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Hospitals seek rules for Caritas after sale

Competitors worried that for-profit system will ‘become predatory’

By Robert Weisman
Globe Staff / September 16, 2010

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A coalition of community hospitals that compete with Caritas Christi Health Care across eastern Massachusetts is appealing to the state attorney general’s office to impose strict rules on the proposed sale of the nonprofit chain to a New York private equity firm.

Among the conditions being sought by the Healthcare Access Coalition are measures to prohibit the buyer, Cerberus Capital Management, from using “improper’’ incentives to recruit doctors from rival hospitals, a three-year ban on price increases for hospital services, and restrictions on “limited network’’ insurance contracts that exclude other providers. The community hospitals also want Cerberus to commit to not selling Caritas for seven years instead of three.

Members of the coalition, made up of Lawrence General Hospital, Signature Healthcare Brockton Hospital, and Southcoast Hospitals Group in New Bedford, said the restrictions are needed to keep them viable and ensure that low-income patients have access to health care services at reasonable prices.

“We need a level playing field in order to be successful,’’ said Dianne J. Anderson, chief executive of Lawrence General Hospital. “It’s going to be very difficult to compete against private equity money.’’

Although they are being squeezed by Medicaid payments that don’t cover their costs, some of the hospitals requesting conditions for Cerberus are in better financial shape than the Caritas hospitals in their markets, with more cash on hand and less pension liability. That advantage would evaporate once Cerberus acquires Caritas.

Boston lawyer Donald K. Stern, a former US attorney who is representing the coalition, said the financial resources Cerberus could deploy have the potential to damage competing nonprofit hospitals.

“At some point, this could become predatory,’’ Stern said. “This is an unprecedented transaction in the Massachusetts health care world.’’

Some of the proposed limits, such as a ban on improper recruitment incentives, are covered by existing laws, said health care lawyer David Szabo, a partner at Edwards Angell Palmer & Dodge in Boston. Others, such as restrictions on limited network insurance plans, which are encouraged by a state law passed this summer, may exceed the state’s authority, he said.

“One of the questions you have to ask about all of these conditions is are they aimed at protecting the public or just limiting competition,’’ Szabo said. He has done legal work for Caritas in the past, but isn’t representing it in the Cerberus deal.

Caritas and Cerberus officials said they had not seen the proposals and declined to discuss them.

In a letter sent yesterday to David G. Spackman, chief of the attorney general’s public charities division, Stern cited the responsibility of Attorney General Martha Coakley to review whether it’s in the public interest to allow the conversion of Caritas’s six Catholic hospitals to a for-profit system under the umbrella of Steward Health Care System LLC, a holding company being set up by Cerberus.

“Without these conditions, Cerberus is likely to use its dominant market position to dictate health care prices, leading to an increase in health care premiums,’’ wrote Stern, a partner at Cooley LLP in Boston.

Coakley’s office is expected to make a recommendation later this fall to the Supreme Judicial Court of Massachusetts, which would have to approve the transfer of ownership to Cerberus.

“All public comments are welcome and being considered as we conduct this important review,’’ said Coakley spokeswoman Melissa Karpinsky.

In addition to court approval, the state Department of Public Health would have to issue new licenses for Caritas hospitals, and the Vatican would have to sign off on the deal. The Caritas hospitals are St. Elizabeth’s Medical Center and Carney Hospital in Boston, Norwood Hospital, Good Samaritan Medical Center in Brockton, Saint Anne’s Hospital in Fall River, and Holy Family Hospital in Methuen.

Stern proposed in his letter that the attorney general’s office set these conditions for the sale of Caritas to Cerberus:

■ Prohibit the holding company, Steward, from raising the prices it charges patients and insurance payers for hospital services for three years other than to account for inflation.

■ Bar Steward from entering exclusive health plan contracts that bar competing hospitals. An example would be a limited network contract with an insurer that required patients to see only Caritas-affiliated doctors.

■ Restrict the new owner from striking joint ventures with health insurance carriers. Such deals could put Steward in the health insurance business, the coalition said, giving it an inside track on contracts that boost reimbursement payments to Caritas hospitals.

■ Require Steward to disclose all of its commercial and government insurance contracts to the attorney general’s office.

■ Forbid it from “improperly inducing physicians away from the coalition hospitals’’ and require Caritas to file quarterly reports listing doctors with admitting privileges. The letter didn’t define improper inducements, but Stern said it would involve Cerberus courting doctors with “overly generous’’ incentives.

■ Extend Steward’s commitment to hold Caritas from three to seven years, but only in concert with the other conditions.

■ Appoint a monitor to oversee Caritas hospitals under Steward and require notice of any future sale.

“We don’t comment on matters under regulatory review,’’ Cerberus managing director Timothy Price said when asked about the proposals.

Chris Murphy, a Caritas spokesman, said the agreement with Cerberus was announced seven months ago and state officials hosted a half-dozen public hearings over the summer to allow comment.

“We’re working diligently with the attorney general, as the arbiter of the public interest, to safeguard our employee pensions, the interests of our patients, and the broader community,’’ Murphy said.

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

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