Deadly Over-Doses and Private Equity - the Case of Bain Capital's Methadone Clinics

Some reporting by Bloomberg provides more evidence about what happens when direct care of the most vulnerable patients is commercialized.  The vulnerable patients in this case were narcotic addicts.

By way of introduction, one method of treating narcotic addiction is the use of methadone.  Methadone is a narcotic that may block the "high" produced by other narcotics and thus may lead to the abuse of these drugs.  Because methadone is long-acting and can be given orally in liquid form, methadone clinics traditionally provided patients one dose a day which they swallowed on the spot.  The methadone would presumably block their craving for other narcotics for that day, and the method of administration would prevent diversion of the drug.  Methadone clinics became more prevalent starting in the 1960s, and like most "health care provider organizations," as we now call them, were then largely non-profit.

On a personal note, in the 1980s, I was the internal medicine physician for a non-profit hospital based methadone clinic designed for patients who had become addicted to prescription narcotics.  It was a challenging task, but the challenges seemed manageable.  That was then.

Nowadays, methadone clinics are more likely to be for-profit.  In this brave new world of for-profit "health care delivery," there may be problems unlike those seen "back in the day."   For example, Bloomberg just reported on a case with a distinctly colorful title

Dead Man Spurs Methadone Probe at Bain’s CRC Clinic in Baltimore 

Maryland state regulators are investigating an addiction-treatment clinic owned by Bain Capital Partners LLC after the methadone-related death of a Baltimore man. 

The probe is focused on the Pine Heights Treatment Center in Baltimore, one of dozens of clinics operated by Bain’s CRC Health Corp., the largest methadone-treatment provider in the U.S. It was triggered by a complaint from the public, said Dori Henry, a spokeswoman for the state Alcohol and Drug Abuse Administration. She declined to comment on the investigation’s details.

The complaint alleges that Warren Lumpkin, 34, a forklift operator, died on Jan. 4 after ingesting methadone that was given to him by a CRC patient, according to a copy obtained by Bloomberg News. An autopsy found that 'methadone intoxication' contributed to his death, records show.

Lumpkin’s ex-wife, Sabrina M. Lumpkin, who filed the complaint, said in it that he wasn’t a patient at the CRC clinic. He had a friend who was, and that friend gave half a dose of methadone from the clinic to Lumpkin, according to the complaint. 

Note that "back in the day," such an event would have been nearly impossible.  As noted above, patients were given a cup of liquid containing their daily methadone dose, and drank it under observation.   Practically, they could not "cheek" or otherwise divert the drug.  Of course, that approach required personnel to observe each patient each day.  Paying those personnel made the operation more expensive.  "Back in the day," though, non-profit hospitals and clinics were willing to provide the service in the interest of making sure the patients, and only the patients got the prescribed treatment.

Things may be different when methadone clinics are run for a profit.  A Bloomberg investigative report published in February looked into the operations of the company that owned the clinic in Maryland.  That too had a provocative title and started with a similarly disconcerting case.

Drug Users Turn Death Dealers as Methadone From Bain Hits Street 

 After Jennifer Vanlieu turned to methadone treatment to beat an addiction to heroin and pain pills, she morphed from drug user to convicted drug dealer.
 
Vanlieu said she got a carryout methadone dose at a clinic operated by CRC Health Corp. in Richmond, Indiana, in March, 2010, and then gave about 15 milligrams to her friend Carissa Plemons. Plemons died hours later, after ingesting a lethal mix of methadone and other drugs, according to police reports.

Take-home methadone -- doses patients carry out instead of taking at clinics -- enabled the abuse, said Vanlieu, 26, who was sentenced to six years in prison for dealing the drug to Plemons. While she didn’t sell it to her friend, she said in an interview that other clinic patients often resold their take- homes. CRC is owned by Boston-based Bain Capital Partners LLC and is the largest U.S. provider of methadone treatment.

'Some would sell it in the parking lot,' she said. 

As in the first case, unlike the process "back in the day," now patients, who are almost all presumably narcotic addicts, may be given multiple doses of liquid methadone to take home.  They are no longer required to take a daily dose of methadone under observation.  As the case above illustrates, it is all too easy to divert take home doses of methadone.  While methadone can be used to block the effects of other narcotics, it can also be abused.  Obviously, as in the cases above, abused methadone can cause a lethal overdose. 

Wide Use of Take-Home Methadone

The Bloomberg report found multiple instances in which CRC Health clinics handed out multiple take-home methadone doses apparently without proper consideration of the risk or supervision of the patients.

 In states where CRC has had its highest patient counts -- Indiana, West Virginia, California and Oregon -- available data and interviews show the company tries to provide take-home packages, which range from one dose to as many as 30, more often than other clinics.

