|Fourteen of the nation’s largest health systems announced this week that they have joined together to form a new, for-profit data company aimed at aggregating and mining their clinical data. Called Truveta, the company will draw on the de-identified health records of millions of patients from thousands of care sites across 40 states, allowing researchers, physicians, biopharma companies, and others to draw insights aimed at “improving the lives of those they serve.” |
Health system participants include the multi-state Catholic systems CommonSpirit Health, Trinity Health, Providence, and Bon Secours Mercy, the for-profit system Tenet Healthcare, and a number of regional systems. The new company will be led by former Microsoft executive Terry Myerson, who has been working on the project since March of last year. As large technology companies like Amazon and Google continue to build out healthcare offerings, and national insurers like UnitedHealth Group and Aetna continue to grow their analytical capabilities based on physician, hospital, and pharmacy encounters, it’s surprising that hospital systems are only now mobilizing in a concerted way to monetize the clinical data they generate.
Like Civica, an earlier health system collaboration around pharmaceutical manufacturing, Truveta’s launch signals that large national and regional systems are waking up to the value of scale they’ve amassed over time, moving beyond pricing leverage to capture other benefits from the size of their clinical operations—and exploring non-merger partnerships to create value from collaboration. There will inevitably be questions about how patient data is used by Truveta and its eventual customers, but we believe the venture holds real promise for harnessing the power of massive clinical datasets to drive improvement in how care is delivered.
Chinese investor Tianqiao Chen and his group of companies have a 12.2 percent stake in Franklin, Tenn.-based Community Health Systems after selling nearly 13 million shares of the company in the past month, according to Securities and Exchange Commission filings.
Mr. Chen and his Shanda Group company affiliates sold 3.4 million shares of CHS on Dec. 14 for between $8.50 and $8.71 per share, bringing in a total of $28.5 million. The move comes after he sold 5 million shares of CHS from Nov. 10-12 and another 4.6 million shares Nov. 23. Those sales brought in a total of $81.2 million.
Mr. Chen, a pioneer in China’s online gaming industry, began buying up shares of CHS in 2016. The last public comment the investor made about CHS was in 2018, when Shanda Group said it had a “good relationship” with CHS and supported the company’s strategy and management team.
The company’s surgery centers far outnumber its hospital portfolio, and its ambulatory earnings will account for nearly half of overall earnings next year.
Tenet Health got its start as a major hospital operator in the U.S. and can trace its hospital business roots as far back as 1969. But it may be time to think of the Dallas-based company as an ambulatory surgery center operator, first, and a hospital chain, second.
Following its latest acquisition, Tenet’s ASC footprint will be nearly five times larger by the number of facilities than its hospital portfolio, and its ambulatory earnings will account for nearly half of the company’s overall earnings next year, executives recently said. That’s a significant leap from about six years ago when ambulatory represented just 4% of the company’s earnings.
“From a stock perspective, I think they’re going to get more credit now for that ownership of the surgery center business than ever just because of the size contribution,” Brian Tanquilut, an analyst with Jefferies, said.
Still he noted they will likely retain their image as a hospital provider first given that half its business (and earnings) are subject to the dynamics of the hospital space.
Tenet will now operate up to 310 ASCs in 33 states following its $1.1 billion cash deal to buy up to 45 centers from SurgCenter Development.
Tenet has billed its purchase from SurgCenter Development as a transformative deal, crowning itself the leading musculoskeletal surgical platform.
SurgCenter Development is one of the larger ASC operators in the country. The Towson, Maryland-based firm has developed more than 200 centers since the company was officially established in 2002. SCD’s business model calls for its physician partners to maintain majority ownership while SCD provides consulting and capital.
In fact, Tenet will pull ahead of the pack and will operate the most ASCs compared to its competitors, according to various public data.
Amsurg, an ASC operator under private equity-owned Envision, controls more than 250 surgery centers, according to its website, followed by Optum’s 230 centers under its Surgical Care Affiliates brand.
|Owner||Number of ASCs (fully or partially owned)|
|Surgical Care Affiliates (Optum)||230|
|Total Medicare-certified ASCs in U.S.||5,700|
Still, those large players only control a sliver of the overall market. There are more than 5,700 Medicare-certified ASCs operating in the U.S., according to MedPac’s latest March report.
