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From Boom to Bust: Steward Health’s Financial Crisis · CareTalk: Healthcare. Unfiltered.

• 0:00
  The financial crisis at Stewart HealthCare is shaking up the Massachusetts health care system.
• 0:05
  Stewart's nine Massachusetts hospitals with some 16 ,000 employees serving 200,000 patients are in danger of closing.
• 0:14
  The company blames low reimbursement while critics cite the evils of private equity and for -profit ownership.
• 0:20
  So will the hospitals stay open in the short term?
• 0:23
  And will Massachusetts take the opportunity presented by this crisis?
• 0:27
  to restructure its healthcare industry to improve access, lower costs, and align incentives.
• 0:36
  you Welcome to Care Talk, America's home for incisive debate about healthcare business and policy.
• 0:45
  I'm David Williams, president of Health Business Group.
• 0:48
  And I'm John Driscoll, the president of Walgreens Health.
• 0:50
  David, back up a second and explain how the People's Republic of Massachusetts actually, how it's organized around academic medical centers like the Harvard system and exactly what Stuart represents.
• 1:07
  So people have some context here because...
• 1:10
  that every people know Harvard and they know the Brigham and Mass General, all the big name Dana -Farber university institutions, but probably people outside of Massachusetts haven't heard about Steward and don't have any context.
• 1:25
  So can you just kind of paint a picture of the healthcare topography of the Massachusetts healthcare system?
• 1:32
  Sure, I'll do my best.
• 1:34
  So like you say, actually dominated by some of these big systems, there's what we used to be called Partners Healthcare, which is Mass General and Brigham and Women's, they came together.
• 1:43
  Now it's called Mass General Brigham.
• 1:44
  You've also got Beth Israel, which also has Leahy Clinic as well.
• 1:48
  So Beth Israel, Leahy, those are the big guys.
• 1:50
  You also have Tufts.
• 1:51
  There's some other players, like you said, Dana Farber, Children's Hospital, et cetera.
• 1:55
  But then you got some of the community hospitals too in Massachusetts.
• 1:59
  And there was a hospital system that was a Caritas Christie system was actually owned by the Catholic Church.
• 2:05
  And in around 2010, They decided to sell that.
• 2:09
  They needed to raise some money.
• 2:11
  And a group came in led by Dr.
• 2:13
  Ralph Delatorre, who is a heart surgeon from Beth Israel, actually.
• 2:18
  And he partnered with a private equity firm called Cerberus Capital.
• 2:22
  And they acquired a bunch of hospitals from Kyrgyzstv and then some others.
• 2:26
  Now, these were not -for -profit hospitals, and they converted them to for-profit hospitals.
• 2:31
  They bought a couple more hospitals, Morton Hospital and Quincy Medical Center.
• 2:35
  in 2011.
• 2:36
  So that was, you know, 10 plus years ago, they came into the market, John.
• 2:40
  So stepping back, there really is a really interesting dynamic in the US healthcare system where academic medical centers like a Tufts or the Harvard system, which includes a number of the institutions you mentioned, the ill named partners where it doesn't seem like the doctors partner with the hospitals or the hospitals partner well with each other.
• 3:00
  In fact, I think in another care talk episode, we talked about how all these hospitals, academic medical centers in Massachusetts really can't seem to get along.
• 3:11
  But there also is in America a community health care system, local community hospitals that are nonprofits, and in some cases, those that are run by religious institutions.
• 3:21
  You know, historically, a lot of religious institutions like the Catholic Caritas system, and there are other systems run by different religious groups around the country, were there to kind of be the hospitals of last resort often.
• 3:34
  anchored in poor communities where they didn't have access to the better care or certainly the academic care that exists.
• 3:42
  But in the Massachusetts system, it's a particularly feast or famine system where the richly endowed and highly compensated academic medical centers in many ways set a pretty high price to get care in the state.
• 3:58
  And there's a, is this historically an oversupply of specialists?
• 4:02
  and an under supply of internal medicine, general practitioners.
• 4:07
  And this, I thought the whole Stuart system, it's sort of bizarre that it, in some ways that it was named Stuart, given how poorly it stewarded the healthcare and the economics of its own system.
• 4:20
  But it seemed like not a crazy idea that a community healthcare system based around primary care could potentially manage care.
• 4:30
  better than the academic medical centers, which typically are focused more on research and specialist care, like heart surgery or complex new immunotherapies or new interesting children's diseases at Boston Children's.