In addition, 

The Richmond, Indiana, clinic gave take-home methadone to a patient who flunked a drug test, a January 2012 audit found. The company’s Williamson, West Virginia, clinic didn’t immediately revoke take-homes from a patient who had two positive drug tests in 2010, records show. In 2011, inspectors found no evidence that a physician at CRC’s clinic in Renton, Washington, used 'good clinical, judgment' in giving patients carryout doses.

A CRC center in Chattanooga, Tennessee, failed to supervise take-home doses properly in a case 'clearly indicative of drug diversion,' state authorities found in June 2011. The company’s clinics in Claymont, Delaware, and Coatesville, Pennsylvania, were faulted in May 2012 and October 2010, respectively, for giving carry-outs to patients who missed required counseling, records show.

As for the spot-checks Herschman described -- they hardly ever happened at CRC’s clinic in Goldsboro, North Carolina, said Liaudaitis, the former counselor. 

Furthermore,

In Indiana, CRC’s five clinics served 69 percent of methadone patients in 2011, while distributing 96 percent of the take-homes tracked by state records. Patients of CRC’s dozen California clinics received carryout packages of as many as 30 doses at a rate twice that of all others. In Virginia, 74 percent of patients at CRC’s three clinics got at least one take-home dose a week in August 2012, while 47 percent of patients at all other clinics did, state records show. 

The Business Model Behind Take-Home Methadone

So why would a methadone clinic hand multiple doses of an abusable narcotic to narcotic abusers?  The Bloomberg article went on to document some possible reasons which ultimately have to do with the business model of for-profit methadone clinics.

First of all, providing multiple doses of methadone requires less time from clinic personnel, which is handy when the clinics may be under-staffed by over-worked poorly paid personnel.  

'That was the culture -- keep the census up,' said Mike Liaudaitis, who worked as a counselor at CRC’s clinic in Goldsboro, North Carolina, from mid-2009 until early 2011. He recalls being swamped with a 64-person caseload that exceeded the state’s limit of 50. 

Also,

'Clearly the company is saving money if they’re distributing multiple take-home doses at one time,' said West Virginia Delegate Don Perdue, a Democrat who has pursued stricter oversight of for-profit clinics. 'They don’t have to have as many staff handing out the merchandise.'

In particular,

the Goldsboro clinic -- like others described by regulators and former CRC employees in Indiana and West Virginia -- was frequently understaffed, Liaudaitis said.

Since Jan. 1, 2009, CRC’s clinics haven’t met staffing standards more than 50 times, regulatory records from 15 states show. Clinics were cited 80 times for failing to document that they gave patients enough counseling. In response, the company agreed to hire more, recruit more aggressively and increase supervision. Competition for qualified workers is intense, CRC said in its 2011 annual report.

CRC didn’t pay well enough to attract or keep experienced counselors, said Malaysia Williams, who worked at its clinic in Huntington, West Virginia, from June 2009 through March 2010. 'Nobody stayed there,' she said. 'It paid poorly.'

Williams got $13 an hour, she said -- about the same amount other former counselors reported. That’s roughly $27,000 a year. 

There is evidence that under-staffing, under-payment of personnel, and the wide use of take-home methadone lead to big increases in short-term revenue for CRC Health, the for-profit corporation running the clinics.

 Until recently, there was little difference between the operations of for-profit and non-profit methadone clinics, said Thomas D’Aunno, a professor of health policy and management at Columbia University who has tracked the treatment centers for years. That changed in 2011 survey data, which showed 'significant differences,' he said: For-profit clinics had fewer staffers than public clinics.

As Williams struggled to catch up in Huntington, the clinic pushed its revenue up almost 8 percent to $5 million in 2010 -- while expenses increased less than 1 percent to $2.6 million, according to state regulatory documents. 

Private Equity's Take Over of Methadone Clinics

The potential for big revenues has drawn private equity into the world of methadone maintenance for the treatment of narcotic addiction.

 Nurtured by government spending, methadone clinics spread nationwide in the 1960s and ’70s until strapped state and local governments began decreasing their outlays. By 2010, for-profit providers controlled 52.8 percent of the 1,200 U.S. clinics.

Over the past seven years, private equity firms have invested more than $2.2 billion in substance-abuse treatment and behavioral health companies in 62 deals, according to PitchBook Data Inc., a Seattle-based research firm.

Addiction-treatment companies are 'some of the most sought-after -- and valuable -- acquisition candidates in health care,' partly because of profit margins that can top 20 percent, according to the Braff Group, a Pittsburgh-based mergers and acquisitions advisory firm.

 As it turns out, CRC Health was acquired by one of the more notable private equity firms.