The market is so fragmented because, historically, a handful of doctors could come together and open up a small surgery center with a few operating rooms, Todd Johnson, a partner at Bain and Company, said. Johnson noted there are not that many deals like this out there, which is why it’s significant that Tenet was able to gobble up 45 centers in one swoop.
“We’re a long way from this being a market where any individual operator’s got 30% of market share. There’s just so many of these out there,” Johnson said.
What’s so attractive?
Regulatory and reimbursement changes and patient preference continues to fuel certain procedure migration away from hospitals.
“For payers, typically, the surgery rates are 30 to 40% less than the same procedure that’s done in a hospital outpatient department. So, payers certainly value the economic value proposition of ASCs,” Johnson said.
Just recently, regulators cleared the way for more procedures to be done in ASCs. CMS is eliminating the list of procedures that must be performed in a hospital, drawing ire from the hospital lobby. The inpatient-only list will be completely phased out by 2024, creating even more growth potential for surgery centers. Come Jan. 1, total hip replacements will be covered if performed in an ASC, a huge win for ASC operators.
It’s why hospital operators like Tenet have been keen to expand their surgery center footprint. The centers attract relatively healthy patients for quick procedures — eating into hospitals’ revenue and margin.
“This further move only solidifies the fact that they are trying to diversify their revenue streams, and, frankly move into a more attractive economic profile of procedure types — not trauma and COVID but rather scheduled surgeries they can run in and out like a factory but with really good clinical outcomes,” Johnson said.
To this point, Tenet leaders said the new SurgCenter Development centers generate higher margins and have minimal debt.
Patients also tend to prefer ASCs, Johnson said. Plus, as a lower cost option it can be persuasive for patients, especially those with high-deductible health plans.
Tenet has continued to bet on the shift from inpatient to outpatient services following its purchase of USPI in 2015.
The purchase set Tenet up to be a serious competitor in the space, establishing a portfolio of 244 surgery centers when the deal was announced. It illustrated Tenet’s intent to build a broader portfolio.
At the same time, it has whittled down its hospital portfolio, divesting in markets where it isn’t the No. 1 or No. 2 player as it seeks to hone its most competitive segments and markets.
Just last year, it announced plans to largely exit the Memphis, Tennessee, market with the sale of a number of assets including two hospitals, urgent care centers and the associated physician practices.
In 2018, Tenet shed all of its operations in the U.K. and eight hospitals across the U.S.
That long-term strategy was made clearer last week when Tenet announced its sale of its urgent care business to FastMed. By selling off its 87 CareSpot and MedPost centers, Tenet said it will allow the company to further focus on its surgery center business.
Tenet has been keen to tout its position of musculosketel procedures — a high growth area compared to other procedure types such as gastroenterology. A 2019 report from Bain and Company expects that orthopaedic and spine procedure volumes will increase the fastest over the next few years.
With the SCD centers in the mix, CEO Ron Rittenmeyer said, “this transaction ensures Tenet will essentially double down and further deepen our concentration in these high growth areas of the future.”
Chinese investor Tianqiao Chen and his group of companies have a 14.96 percent stake in Franklin, Tenn.-based Community Health Systems after recently selling nearly 4.6 million shares of the company, according to a Securities and Exchange Commission filing.
Mr. Chen and his Shanda Group company affiliates sold the shares Nov. 23 for between $8.66 and $9.08 per share, bringing in a total of $39.8 million. The move comes after he sold 5 million shares of CHS from Nov. 10-12 for $41.46 million.
Mr. Chen, a pioneer in China’s online gaming industry, began buying up shares of CHS in 2016. The last public comment the investor made about CHS was in 2018, when Shanda Group said it had a “good relationship” with CHS and supported the company’s strategy and management team.
For-profit hospitals are expected to see a financial decline over the next 12 to 18 months as federal relief funds that shored up revenue losses due to COVID-19 start to wane, a recent analysis from Moody’s said.
The analysis, released Monday, finds that cost management is going to be challenging for hospital systems as more surgical procedures are expected to migrate away from the hospital and people lose higher-paying commercial plans and go to lower-paying government programs such as Medicaid.
“The number of surgical procedures done outside of the hospital setting will continue to increase, which will weaken hospital earnings, particularly for companies that lack sizeable outpatient service lines (including ambulatory surgery centers),” the analysis said.
A $175 billion provider relief fund passed by Congress as part of the CARES Act helped keep hospital systems afloat in March and April as volumes plummeted due to the cancellation of elective procedures and reticence among patients to go to the hospitals.