• 4:47
  I mean, what happened here?
• 4:49
  Because the theory that a community -based system, so lower cost because they don't have to subsidize all the academic costs.
• 4:58
  more focused on internal medicine.
• 5:00
  Gosh, it seemed like your buddy Ralph, your neighbor Ralph, had a really pretty good idea.
• 5:07
  What happened and how did it put the entire healthcare system in Massachusetts in crisis?
• 5:13
  John, it was a good idea and they did some good things.
• 5:16
  And let's talk about it also from the perspective of the broader system.
• 5:19
  So what happened with these famous hospitals, they're terrific.
• 5:22
  And in fact, I go there for care and if somebody has a...
• 5:25
  serious problem.
• 5:26
  They come from all over the country, all around the world to go there.
• 5:29
  But what had happened is Mass General and the Brigham in particular had been expanding out into the suburbs and not just any old suburb, John, not the suburbs of last resort, you know, where Kiritas Christi was based, but in fact, the richer suburbs.
• 5:44
  And they would go and acquire community hospital, acquire physicians, and actually just by doing that and putting their name on it without changing anything else, actually raise the prices.
• 5:53
  And that's how it worked actually with Yeah.
• 5:56
  I'm shocked that healthcare prices are going up, David.
• 5:59
  I mean, of course.
• 6:00
  So why wouldn't you expect that?
• 6:03
  I mean, are you surprised?
• 6:05
  Because no, because what happened, John, is when they can't just raise the retail price, they can do that, but they actually automatically got higher reimbursement from the commercial insurer.
• 6:13
  So because of the market power, they are able to just force the prices to go up.
• 6:19
  So if you are a physician working independently and all of a sudden you started working for partners, actually got paid more by Blue Cross.
• 6:25
  and others as a result of that as well as well documented.
• 6:28
  So Stuart is coming into this situation where we've got also the most expensive, you know, Massachusetts is either the top or within the top three or four most expensive states in the country and said, let's actually do something that's more cost based.
• 6:40
  Pause there.
• 6:40
  That in the most expensive healthcare system in the world, Massachusetts again competes to win, not just like the Bruins and the Celtics, well, the Patriots used to be.
• 6:53
  but also in the healthcare price derby.
• 6:56
  Are you saying that the academic medical centers are more expensive, David?
• 7:01
  I'm saying, John, you know, the Patriots only won six Super Bowls and the, uh, and the Brigham and the general are doing better than that.
• 7:08
  They tend to win every year.
• 7:10
  So, uh, yeah, so they've got very high cost system and you should be, we're trying to move toward, you know, value-based care.
• 7:16
  So in that case, uh, what, what they were trying to do, what Ralph was trying to do was to say, let's actually do value -based care.
• 7:23
  with Medicaid patients.
• 7:24
  And instead of just being paid a lower fee for service amount by taking care of patients, let's actually do something where we're managing overall cost of care.
• 7:31
  Now the healthcare system didn't change that fast.
• 7:33
  Instead, what happened is that the managed care companies in Massachusetts, the insurance plans, it just gave them lower prices on a fee for service basis and they really couldn't get anywhere.
• 7:43
  Let me also point out one other thing about for -profit before you go there, John, which is that, you know, so on the one hand, there's this concern about the profit, you know, motive and private equities role and so on.
• 7:52
  But a difference between a for -profit hospital and a not -for -profit hospital is a for -profit hospital actually pays local real estate taxes.
• 8:01
  So Stuart is paying something like $15 or$20 million a year that hadn't been paid before and which the academic medical centers don't pay.
• 8:09
  So that's the difference too.
• 8:11
  Well, I think what's interesting is that it shows the power of academic medical centers because the academic medical centers, to be fair, don't have a perfect system themselves.
• 8:24
  They are, they have to subsidize the teaching of all of the new residents and doctors and specialists in their system.
• 8:31
  So they argue that of course they should charge more because the federal and state governments rely on them as production facilities to train new doctors and to kind of do the best research.
• 8:42
  That's balanced against the fact that our costs are the healthcare system costs too much and does too little.
• 8:48
  So these community -based hospitals that are paying taxes, particularly if they're for profits.
• 8:54
  What happened to the I mean, I understand that the health insurance companies and the employers and the and probably the state through Medicaid pay a bit more to academic medical centers than they then then steward.
• 9:08
  But the premise was that by managing the care better, that the community based hospital systems with a lower cost hospital and more management of care would just.
• 9:20
  do really well.