Bain Capital, the private equity firm co-founded by former Republican presidential candidate Mitt Romney, paid $723 million for CRC in 2006, corporate filings show. Romney, who left Bain in 1999, had no input in its investments or management of companies after that, he has said.

Still, Romney reported last year that he owned more than $1 million worth of a Bain fund that holds most of CRC’s shares. He reported receiving between $100,000 and $1 million in dividends, interest and capital gains from that holding, as well as income from two other Bain funds with interests in CRC, according to the financial disclosure he filed with the U.S. Office of Government Ethics in June. Bain executives declined to comment, said Alex Stanton, a spokesman. Representatives for Romney didn’t respond to requests for comment.

 CRC has reported paying Bain about $15.4 million in management fees along with $7.2 million in fees related to the merger since 2006. The company’s revenue more than doubled to $446 million in 2011 from $209 million in 2005. Methadone clinics generated more than a quarter of the 2011 revenue, $123 million.

Note that last year, when Mr Romney was running for the US Presidency, and hence his ties to Bain Capital were particularly newsworthy, several investigative reports about care at Bain owned health care provider organizations were published.  We posted about issues at another CRC Health operation, Aspen, which operates in -patient treatment centers for psychiatric patients.  Investigative reporting about that part of CRC Health also suggested that the company was putting short-term revenue ahead of patient welfare.  We also posted about issues at HCA, a for-profit hospital chain partially owned by Bain, which again suggested revenue came before patients. 

In one sense, this should be no surprise, since the business model for private equity is all about extracting the most money in the shortest time for acquired corporations.  (Look here for more details.)

Summary

We now have more evidence that patients "cared for" directly by for-profit corporations, especially those owned by private equity firms, do not do well.  Meanwhile, the top executives of these firms do exceedingly well.

We have noted how health care organizations have increasingly been "financialized," lead by executives who put short-term revenue generation ahead of all other goals, including good patient care. Furthermore, hospitals are increasingly likely to be formally for-profit, and hence likely to be lead by such executives. Worse, hospitals are increasingly likely to be owned by private equity firms, further increasing the emphasis on short-term money making. Even worse, physicians are now more frequently employed by such organizations, which may pressure them to do what it takes to increase revenue, no matter what the effect on patients' and the public's health.

The probably effects on the quality of care, access, and costs are obvious.

In my humble opinion, before the health care bubble bursts, we need to challenge the notion that direct health care should ever be provided, or that medicine ought to be practiced by for-profit corporations. Before market fundamentalism became so prominent, many states prohibited the corporate practice of medicine, and the American Medical Association forbade the commercialization of medicine.

 It is time to heed that wisdom. I submit that we will not be able to have good quality, accessible health care at an affordable price until we restore physicians as independent, ethical health care professionals, and until we restore small, independent, community responsible, non-profit hospitals as the locus for inpatient care.

 True health care reform will require an end to market fundamentalism in health care.

Paging Doctor EBDITA - How Private Equity May Push Hospitals to Put Revenue Ahead of Patient Care

Issues raised by the increasing influence of private equity firms in the direct care of patients were illuminated by a series of articles about the for-profit hospital chain HCA.

Quality Problems

The articles highlighted a series of concerns about quality problems affecting the chain's patients. 

Cardiac Overtreatment

First, a New York Times article described problems in the care of cardiac patients. 

HCA, the largest for-profit hospital chain in the United States with 163 facilities, had uncovered evidence as far back as 2002 and as recently as late 2010 showing that some cardiologists at several of its hospitals in Florida were unable to justify many of the procedures they were performing. Those hospitals included the Cedars Medical Center in Miami, which the company no longer owns, and the Regional Medical Center Bayonet Point. In some cases, the doctors made misleading statements in medical records that made it appear the procedures were necessary, according to internal reports.

More specifically, at one hospital, cardiac catheterizations seemed to occur to often: "about half the procedures ... were determined to have been done to patients without significant heart disease." Two patients at another hospital had severe adverse effects after cardiac procedures that seemed unnecessary in retrospect. There were "incidents at Bayonet Point where patients were treated for multiple lesions, or blockages, even when 'the second lesion (or third) did not appear to have significant disease....' [In] 'several cases'  ... patients were treated even though their arteries did not have significant blockages." Then,

HCA brought in an external company, CardioQual Associates of Franklin, Mich., in 2004 to examine medical records from Bayonet Point. In a confidential memo prepared in December 2004 and reviewed by The Times, CardioQual concluded that as many as 43 percent of 355 angioplasty cases, where doctors performed invasive procedures to open up a patient’s arteries, were outside reasonable and expected medical practice. Worse, the investigation revealed that some physicians had indicated in medical records that the patients had blockages of 80 to 90 percent when a later, more scientific analysis of a sampling of cases revealed the blockages had ranged from 33 to 53 percent.