Some for-profit systems such as HCA and Tenet pointed to relief funding to help generate profits in the second quarter of the year. The benefits are likely to dwindle as Congress has stalled over talks on replenishing the fund.
“Hospitals will continue to recognize grant aid as earnings in Q3 2020, but this tailwind will significantly moderate after that,” Moody’s said.
Cost cutting challenges
Compounding problems for hospitals is how to handle major costs.
Some hospital systems cut some costs such as staff thanks to furloughs and other measures.
“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs,” the analysis said. “However, we believe that these levels of cost cuts are not sustainable.”
Hospitals can’t cut costs indefinitely, but the costs for handling the pandemic (more money for personal protective equipment and safety measures) are going to continue for some time, Moody’s added.
“As a result, hospitals will operate less efficiently in the wake of the pandemic, although their early experiences in treating COVID-19 patients will enable them to provide care more efficiently than in the early days of the pandemic,” the analysis found. “This will help hospitals free up bed capacity more rapidly and avoid the need for widespread shutdowns of elective surgeries.”
But will that capacity be put to use?
The number of surgical procedures done outside of the hospital is likely to increase and will further weaken earnings, Moody’s said.
“Outpatient procedures typically result in lower costs for both consumers and payers and will likely be preferred by more patients who are reluctant to check-in to a hospital due to COVID-19,” the analysis said.
The payer mix will also shift, and not in hospitals’ favor. Mounting job losses due to the pandemic will force more patients with commercial plans toward programs such as Medicaid.
“This will hinder hospitals’ earnings growth over the next 12-18 months,” Moody’s said. “Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs.”
There are some bright spots for hospitals, including that not all of the $175 billion has been dispersed yet. The CARES Act continues to provide hospitals with a 20% add-on payment for treating Medicare patients that have COVID-19, and it suspends a 2% payment cut for Medicare payments that was installed as part of sequestration.
The Centers for Medicare & Medicaid Services also proposed increasing outpatient payment rates for the 2021 fiscal year by 2.6% and in-patient rates by 2.9%. The fiscal year is set to start next month.
Patient volumes could also return to normal in 2021. Moody’s expects that patient volumes will return to about 90% of pre-pandemic levels on average in the fourth quarter of the year.
“The remaining 10% is likely to come back more slowly in 2021, but faster if a vaccine becomes widely available,” the analysis found.
Moody’s Investors Service maintained its negative outlook for U.S. for-profit hospitals due to waning federal aid, shifting payer mixes and varying volume trends.
Moody’s expects for-profit hospitals earnings before interest tax depreciation and amortization to decline by a low-to-mid single-digit rate in the next 12 to 18 months.
The credit rating agency maintained the negative outlook for several reasons, including that government aid to providers is beginning to wind down and most providers will see adverse payer mix shifts in the next year due to the high unemployment rate in the U.S.
In addition, volume trends and acuity levels are likely to vary significantly for these for-profit providers across the U.S. and the number of procedures performed outside of the hospital setting will continue to increase, which will weaken hospital earnings, Moody’s said.
Further, the credit rating agency said that many providers implemented rapid and aggressive cost cutting measures, which enabled them to exit the second quarter largely unscathed.
“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs. However, we believe that these levels of cost cuts are not sustainable,” Moody’s said.
Overall, Moody’s said it expects volumes to gradually return to pre-COVID-19 levels in 2021.
Physicians Premier ER charged Dr. Zachary Sussman’s insurance $10,984 for his COVID-19 antibody test even though Sussman worked for the chain and knows the testing materials only cost about $8. Even more surprising: The insurer paid in full.
When Dr. Zachary Sussman went to Physicians Premier ER in Austin for a COVID-19 antibody test, he assumed he would get a freebie because he was a doctor for the chain. Instead, the free-standing emergency room charged his insurance company an astonishing $10,984 for the visit — and got paid every penny, with no pushback.
The bill left him so dismayed he quit his job. And now, after ProPublica’s questions, the parent company of his insurer said the case is being investigated and could lead to repayment or a referral to law enforcement.
The case is the latest to show how providers have sometimes charged exorbitant prices for visits for simple and inexpensive COVID-19 tests. ProPublica recently reported how a $175 COVID-19 test resulted in charges of $2,479 at a different free-standing ER in Texas. In that situation, the health plan said the payment for the visit would be reduced and the facility said the family would not receive a bill. In Sussman’s case, the insurer paid it all. But those dollars come from people who pay insurance premiums, and health experts say high prices are a major reason why Americans pay so much for health care.
