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Caritas sale linked to insurer pact

Cerberus wants cost-containment measure to be part of purchase

By Robert Weisman
Globe Staff / July 13, 2010

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The proposed buyer of Caritas Christi Health Care is so convinced of the potential financial benefits of an insurance contract the Catholic hospital system negotiated with Blue Cross Blue Shield of Massachusetts last year that it has made the agreement a condition of closing the deal.

But some critics question whether incentives in the insurance contract might tempt the new owner of the Boston-based hospital chain to scale back or drop unprofitable services as a way to generate a higher return on its investment. A Caritas spokesman says that won’t happen.

Under an “alternative quality contract’’ introduced last year by Blue Cross Blue Shield to stem rising medical expenses, Caritas hospitals and doctors can reap savings and bonuses if they adhere to a budget that promotes more efficient treatment at lower costs. “This is a template for the future environment hospitals will have to work with,’’ said Steven J. Tringale, managing director at Hinkley Allen & Tringale, a health care consulting firm in Boston.

Cerberus Capital Management, the New York private equity firm that wants to buy Caritas, specified in its purchase deal that it wants a successor agreement to the Caritas arrangement with Blue Cross Blue Shield put in place before its acquisition of Caritas takes effect. The sale, which must be approved by Massachusetts state officials, would turn the nonprofit Caritas into a for-profit business.

Failing a successor agreement, Cerberus wants written assurance from Blue Cross Blue Shield that the payment pact it made with Caritas last August will stay in effect for five years.

“We expect and we think that the successor agreement will be done in advance of the [acquisition] deal going through,’’ said Tara Murray, a Blue Cross Blue Shield spokeswoman.

The Blue Cross Blue Shield contract is not a public document, so the medical-spending budget the insurer provided to Caritas is confidential. The chain’s hospitals are St. Elizabeth’s Medical Center of Brighton, Carney Hospital of Dorchester, Norwood Hospital, Good Samaritan Medical Center in Brockton, Saint Anne’s Hospital in Fall River, and Holy Family Hospital in Methuen.

Listing the Blue Cross pact as a condition for completing the deal is “a standard top-10 contract provision,’’ said Cerberus managing director Timothy F. Price in New York. “We need to assume that all these contracts will remain the same,’’ he said.

The contract with the state’s largest health insurer may offer insight into how Cerberus and Caritas officials plan to generate profits, and satisfy private investors, by paring unnecessary expenses, boosting the quality of operations, and meeting the insurer’s measures on performance and health outcomes.

“It’s better for Caritas if we do a better job of being more efficient and better managing our patient care,’’ said Caritas spokesman Chris Murphy. “It doesn’t mean not treating patients. It means treating them more effectively in the most appropriate settings.’’

Caritas is the third-largest provider to sign onto the new alternative quality contract, after the Atrius Health physicians groups and doctors affiliated with Tufts Medical Center. The contracts, unlike more common and frequently criticized fee-for-service pacts, transfer risk to providers by giving them a “global payment’’ to cover the care of all patients for a year.

If they can improve outcomes and meet quality measures, they can collect bonuses and keep unspent funds. For instance, a doctor might be rewarded for offering a nutrition class for a group of diabetic patients if their blood sugar levels are lowered as a result. But doctors and hospitals won’t be reimbursed if they go over budget.

Some warn that a global payment system could be abused by for-profit providers who must answer to private investors.

“There certainly may be a temptation to stay away from sicker patients,’’ said Daniel J. Driscoll, president of Harbor Health Service Inc., which runs community health centers in Dorchester and Mattapan that refer some patients to Carney. “If a private investment firm buys a hospital system that has been weak financially and they now have to pay taxes and satisfy investors, will they cut back on services that aren’t profitable, like mental health?’’

Some early alternative quality contracts Blue Cross negotiated with small doctors groups have resulted in better practices and better care to patients, said Alan Sager, professor of health policy and management at Boston University School of Public Health.

“The gain sharing rested on a belief that the doctors and hospitals would do what was in the best interests of the patient,’’ Sager said. “With Cerberus coming in and anxious to earn a return, it may be that the financial incentives could be used to withhold care.’’

Murphy said Caritas has no intention of withholding or restricting care. He noted the alternative quality contract is structured so that more is provided in the budget for the sickest patients. “We are the No. 1 provider of mental health services in the city of Boston, and our commitment is not going to change,’’ Murphy said.

Nancy Kane, professor of management at Harvard School of Public Health, said the primary attraction might simply be that the contract is a platform for Caritas to pioneer a payment system that will become increasingly common.

“Caritas and Cerberus see the big opportunity in health care going forward lies in being able to manage care better under a cap,’’ Kane said.

Robert Weisman can be reached at weisman@globe.com.