Possible Undertreatment of Acute Illness

Then, a second NY Times article found that

HCA decided not to treat patients who came in with nonurgent conditions, like a cold or the flu or even a sprained wrist, unless those patients paid in advance. In a recent statement, HCA said that of the six million patients treated in its emergency rooms last year, 80,000, or about 1.3 percent, 'chose to seek alternative care options.'

Of course, the problem with this approach is that it is not always possible to tell how severe an acute illness is without a more complete evaluation than can be done in emergency department triage. There is anecdotal evidence that HCA turned away some patients who actually had serious illness:

Regulators in several states have taken HCA hospitals to task over screening out patients too aggressively, including situations where the screening missed serious conditions.

In early 2010, an uninsured patient who entered HCA’s TriStar Skyline Medical Center in Nashville, complaining of 'pain when breathing,' was sent away. An hour and a half later, at another hospital, the same patient was found to have pneumonia, according to the results of a Medicare investigation. Regulators cited Skyline for having 'failed to ensure that an appropriate medical screening examination was conducted.'

This year, the Office of Inspector General fined HCA’s Northside Hospital in St. Petersburg, Fla., $38,000 for sending home a feverish patient with an artificial heart valve. Two days later, the patient reappeared with the flu and severe respiratory problems. The following day, he died.

Undertreatment of Bed Sores

The second Times article also suggested that decreased nurse staffing at HCA hospitals lead to worse treatment of bed sores (decubitus ulcers):

Experts say there is often a direct correlation between bedsores and the quality of hospital staff levels. 'Staffing is critical,' said Courtney H. Lyder, the dean at the UCLA School of Nursing and an expert on wound care. 'When you see high levels of wounds, you usually see a high level of dysfunctional staff,' he said.

HCA owned eight of the 15 worst hospitals for bedsores among 545 profit-making hospitals nationwide, each with more than 1,000 patient discharges, tracked by the Sunlight Foundation using Medicare data from October 2008 to June 2010. HCA’s West Houston Medical Center and CJW Medical Center in Richmond, Va., landed near the top of the list.

HCA says it has increased its nursing staff at its hospitals each year over the last five years. But an examination of lawsuits shows bedsore problems have been persistent at several HCA facilities. In Portsmouth Regional Hospital in New Hampshire, a 60-year-old woman died in 2009 after her bedsores went untreated for three days and became infected, according to a wrongful-death lawsuit filed in the spring of 2011 in federal court against the hospital.

One HCA hospital

was cited twice by Florida regulators, in 2008 and 2010, for having inadequate numbers of nurses on its staff to oversee wound care for patients. During the 2010 examination, regulators noted that Memorial had less than the equivalent of two full-time nurses who specialized in wound care to treat the 132 patients who required aid.

'The system of treatment for wound care places patients at risk for additional medical complications,' the examiners said.

So, in summary, there is reason for concern about overtreatment of cardiac disease, and undertreatment of acute illness and bedsores at HCA hospitals. However, no hospital and no doctor is perfect. Everyone makes mistakes, and many decisions can be questioned in retrospect. Instead

Putting Money Ahead of Quality

Instead, the articles suggested they were part of a pattern in which concerns about short-term revenue trumped concerns about patient care.

Cardiac Procedures to Generate More Revenue

The article about cardiac care noted that one of the physicians who allegedly was doing too many cardiac procedures

was highlighted by the hospital in a 2009 business plan as being the most profitable doctor at the facility. 'Our leading EBDITA MD,' the plan described him. (Ebitda, or earnings before interest, taxes, depreciation and amortization, is a measure of corporate earnings.)

On the other hand, according to the Tampa Bay Times, some of the doctors whom HCA suspended for doing too many percutaneous cardiac revascularization procedures charged that the issue was that

far from concern over the cost of stents — Bayonet Point was upset that stents were replacing more expensive bypass surgeries.

The first NY Times article also suggested that HCA executives did their best to keep the issue quiet so as not to affect revenue. First,

HCA declined to provide evidence that it had alerted Medicare, state Medicaid or private insurers of its findings, or reimbursed them for any of the procedures that the company later deemed unnecessary, as required by law.

Also,

HCA also declined to show that it had ever notified patients, who might have been entitled to compensation from the hospital for any harm.

The Times uncovered internal HCA communications suggesting that obfuscation was deliberate:

In January 2005, David Williams, who was then the chief executive of Bayonet Point, wrote in an e-mail: 'Clearly, we have protected ourselves under the peer review umbrella and have released very little information.' The recipients of his message included Dan Miller, who then oversaw HCA’s hospitals in western Florida, and Charles R. Evans, a Nashville executive who was president of all of HCA’s hospitals on the eastern side of the country.