• 9:20
  I mean, all of the that's that's what Ralph and his team said when they came in.
• 9:24
  What went wrong?
• 9:26
  Yeah.
• 9:26
  So, I mean, they they struggled.
• 9:28
  And so they actually did make money in around 2015 for the first time.
• 9:32
  And then they decided to make it a national chain.
• 9:36
  And they went and bought hospitals all around the country, got revenue up to about eight billion dollars, which is the largest private for profit chain in the U.S.
• 9:45
  and then started to started to struggle.
• 9:47
  You partly overextended.
• 9:48
  Well, pause there.
• 9:49
  I think, I think that would shock the people at Tenant and HCA that they were the largest private for profit.
• 9:56
  I think what you mean is that they were, that they had private investments that, you know, the Hospital Corporation of America and Tenant Hospitals are obviously publicly traded and are pretty substantial.
• 10:05
  So, and they actually grew and became profitable by, by becoming greater than regional and going national.
• 10:13
  Yeah.
• 10:13
  It sounds like a good plan.
• 10:15
  HCA has done very, very well.
• 10:17
  Tenant has struggled.
• 10:18
  here and there in markets.
• 10:20
  I'm still trying to figure out why what where the cause it blew up.
• 10:25
  Because it turned out that this, you know, idea of being able to manage care effectively and to save money wasn't really there.
• 10:31
  So I'll give you an example.
• 10:33
  So and this is partly because of, you know, maybe poor management, but also, you know, broader things going on in the system.
• 10:39
  So we have an opioid crisis in America and including in Massachusetts and especially in the poor areas.
• 10:45
  Well, some of those places, guess what?
• 10:46
  You go into the emergency room of a steward hospital and it's full of people that have overdoses or psychotic and they're not being treated well and it's taking up all the capacity.
• 10:56
  So they actually don't have room for paying patients and actually spend their own money to try to clear people out.
• 11:02
  That's not something that they can do on their own.
• 11:04
  It doesn't just affect them, but that's an example.
• 11:07
  The sort of slow move toward Medicaid ACOs is another one.
• 11:11
  And then when they got in trouble, Uh, then they started doing things that are sort of like, you know, uh, eating the seed corn.
• 11:18
  So as an example, I knew that they were in trouble, uh, a year and a half ago when a physician, uh, who I know works there as radiologist told me that, um, yeah, people couldn't get, uh, appointments for the MRI, not because the MRI was booked, but because they laid off the scheduler.
• 11:34
  So as a result, you know, to save money in the short term, they laid off the scheduler.
• 11:38
  People aren't scheduled.
• 11:39
  Then there's no revenue from the MRI.
• 11:41
  Similarly.
• 11:42
  not paying their bills to Medtronic or the medical device companies.
• 11:47
  And so then they can't get the surgical instruments or the devices for surgeries and they can't make money from there.
• 11:52
  So that's why it got into a death spiral.
• 11:55
  But it was just too much of a struggle and their model wasn't so great that it was gonna overcome all the challenges in the healthcare system.
• 12:03
  I still don't think I understand exactly why other than poor management, They got into trouble.
• 12:10
  Did they actually manage the care for the individuals that they were managing?
• 12:15
  Because theoretically managed care should keep people out of hospitals and away from specialists.
• 12:20
  Did they perform?
• 12:22
  They didn't have, um, they didn't have the opportunity to really manage people at the, at the population level.
• 12:29
  Um, and so I think that, you know, the Medicaid ACOs that have come in had been sort of too little, too late for their model to work.
• 12:36
  If it in fact would work.
• 12:37
  So I think they don't know that they had a fair test.
• 12:39
  to really make it work.
• 12:41
  You know, they had some other challenges along the way.
• 12:43
  You know, they were dealing with the old, you know, old infrastructure.
• 12:47
  They had a flood at one of the hospitals that shut down the emergency room for a while.
• 12:51
  You know, they have challenges like that.
• 12:53
  I mean, I don't know that it's been particularly well managed the last few years.
• 12:56
  Yeah.
• 12:57
  You actually were interested in it.
• 12:59
  Yes, there are for profit hospitals that are successful.
• 13:03
  There has to be a path to success for these community based hospitals.
• 13:08
  They've got a cost advantage.
• 13:10
  Honestly, it just sounds like it was colossally poorly managed.
• 13:14
  Well, first of all, not all the hospitals, you know, are some of them actually could be successful on a standalone basis.
• 13:20
  It's a few of the hospitals.
