, again expressed interest to the special master that it wanted to return to the deal. The other systems withdrew their bids and Steward filed a petition with the court to approve an agreement with Landmark.
Months later, Steward communicated that it would agree only to extend the asset-purchase agreement, a necessary step to complete the review process, if new conditions were added.
The new conditions allowed Steward to walk away from the deal if lawmakers didn’t pass legislation to amend the Hospital Conversions Act. Other conditions include removing restrictions that would prevent Steward from reducing staff and clinical services.
The deal still has some outstanding conditions, such as establishing a memorandum of understanding to “align” Landmark with Thundermist Health Center, a community health center serving Woonsocket, South County and West Warwick. Steward also wants a definitive agreement with Radiation Therapy Services to buy out the company’s membership interest in Landmark’s cancer center.
The attorney general objected to the addition of new conditions, but the court approved the amended purchase agreement in March.
Steward will pay $40.1 million for Landmark and the Rehabilitation Hospital of Rhode Island, as well as an additional $4.5 million on physician recruitment during the next five years. The system is also likely to pay several million dollars in taxes to Woonsocket, based on Landmark’s assessed value of $30 million.
“The payment by real estate taxes to Woonsocket, that so desperately needs the resources, is a clear, tangible benefit directly resulting from the proposed transaction,” the attorney general wrote in the May 25 decision. “While it remains a question whether this benefit will outweigh the possible risks of allowing Rhode Island hospitals to be purchased by for-profit entities remains to be seen, payment of real estate taxes to Woonsocket certainly represents a positive attribute of Steward.”
The deal in many ways reflects the national shift toward consolidation among providers as for-profit and not-for-profit hospitals seek to address declining reimbursement rates and looming changes in payment and care models.
Rhode Island, Massachusetts and Connecticut have traditionally been less hospitable markets to investor-owned hospital companies, said Barry Sagraves, a managing director at Juniper Advisory.
“We’re moving toward a situation where there’s more acceptance of hospitals being owned by investors as opposed to being notfor-profit,” he added.
In Rhode Island, a state whose hospitals reported one of the lowest profit margins in the county in 2010, the financial crisis has been notably difficult, especially for the state’s hospitals. The attorney general referred to the city of Woonsocket, which was recently placed
under fiscal oversight, as “on the brink of financial disaster.”
Landmark’s financial picture has deteriorated further, according to unaudited results submitted to the state as part of Steward’s application to buy Landmark. The hospital reported $122.3 million in revenue and a $10.7 million loss in fiscal 2011.
There are 13 not-for-profit acute-care hospitals in Rhode Island, six of which are standalone community hospitals. Of those six, Landmark and another hospital, the 100-bed Westerly Hospital, are in receivership and the other four hospitals are also facing financial issues.
“The circumstances that put Landmark in receivership and Westerly Hospital in receivership demonstrate that hospitals in our state are financially distressed,” said Edward Quinlan, president of the Hospital Association of Rhode Island.
While the Hospital Conversions Act has discouraged for-profit investment in Rhode Island’s hospitals since it became law in 1997, state hospitals have complained about the state’s interpretation of the law. Quinlan said hospitals often felt the “letter and spirit of the law was not consistently applied.”
Lifespan and Care New England, the state’s other hospital system, walked away from a proposed merger in 2010, citing burdensome requirements associated with the Hospital Conversions Act. In April, a Care New England spokeswoman said the Providence-based, three-hospital system supported lawmakers’ efforts to change the law because hospitals need to have the ability to grow in order to compete with other for-profit providers.
“The financial climate has changed to an extraordinary degree,” said Jill Horwitz, an economist and professor at the University of Michigan Law School who has studied hospital conversion laws. “States and cities are under a lot more financial pressure than they used to be.”
She noted that while the management of for-profit health systems hasn’t changed since multiple states passed hospital conversion laws in the 1990s, the financial climate in many states has. Some local governments can no longer support struggling hospitals.
For some of those hospitals, Horwitz said, for-profit systems are “seen as the last hope.”
TAKEAWAY: The story of Steward’s bid to buy a small Rhode Island hospital signals growing potential of for-profits to break into markets once averse to them.