In his response, Mr. Evans thanked Mr. Williams for the update and asked for a 'summary as to the business impact.'

Furthermore, as the last sentence above indicated, review of internal emails suggested that executives were more worried about revenue than quality of care or patient outcomes:

A review of those communications reveals that rather than asking whether patients had been harmed or whether regulators needed to be contacted, hospital officials asked for information on how the physicians’ activities affected the hospitals’ bottom line.

Avoiding Caring for Poor Patients in the Emergency Department

On the other hand, the impetus for triaging away apparently less acutely ill patients from the Emergency Department was to avoid such patients who could not pay. The second NY Times article noted there was a way for supposedly less ill patient to get Emergency Department treatment,

Patients whose ailments were not deemed urgent were told to go somewhere else, like a free clinic, or that they could be treated if they paid the co-payment for their insurance or around $150 in cash.

In addition, there is reason to think that HCA management pushed health care professionals to put off increasing numbers of patients, regardless of their clinical problems,

Several former emergency department doctors at Lawnwood Regional Medical Center in Fort Pierce, Fla., said they frequently had felt compelled to override the screening system in order to treat patients.

Also,

'Physicians had a really, really hard time with it,' said Dr. J. Patrick Pearsall, who worked for an emergency physician group based in Houston that worked in HCA hospitals. When the doctors failed to meet the hospital’s goals for how many patients should be considered emergencies, 'they really started putting pressure on.'

One emergency room doctor who worked at an HCA Florida hospital said doctors had been told they had targets to hit. The doctors’ concerns about the screening policy were acknowledged in an e-mail reviewed by The Times that was sent to the doctors at the hospital in early 2008 by an outside company that worked in the emergency room.

The doctors were told HCA’s regional executives were 'quite intent on pursuing this program at least for the time being and fully expects us to comply. Their expectations are that approximately 15 percent of all patients are to be screened and of those screened no more than 35 percent overridden.'

Keep in mind that variations in patient populations over time and across geographic areas means that the proportions of more and less severely ill patients showing up at individual Emergency Departments will vary substantially. Pressuring health care professionals to turn away a minimum percentage of people will make it very likely that at some times severely acutely ill patients will not be seen.

So it appears that at HCA, patients sometimes were overtreated, and sometimes were undertreated, and that executives trying to increase revenue may have been more responsible for both than simple human error.

Finally, there is reason to think that the take-over of HCA by private equity (that is, leveraged buy-out) firms further increased the for-profit corporation's emphasis on short-term revenue leading to worsening quality of care.

Private Equity Pushed for Even More Short-Term Revenue

The second NY Times article first noted,

During the Great Recession, when many hospitals across the country were nearly brought to their knees by growing numbers of uninsured patients, one hospital system not only survived — it thrived.

In fact, profits at the health care industry giant HCA, which controls 163 hospitals from New Hampshire to California, have soared, far outpacing those of most of its competitors.

The big winners have been three private equity firms — including Bain Capital, co-founded by Mitt Romney, the Republican presidential candidate — that bought HCA in late 2006.

HCA’s robust profit growth has raised the value of the firms’ holdings to nearly three and a half times their initial investment in the $33 billion deal.

The financial performance has been so impressive that HCA has become a model for the industry.

Note that the private equity firms extracted a considerable amount of cash from HCA at the time they turned it back into a publicly held for-profit corporation:

In 2010, buoyed by robust growth in profit, HCA was able to issue billions of dollars in debt that was used to pay funds overseen by the three buyout firms nearly $1 billion in dividends — each. In the spring of 2011, in one of the most closely watched public offerings since the financial crisis, HCA became a public company once again. Its three buyout owners each sold another $500 million worth of stock, allowing them to recoup all their initial investment.

By thus increasing the new public corporation's debt load, they further increased pressure on its executives to bolster short-term revenue.

However,

As HCA’s profits and influence grew, strains arose with doctors and nurses over whether the chain’s pursuit of profit may have, at times, come at the expense of patient care.

Summary:  Why No Hospital Should be For-Profit?

Among all developed countries, I believe only the US has such a high proportion of for-profit hospitals, and physicians employed by for-profit corporations to take care of patients.

However, in summary, this case shows there is evidence that
- The management of one for-profit hospital chain was pushed to focus even more on short-term revenue by a leveraged buy-out engineered by private equity firms
- This focus lead management to pressure health care professionals to increase revenue, even if that required over- or under-treating patients
- The resulting over- and under-treatment likely harmed patients.