• 13:21
  Hospitals in general have struggled.
• 13:23
  You know, they all struggle with staffing.
• 13:25
  And don't forget that what's going to be happening where you've got these big, well-paid systems.
• 13:29
  I mean, that's who sets the, you know, who's setting the price for for labor.
• 13:34
  It's based on, you know, union negotiation.
• 13:37
  And if you're getting paid more, like Mass General or Brigham, they can actually pay more.
• 13:41
  And they do.
• 13:42
  And so, stewards affected by that happening as well.
• 13:45
  I think, John, that this is beyond, I mean, I don't think we should expect some, you know, private equity firm to come in and instead of guarding the gates of hell or whatever Cerberus does, you know, from its namesake, is actually come and try to reform the whole - not their business plan.
• 13:59
  It happens to be their mythical role.
• 14:02
  Okay.
• 14:03
  So - It is a little odd that people would invest.
• 14:06
  Yeah.
• 14:07
  In a company like Cerberus.
• 14:10
  And, you know, I, well, we're not going to get into some.
• 14:13
  Anyway, so, so, so, so the Garden of Gates of Helen.
• 14:16
  It's an odd, it's an odd name for a hospital system sponsor.
• 14:20
  So we can't expect them to come in and completely reform the system.
• 14:23
  I think they were hoping to ride a wave of what was happening.
• 14:26
  So let's look at where we are now, because we've talked about it a lot, John, about care at home, you know, the hospital is sort of, if you're in the hospital, sort of in most cases, is a failure.
• 14:34
  prevention and primary care should have been able to keep you out of the hospital.
• 14:39
  So now there's this worry that all these hospitals are going to close.
• 14:41
  And I get that.
• 14:43
  At the same time, I think maybe we need less hospital capacity.
• 14:46
  So shouldn't the state be saying instead of like, how do we save the hospital or how do we, instead of selling it to, let's say, one of these big systems, I want to say, why don't we maybe close the hospital down in an orderly manner and redeploy the expense out to primary care, urgent care, telehealth, other new sorts of approaches that we can take.
• 15:10
  And even on an outpatient basis, John, outpatient care at a hospital is very expensive.
• 15:14
  So I think more community -based and home-based care is the way to go and improve the incentives so that - I think you're surfing the next wave here.
• 15:20
  I think there are some things here that are elementally dangerous and you're missing some of the string of the story.
• 15:27
  I mean, they made money in 2015.
• 15:29
  Um, they got into trouble.
• 15:31
  Uh, I, I'm sure during COVID when all hospitals were having a really hard time coming out of COVID hospital balance sheets are really in trouble.
• 15:40
  And in some cases hospitals are, are, are only staying in business due to the margin from their, their, their, their, their pharmacies and their drug distribution, or some specialist oncology thing like hospitals really are struggling.
• 15:55
  Yeah.
• 15:55
  Or their endowment, or their endowment, John, you know, or their endowment.
• 15:59
  Yeah, no, they're there because they're subsidized and they've got a tax advantage.
• 16:02
  So that's the truth.
• 16:04
  But I think that the other practical matter is they the it sounded like the Stewart balance sheet was upside down.
• 16:10
  They borrowed a ton of money.
• 16:11
  There are certain in the rush to sort of finance everything through private equity, particularly when rates were zero.
• 16:22
  A lot of a lot of bad business plans.
• 16:25
  plans that would never have, that can't survive a normalized interest rate environment where they actually have to pay the interest on the debt or pay the debt down.
• 16:34
  I think that's where these guys really manage the balance sheet.
• 16:38
  And I think that there's a reasonable argument that private equity are pirates here because you've got a CEO with a yacht.
• 16:51
  He's got a busted company that's supposed to be providing care for people.
• 16:55
  And he's got a big yacht, apparently, folks say, somewhere in the Caribbean.
• 17:02
  I mean, this is a pretty bad look for private equity and investment.
• 17:07
  But it might start with the fact that they just never should have borrowed that amount of money with an unclear business model.
• 17:14
  Well, John, the thing is, when they did this, it was starting in 2010, which is when the Affordable Care Act came in.
• 17:19
  And it was a reasonable bet at the time, right?
• 17:20
  We're moving toward value -based care, this sort of fee -for -service system of these overwrought hospitals has got to stop.
• 17:29
  Massachusetts was going to all sorts of lengths to try to do something about these big academic systems and the costs.
• 17:36
  So that wasn't a bad idea either.