Sussman, a 44-year-old pathologist, was working under contract as a part-time medical director at four of Physicians Premier’s other locations. He said he made $4,000 a month to oversee the antibody tests, which can detect signs of a previous COVID-19 infection. It was a temporary position holding him over between hospital gigs in Austin and New Mexico, where he now lives and works.
In May, before visiting his family in Scottsdale, Arizona, Sussman wanted the test because he had recently had a headache, which can be a symptom of COVID-19. He decided to go to one of his own company’s locations because he was curious to see how the process played out from a patient’s point of view. He knew the materials for each antibody test only amounted to about $8, and it gets read on the spot — similar to an at-home pregnancy test.
He could even do the reading himself. So he assumed Physicians Premier would comp him and administer it on the house. But the staff went ahead and took down his insurance details, while promising him he would not be responsible for any portion of the bill. He had a short-term plan through Golden Rule Insurance Company, which is owned by UnitedHealthcare, the largest insurer in the country. (The insurance was not provided through his work.)
During the brief visit, Sussman said he chatted with the emergency room doctor, whom he didn’t know. He said there was no physical examination. “Never laid a hand on me,” he said. His vitals were checked and his blood was drawn. He tested negative. He said the whole encounter took about 30 minutes.
About a month later, Golden Rule sent Sussman his explanation of benefits for the physician portion of the bill. The charges came to $2,100. Sussman was surprised by the expense but he said he was familiar with the Physicians Premier high-dollar business model, in which the convenience of a free-standing ER with no wait comes at a cost.
“It may as well say Gucci on the outside,” he said of the facility. Physicians Premier says on its website that it bills private insurance plans, but that it is out-of-network with them, meaning it does not have agreed-upon prices. That often leads to higher charges, which then get negotiated down by the insurers, or result in medical bills getting passed on to patients.
Sussman felt more puzzled to see the insurance document say, “Payable at: 100%.” So apparently Golden Rule hadn’t fought for a better deal and had paid more than two grand for a quick, walk-in visit for a test. He was happy not to get hit with a bill, but it also didn’t feel right.
He said he let the issue slide until a few weeks later when a second explanation of benefits arrived from Golden Rule, for the Physicians Premier facility charges. This time, an entity listed as USA Emergency sought $8,884.16. Again, the insurer said, “Payable at: 100%.”
USA Emergency Centers says on its website that it licenses the Physicians Premier ER name for some of its locations.
Now Sussman said he felt spooked. He knew Physicians Premier provided top-notch care and testing on the medical side of things. But somehow his employer had charged his health plan $10,984.16 for a quick visit for a COVID-19 test. And even more troubling to Sussman: Golden Rule paid the whole thing.
Sussman was so shaken he resigned. “I have decided I can no longer ethically provide Medical directorship services to the company,” he wrote in his July 13 resignation email. “If not outright fraudulent, these charges are at least exorbitant and seek to take advantage of payers in the midst of the COVID19 pandemic.”
Sussman agreed to waive his patient privacy so officials from the company could speak to ProPublica. USA Emergency Centers declined interview requests and provided a statement, saying “the allegations are false,” though it did not say which ones.
The statement also said the company “takes all complaints seriously and will continue to work directly with patients to resolve issues pertaining to their emergency room care or bill. …The allegations received pertain to a former contracted employee, and we cannot provide details or further comment at this time.”
Physicians Premier advertises itself as a COVID-19 testing facility on its website, with “results in an hour.” According to the claims submitted by Physicians Premier to Golden Rule, obtained by Sussman, the physician fee and facility fees were coded as emergency room visits of moderate complexity. That would mean his visit included an expanded, problem-focused history and examination. But Sussman said the staff only took down a cursory medical history that took a few minutes related to his possible exposure to COVID-19. And he said no one examined him.
The claims also included codes for a nasal swab coronavirus test. But that test was not performed, Sussman said. The physician’s orders documented in the facility’s medical record also do not mention the nasal swab test. Those charges came to $4,989.
The claims show two charges totaling $1,600 for the antibody test Sussman received. In a spreadsheet available on its website on Friday, Physicians Premier lists a price of $75 for the antibody test.
For comparison, Medicare lists its payment at $42.13 for COVID-19 antibody tests. That’s because Medicare, the government’s insurance plan for the disabled and people over 65, sets prices.