As a Tampa Bay Times editorial put it,

the allegations suggest a disturbing pattern of endangering patients, and they again expose the weaknesses of a health care system driven by volume and profit rather than efficiencies and patient outcomes.

In a column in Forbes, Steve Denning warned,

The hospitals owned by private equity are making money in the short-term at the expense of Medicare and the economy. But when the private equity firms depart, as they plan to do, they leave the hospitals with a load of debt, dispirited doctors and nurses, and a bankrupt Medicare system, with serious questions as to whether overall care has been maintained, let alone improved.

The current bonanza for private equity from milking Medicare is a bubble that cannot be sustained.

We have noted how health care organizations have increasingly been "financialized," lead by executives who put short-term revenue generation ahead of all other goals, including good patient care. Furthermore, hospitals are increasingly likely to be formally for-profit, and hence likely to be lead by such executives. Worse, hospitals are increasingly likely to be owned by private equity firms, further increasing the emphasis on short-term money making. Even worse, physicians are now more frequently employed by such organizations, which may pressure them to do what it takes to increase revenue, no matter what the effect on patients' and the public's health.

The probably effects on the quality of care, access, and costs are obvious.

In my humble opinion, before the health care bubble bursts, we need to challenge the notion that direct health care should ever be provided, or that medicine ought to be practiced by for-profit corporations. Before market fundamentalism became so prominent, many stated prohibited the corporate practice of medicine, and the American Medical Association forbade the commercialization of medicine. It is time to heed that wisdom. I submit that we will not be able to have good quality, accessible health care at an affordable price until we restore physicians as independent, ethical health care professionals, and until we restore small, independent, community responsible, non-profit hospitals as the locus for inpatient care.

As Todd Hixon wrote, surprisingly in Forbes,

I believe a big part of the answer lies in changing the idea that health care should be a path to riches. There are professions, like university teaching and research, where a big part of the motivation is helping people and gaining respect in the community. If we could shift the balance for health care providers in that direction, solving problems like the one manifest at HCA would be a lot more possible.

True health care reform will require an end to market fundamentalism in health care.

Note - See also comments by Paul Levy in the Not Running a Hospital Blog.

Private Equity vs Patient Care - a Bainful Example

A long investigative report in Salon summarized allegations about the quality of care in various treatment centers owned by Aspen Education, and its parent company, CRC Health Group, in turn wholly owned by a private equity firm, Bain Capital.  The article provides examples of what can go wrong when health care organizations are taken over by remote leadership focused overwhelmingly on short-term revenue.   

A Death from a Treatable Disease
The report opened with the investigation of a 14 year old resident at Youth Care, in Salt Lake City, and Aspen Education treatment center.  Brendan Blum "died of a twisted-bowel infaction," according to the local medical examiner, which allegedly went untreated because "two poorly paid monitors on duty," were slow to seek approval to call for emergency services, and "were too low on the totem pole to call 911 themselves."

The article cited "previously unreported allegations of abuse and neglect in at least 10 CRC residential drug and teen care facilities across the country."  It charged, "such incidents have largely escaped notice because the programs are, thanks to lax state regulations, largely unaccountable." 

Allegations of Toxic Corporate Culture

The article noted numerous other reports of unexplained and allegedly wrongful deaths, and other allegations of mistreatment of patients.

Furthermore, the article noted allegations "that such incidents reflect, in part, a broader corporate culture at Aspen's owner, CRC Health Group, a leading national chain of treatment centers.  Lawsuits and critics have claimed that CRC prizes profits, and the avoidance of outside scrutiny, over the health and safety of its clients." 

We have frequently discussed how the corporate culture of the finance industry, the industry that brought us the global financial collapse/ great recession, has influenced health care, and how this culture may be related to extensive problems with the leadership of health care, including lack of understanding of or even outright hostility to the health care mission, the prioritization of self-interest over the mission, conflicts of interest, and even outright criminal behavior, such as fraud, and kick-backs (bribery).  One way that finance may influence health care is the presence of finance leaders on the boards of trustees of non-profit health care institutions (see recent examples here and here). 

A more direct way the culture of finance can influence health care is for private equity firms (that is, re-branded leveraged buyout firms, look here) to purchase organizations that actually take care of patients.  The Salon article noted:

CRC’s corporate culture, in turn, reflects the attitudes and financial imperatives of Bain Capital, the private equity firm founded by Mitt Romney. (The Romney campaign also did not reply to written questions.) Bain is known for its relentless obsession with maximizing shareholder value and revenues. Indeed, this has become a talking point of late on the Romney campaign trail; he bragged to Fox in late May that '80 percent of them [Bain investments] grew their revenues.' CRC, a fast-growing company then in the lucrative field of drug treatment, was perhaps a natural fit when Bain acquired it for $720 million in 2006. In conversations with staff and patients who spent time at CRC facilities since the takeover, there are suggestions that the Bain approach has had its effects. 'If you look at their daily profit numbers compared to what they charge,' Dana Blum [the mother of the boy who died in the incident discussed above] said of CRC’s Aspen division in 2009, 'it’s obscene.' That point, ironically enough, was underscored by the glowing reports in the trade press about its profitability.