• 17:38
  Nobody said, I don't think even at the time, and by the name Cerberus, it's not a friendly name.
• 17:43
  Nobody ever said that Ralph Delatory was a friendly guy or that they liked him.
• 17:47
  But it's like, with Purdue, right?
• 17:49
  They said, you need a tough guy to make a tender chicken.
• 17:52
  Same idea here.
• 17:53
  You needed somebody who's going to shake up the healthcare system.
• 17:55
  Now you come down the path a few years and after getting, you know, making some progress.
• 18:00
  Yeah, they had trouble and they did some of the little private equity things that, you know, that we frowned upon, like, you know, refinancing the company to take a, take a dividend and buy a yacht is a $40 million yacht, John.
• 18:10
  Um, and so it sort of got themselves into, uh, you know, into trouble.
• 18:15
  So you can point the finger at private equity.
• 18:17
  Fair enough.
• 18:18
  However, It also should be pointed out, John, that there have been people that have also made, you know, $10 million nonprofit, uh, healthcare executives in Massachusetts had$10 million plus severance plans from their nonprofit entity.
• 18:30
  So no way.
• 18:32
  Yeah.
• 18:34
  Stunning.
• 18:35
  Yeah.
• 18:35
  So, so, so let's try to draw this dress some conclusions here.
• 18:39
  All right.
• 18:40
  Private equity, good or bad for hospitals as a new source of financing on their new model.
• 18:47
  It was a reasonable shot, but in general, no private equity in hospitals.
• 18:51
  Not a good.
• 18:52
  It was probably a pretty good indicator that a three headed dragon tail dog named Cerberus was probably not the best protector of health care costs.
• 19:01
  Okay.
• 19:01
  How about, how about community hospitals have a future?
• 19:04
  Don't have a future.
• 19:06
  So in Massachusetts, they were sucking wind for a long time and they did not have any future here and they would have, those hospitals would have shut those Caritas hospitals.
• 19:14
  They would already have been shut.
• 19:15
  Uh, so.
• 19:17
  No, I don't think that they have a great future.
• 19:19
  Community hospitals, not really in Massachusetts.
• 19:21
  I think you're wrong there.
• 19:23
  I think we have to support and find a way to financially support and manage community based hospitals there.
• 19:29
  Otherwise, we're going to be the rest of the country is going to look like the Massachusetts system dominated by academic medical centers and crippled with cripplingly high costs.
• 19:39
  So, John, our former that's a bad answer.
• 19:42
  Our former governor, Charlie Baker, used to run Harvard Pilgrim Health Care.
• 19:46
  And one year they put a community hospital on the cover of the annual report and they talked about, you know, caring the community and all that.
• 19:52
  And then suddenly it was gone.
• 19:53
  And I asked him about it one time, what happened?
• 19:55
  And it's like, well, you know, they couldn't really make a go of it because it's that's nope.
• 19:59
  The, you know, the customer doesn't want that.
• 20:01
  The employers don't want that.
• 20:02
  And Massachusetts is dominated by these big systems.
• 20:05
  The community hospitals never got their act together here.
• 20:07
  Never will.
• 20:07
  We should, we should, we should bring Charlie on the show because I think you're a little bit too, too slick and quick to allow their.
• 20:15
  community hospitals to be flushed.
• 20:17
  There's a lot of parts of America, rural areas, suburban areas, where if those community hospitals leave, you won't have access to primary care and specialist care.
• 20:25
  You won't be able to get at the critical surgeries that you need in a crisis or in an emergency like a difficult pregnancy or a bad car accident.
• 20:36
  And frankly, costs will go up.
• 20:38
  We've got to create a path, perhaps not in the People's Republic of Massachusetts, for community hospitals.
• 20:44
  But David?
• 20:45
  I don't know whether we're gonna be able to draw many more conclusions here than that, but I think we profoundly disagree on the future of these hospitals that aren't associated with academic medical science.
• 20:59
  Well, John, it may be the most profound that we've had on the show here, so we're gonna just tie it up right there and say that's it for yet another episode of Care Talk.
• 21:07
  We've been talking about steward healthcare system and the stewardship of Massachusetts.
• 21:11
  I'm David Williams.
• 21:13
  Stewardship of Massachusetts.
• 21:14
  I'm David Blames, president of Health Business Group.
• 21:17
  And I'm John Driscoll, the president of Walgreens South.
• 21:19
  If you like what you heard or you didn't, please subscribe on your favorite service and we'd love a review.