Complicating matters, Texas is the nation’s epicenter for free-standing emergency rooms that are not connected to hospitals. Vivian Ho, an economist at Rice University who studies the facilities, said their business model is based on “trying to mislead the consumer.” They set up in locations where a high proportion of people have health insurance, but they don’t have contracted rates with the insurers, Ho said. They are designed to look like lower-priced urgent care centers or walk-in clinics, Ho said, but charge much higher emergency room rates. (The centers have defended their practices, saying that they clearly identify as emergency rooms and are equipped to handle serious emergencies, and that patients value the convenience.)
The day after he resigned, Sussman texted an acquaintance who works as a doctor at Physicians Premier. The acquaintance said the facility typically only collects a small percentage of what gets billed. “I just don’t want to be part of the game,” Sussman texted to him.
Shelley Safian, a Florida health care coding expert who has written four books on medical coding, reviewed Sussman’s medical records and claims at ProPublica’s request. The records do not document a case of a complex patient that would justify the bills used to code the patient visit, she said. For example, the chief complaint is listed as: “A generic problem (COVID TESTING).” Under “final acuity,” the medical record says, “less urgent.” Under the medical history it says, “NO SYMPTOMS.”
Safian described the charges as “obscene” and said she was shocked the insurer paid them in full. “This is the exact opposite of an employee discount,” she said. “Obviously nobody is minding the store.”
Congress opened the door to profiteering during the pandemic when it passed the CARES Act. The legislation, signed into law in March, says health insurers must pay for out-of-network testing at the cash price a facility posts on its website, or less. But there may be other charges associated with the tests, and insurers generally have tried to avoid making patients pay any portion of costs related to COVID-19 testing or treatment.
The charges for Sussman’s COVID-19 test visit are “ridiculous,” said Niall Brennan, president and CEO of the Health Care Cost Institute, a nonprofit organization that studies health care prices. Brennan wondered whether the CARES Act has made insurers feel legally obligated to cover COVID-19 costs. He called it “well intentioned” public policy that allows for “unscrupulous behavior” by some providers. “Insurance companies and patients are reliant on the good will and honesty of providers,” Brennan said. “But this whole pandemic, combined with the CARES Act provision, seems designed for unscrupulous medical providers to exploit.”
It’s illegal for medical providers to charge for services they did not provide. But ProPublica has previously reported how little insurers, including UnitedHealthcare, do to prevent fraud in their commercial health plans, even though experts estimate it consumes about 10% of all health care costs. For-profit insurance companies don’t want to spend the time and money it takes to hold fraudulent medical providers accountable, former fraud investigators have told ProPublica. Also, the insurance companies want to keep providers in their networks, so they easily cave.
In mid-July, Sussman used the messenger system on Golden Rule’s website to report his concerns about the case. Short-term health plans are typically less expensive because they offer less comprehensive coverage. Sussman said he appreciated that his plan covered the charges, and felt compelled to tell the company what had happened.
That led to a phone conversation with a fraud investigator. They went line by line through the charges and Sussman told him many of the services had not been provided. “His attitude was kind of passive,” Sussman said of the fraud investigator. “There was no indignation. He took in stride, like, ‘Yep, that’s what happens.’” The investigator said he would escalate the case and see if the facility had submitted any other suspect claims. But Sussman never heard back.
Maria Gordon-Shydlo, a spokeswoman for UnitedHealthcare, which owns Golden Rule, would not provide anyone to be interviewed. She said in an emailed statement that the company’s first priority during the pandemic “has been to ensure our members get the care they need and are not billed for COVID testing and treatment. Unfortunately, there are some providers who are trying to take advantage of this and are inappropriately or even fraudulently billing.”
“Golden Rule has put processes in place to address excessive COVID-related billing,” the statement said. “We are currently investigating this matter and, if appropriate, will seek to recoup any overpayment and potentially refer this case to law enforcement.”
Golden Rule’s 100% payment of the charges may simply come down to “incompetence,” said Dr. Eric Bricker, a Texas internist who spent years running a company that advised employers who self-fund their insurance. Insurance companies auto-adjudicate millions of claims on software that may be decades old, said Bricker, who produces videos to help consumers and employers understand health care. If bills are under a certain threshold, like $15,000, they may sail through and get paid without a second look, he said.