The article discussed how Bain Capital's acquisition of CRC Health Group further tilted the balance towards short-term revenue and away from quality care:

When Bain purchased CRC, it looked like an investment masterstroke. The company, founded in the mid-’90s with a single California treatment facility, the Camp Recovery Center, had quickly grown into the largest chain of for-profit drug and alcohol treatment services in the country, with $230 million in annual revenue. Under Bain’s guidance, its revenue has nearly doubled, to more than $450 million. CRC now serves 30,000 clients daily — mostly opiate addicts — at 140 facilities across 25 states. In the first five years after its acquisition, Bain had already extracted nearly $20 million in management-related fees from the chain, although Bain investors haven’t cashed in yet through dividends or an IPO. Bain’s purchase, a leveraged buyout, also saddled CRC with massive debt of well over $600 million.

According to company executives and independent analysts, hands-on oversight of subsidiary companies is a hallmark of both Bain and CRC. Romney’s campaign literature boasts about Bain taking exactly this sort of direct role in helping to turn around failing companies. 'Over the life of an investment, they have a strong management team willing to participate,' Sheryl Skolnick, an analyst with CRT Capital, a leading institutional brokerage firm, says of Bain.

The CRC acquisition immediately made Bain owner of the largest collection of addiction treatment facilities in the nation. Unlike some Bain Capital acquisitions, which led to massive layoffs, the company’s approach with CRC was to boost revenues by gobbling up other treatment centers, raising fees, and expanding its client base through slick, aggressive marketing, while keeping staffing and other costs relatively low. But that rapid pace of acquisition couldn’t be sustained in the mostly small-scale drug treatment industry alone. So Bain Capital and CRC set their sights on an entirely new treatment arena: the multibillion-dollar 'troubled teen' industry, a burgeoning field of mostly locally owned residential schools and wilderness programs then serving, nationwide, about 100,000 kids facing addiction or emotional or behavioral problems.

One of CRC’s first acquisitions under Bain ownership was the Aspen Education Group. Founded in 1998 with about six schools, Aspen Education had expanded to 30 troubled-teen and weight-loss programs by 2006, including Youth Care of Utah. With Bain’s backing, CRC purchased Aspen for nearly $300 million in the fall of 2006.

Less than a year later, Brendan Blum was dead.

At the time of the CRC acquisition, Aspen already had a history of abuse allegations, including at least three lawsuits, and two known patient deaths, one by suicide. Featured on 'Dr. Phil,' it grew out of schools inspired by the 'tough-love' behavior-modification approach of the discredited Synanon program, which was eventually exposed as a cult. By 2006, Aspen was facing a wrongful death lawsuit, later settled, over an incident in 2004 in which a 14-year-old boy, Matthew Meyer, perished from heat stroke just eight days into his stay at its Lone Star Expeditions wilderness camp in Texas.

This just underscores concerns we raised here about how ownership by private equity could undermine the ability of health care organizations to fulfill their missions. At the time we worried that private equity's short time horizon would clash with health care's long-term focus, how standardized cost-cutting approaches, including emphasis on individual employees' "productivity," could undermine patient care, and how private equity's obsession with secrecy is the antithesis of the transparency required to make health care accountable.

The Increasing Influence of Private Equity

Ironically, the reason that the problems at CRC have gotten such public attention is that the former leader of the private equity firm that controls it is now running for the US presidency. His candidacy emphasizes just how influential the culture of private equity has come.

The purchase of CRC came seven years after [former Massachusets Governor and now Republican presidential hopeful Mitt] Romney publicly announced his retirement as CEO of Bain Capital, where he had been in charge since its founding in 1984. But at the time of his departure, Romney worked out an arrangement to continue to share in Bain’s profits as a limited partner in the firm. Today, he is still an investor in 48 Bain accounts. Though he has refused to disclose their underlying assets, some information about them can be gleaned. For example, he has reported at least $300,000 to $1.2 million, if not more, in fluctuating annual earnings from Bain Capital VIII, the convoluted $3.5 billion array of related funds that owns both name-brand companies such as Dunkin’ Donuts and the lesser-known CRC Health Group. Most of these funds were made more attractive to privileged investors by being registered in the Cayman Islands tax haven. And Romney’s connections to CRC run even deeper: Of the three Bain managing partners who sit on CRC’s board, two, John Connaughton and Steven Barnes (with his wife), gave a total of half a million dollars to Restore Our Future, the super PAC supporting Romney. They also each donated the $2,500 maximum directly to his campaign.