UnitedHealth Group reported net earnings of $6.6 billion in the second quarter of 2020. Bricker said the company may be paying bills without questioning them because it doesn’t “want to create any noise” by saying no at a time its own earnings are so high, Bricker said.
Texas has a consumer protection law that’s designed to prevent businesses from exploiting the public during a disaster. The attorney general’s office has received and processed 52 complaints about health care businesses and billing or price gouging related to the pandemic, a spokeswoman from the office said in an email. The agency does not comment on the existence of any investigations, but has not filed any cases related to overpriced COVID-19 tests.
Sussman said he got one voicemail from a billing person at Physicians Premier, saying she wanted to explain the charges, but he did not call back. He said he spoke out about it to ProPublica because he opposes Medicare-for-all health care reform proposals. Bad actors in the profession could cause doctors to lose their privilege to bill and be reimbursed independently, he said. Most physicians are fair with their billing, or even conservative, he said. “If instances like these go unchecked it will provide more ammo for advocates of a single-payer system.”
For-profit health systems have been better able to weather a financial crisis caused by COVID-19 than their nonprofit counterparts because they could reduce more expenses, a new analysis from the Medicare Payment Advisory Commission finds.
The analysis released Thursday during MedPAC’s monthly meeting comes as providers struggle to recover from low patient volumes stemming from the COVID-19 pandemic. The report also explored how physician offices have fared.
Hospitals faced a massive dip in patient volume in March and April at the onset of the pandemic, which forced facilities to cancel or delay elective procedures. Patient volumes have since recovered to near pre-pandemic levels, MedPAC found.
But the recovery has been mixed depending on the hospital system.
MedPAC looked at earnings for three large nonprofit systems in the U.S. and four large for-profit systems in the second quarter and found a variation in how they handled the decline in revenue.
Aggregate patient revenue for the nonprofit systems declined by $1.5 billion and this led to a $621 million loss for the systems in the second quarter compared to the same period in 2019. Overall the systems had operating profit margins ranging from negative 13% to positive 5%.
The four for-profit systems saw a $3.5 billion decline in patient revenue. However, the systems posted an increase of $634 million in operating income.
This led to a range of operating margin increases of 1 to 14% in the second quarter compared to 2019.
The for-profit systems got more relief funding ($1.9 billion compared with $782 million) from a $175 billion federal provider relief fund created by the CARES Act.
But the biggest difference between for-profit and nonprofit systems was how they handled expenses.
“For-profit systems substantially reduced expenses in the second quarter, in aggregate reduced by $2.3 billion and that made up for lost revenue,” said Jeff Stensland, a MedPAC staff member, during the meeting.
Nonprofit systems only saw a $13 million decline in expenses.
MedPAC did not name the systems that it analyzed nor did it delve into what expenses were reduced and how.
Some systems have taken to furloughing employees but all systems have faced increased expenses for personal protective equipment and some staff.
The analysis also looked at the financial impact of the pandemic on physician offices. MedPAC found that federal grants, loans and payment increases offset a majority of the revenue lost in March and May due to patient volume declines.
MedPAC estimated physician offices lost between $45 to $55 billion. However, offices got $26 billion in loans from the Paycheck Protection Program, which don’t have to be repaid if the majority of the funds go to payroll.
Physician offices also received $5 billion out of the $175 billion provider relief fund passed as part of the CARES Act.
Physicians also got $1 billion in savings from the temporary suspension of a 2% decline in Medicare payments created under sequestration.
Prime will acquire St. Francis for a net of $350 million, with a $200 million base cash price and $60 million for accounts receivable.
California Attorney General Xavier Becerra has conditionally approved Verity Health’s application to transfer ownership of St. Francis Medical Center to Prime Healthcare. The Attorney General’s decision follows an earlier decision by the U.S. Bankruptcy Court of the Central District of California granting Verity’s request to reject the existing collective bargaining agreements which impose legacy cost structures that it said contributed to bankruptcy.
Becerra noted that his approval of the sale of St. Francis to Prime Healthcare “protect(s) access to care for the Los Angeles communities served” by St. Francis.
“The COVID-19 public health crisis has brought home the importance of having access to lifesaving hospital care nearby in our communities,” he said. “St. Francis Medical Center is not just an asset, it is an indispensable neighbor, it is the workers who serve the patients, and the doctors who save lives. We conditionally approve this sale to keep it that way.”
Prime Healthcare has built a reputation for saving financially distressed hospitals across the U.S., touting improved clinical quality. Healthgrades said Prime had hospitals named among the nation’s 100 best 53 times, and has been the recipient of several Patient Safety Excellence Awards.
The Attorney General’s office conducted an exhaustive review of the transaction for the past several months and carefully considered public input on the proposed transaction. The Attorney General’s approval includes conditions for the sale which Prime is currently reviewing. Pending a final ruling by the Bankruptcy Court, the transaction is expected to be completed this summer.
THE LARGER TREND
In early April, the U.S. Bankruptcy Court approved the Asset Purchase Agreement for the sale of St. Francis Medical Center to Prime. Under the agreement, Prime will acquire St. Francis for a net consideration of over $350 million, including a $200 million base cash price and $60 million for accounts receivable. In addition, Prime has committed to invest $47 million in capital improvements and extend offers of employment to nearly all staff.
The court also recently granted Verity’s request to reject the existing collective bargaining agreements with two unions that represent associates at St. Francis Medical Center, SEIU and UNAC. The court noted that Prime Healthcare was the only party to submit a qualifying bid for St. Francis and that without rejecting the existing CBAs, “St. Francis would not continue to operate as a going concern, and all of the UNAC (and SEIU) represented employees would lose their jobs.”
The court also noted that Prime and Verity had made multiple efforts to negotiate in good faith with the unions, and the parties devoted “hundreds of hours to negotiations,” but ultimately were unable to agree on new CBAs. Further, the court determined that one of the reasons for the hospital’s bankruptcy was the “legacy cost structure imposed by the existing CBAs.”
It then staid that the proposals were rejected “without good cause” by the unions. Prime said it negotiated in good faith and proposed increasingly generous offers to UNAC and SEIU with wages far above its existing agreements at its Los Angeles-area hospitals. Prime’s latest offer to SEIU maintained existing wages for roughly 90% of SEIU members, and increased wages for some of them. Prime said these wages would be substantially higher than those recently voted by SEIU members at three of Prime’s Los Angeles hospitals.
ON THE RECORD
“Receiving conditional approval is an important step in ensuring Prime is able to preserve the St. Francis mission for the benefit of associates, members of the medical staff and most importantly the patients and Southeast Los Angeles community that has relied on St. Francis for 75 years,” said Rich Adcock, CEO of Verity Health.
“We are honored to be selected to continue the St. Francis legacy and are working to review the conditions and finalize the sale as quickly as possible,” said Dr. Sunny Bhatia, CEO, Region I and chief medical officer of Prime Healthcare. “St. Francis’ mission is especially critical during this pandemic and we honor the service of all caregivers. Prime has already started investments at St. Francis that will enhance patient care as we commit to continue every service line, community benefit program, charity care and expand new services to the community.”
- For-profit hospital operator Quorum Health received approval of its plan to recapitalize the business Monday in U.S. Bankruptcy Court for the District of Delaware. Quorum expects to emerge from bankruptcy in early July, according to regulatory filings.
- The system filed for Chapter 11 bankruptcy April 7 to address current liquidity needs while continuing to care for patients and keep its hospitals operating amid a pandemic, according to a statement. It entered into a restructuring agreement with a majority of its lenders and noteholders.
- Quorum still needs the court to issue a final order, but said the reorganization will reduce its debt by about $500 million, as originally expected.
Tennessee-based Quorum Health, which operates 22 rural and mid-sized hospitals in 13 states, may have been more ill-positioned financially than other systems going into the pandemic.
The company went public in May 2016 with 38 hospitals — 14 of which have since shuttered. In 2017, private equity firm KKR took a 5.6% stake in the system for $11.3 million.
Beyond being Quorum’s largest debt-holder today, KKR also owns about 9% of its public shares. In December, the firm offered to buy Quorum out and take the hospital chain private at $1 a share.
But that didn’t pan out, and Quorum instead ended up filing for bankruptcy in April, soon after the COVID-19 pandemic hit. The restructuring agreement now “allows our company to begin a new chapter with the flexibility and resources to continue supporting our community hospitals as they serve on the frontlines of this pandemic and beyond,” Marty Smith, Quorum’s executive vice president and chief operating officer, said in a statement Monday.
“We are grateful for the confidence of our financial stakeholders and partners, as well as our dedicated employees and physicians, and look forward to building on the significant progress we have made in strengthening our operations in recent years,” he said.