Furthermore, it provides a warning about much more influential it might become, particularly in regard to health care:

Romney has been outspoken about his belief that for-profit health care companies can flourish only without onerous regulations. 'I had the occasion of actually acquiring and trying to build health care businesses,' he said during a primary debate last year. 'I know something about it, and I believe markets work. And what’s wrong with our health care system in America is that government is playing too heavy a role.'

The allegations against one of those health care businesses suggest another viewpoint.

I have frequently repeated a contention that true health care reform would emphasize leadership of health care organizations that understand and uphold the values of health care, starting with prioritizing the needs of patients and the public's health over all other concerns. Instead, there is a danger that health care leaders will be ever more removed from patients and the public, and their health needs, while they become ever more concerned with making as much money as possible in the short-run, and after that, the Devil take the hindmost.

Now Private Equity Jumps into the Health Care Fray: Will Cerberus Do Better with Caritas Christi than It Did with Chrysler?

And now for an early report on what may be the latest fashion in the ongoing commercialization of US health care in the US.  In the last few weeks we spotted three stories that appear to be closely related.  (And thanks to one of our ever vigilant scouts for finding the first of these.)

Psychiatric Solutions and Bain Capital

The first story was in BusinessWeek in early March:

Psychiatric Solutions Inc., the operator of psychiatric facilities in 32 states, said it has been approached by a potential buyer.

A special board committee will consider possible responses and Goldman, Sachs & Co. has been hired as a financial adviser, the Franklin, Tennessee-based company said today in a statement.

Earlier today, the Wall Street Journal reported the company was in buyout talks with Bain Capital LLC.

Boston-based Bain manages about $65 billion in assets under management, according to the firm’s Web site.

The significance of this story was not initially clear. The proposed deal had not been consummated. Although there may be something jarring about a private equity firm running psychiatric clinics, the clinics were already run by a for-profit corporation.

Detroit Medical Center, Vanguard Health, and the Blackstone Group

About a week later, the Detroit News published a story about another deal,

The Detroit Medical Center is expected to announce today it will be acquired by a private Nashville-based health system that is to invest $850 million in improvements, The Detroit News has learned.

The nonprofit DMC, with nine general and specialty hospitals in Metro Detroit, will be acquired by Vanguard Health Systems, which has 15 hospitals in four states, several sources said. No money is changing hands in the transaction, but Vanguard will assume $300 million in DMC pension obligations and $200 million in bond debt obligations, a source said.

The article further noted,

Vanguard is majority-owned by The Blackstone Group, one of the nation's largest private equity firms, which gives it access to capital for improvements.

This did seem to be a done deal, and one that inspired all sorts of optimism. For example, Tom Walsh, a columnist wrote in the Detroit Free Press,

Just as the bankruptcies of General Motors and Chrysler marked the end of an unsustainable business model for Detroit's auto industry, Friday's deal to sell the Detroit Medical Center to a big for-profit hospital system is a game-changer for the funding and delivery of health care in metro Detroit.

Walsh felt,

three DMC leaders made a bold move -- before it was too late -- to secure access to the money needed to invest in critical technology and top talent.

because,

'We were being choked to death by the nonprofit business model,' Duggan, the DMC CEO, said Friday.

Walsh enthused,

Vanguard's proposed purchase of DMC for $417 million and a promised investment of $850 million more gives DMC a legitimate shot at survival and growth without anywhere near the pain and suffering that the GM and Chrysler retrenchment brought to the region.

It's hard to overstate what a godsend this deal could be for a wobbly city and state where the public sector is in no shape to help a major employer like DMC, if the banks and Wall Street are unwilling to provide capital.

Similarly, Detroit News' editors opined that Vanguard Health

owned by the investment group Blackstone ... promises to plow $850 million into the DMC facilities over 10 years. The cash will modernize all of the hospitals and provide for a major expansion of Children's Hospital.

The upgrades should enable DMC to compete with the best-appointed hospitals in Metro Detroit, and set a new competitive bar for health care in the region.

The most significant news for Detroit is that Vanguard will maintain the DMC's commitment to treat all patients, whether or not they have private insurance.

Caritas Christi Health Care and Cerberus Capital Management

But third time is the charm. Today, the Boston Globe reported,

Caritas Christi Health Care, the state’s second-largest hospital group, is set to disclose today that it has agreed to be acquired by New York private equity firm Cerberus Capital Management in an $830 million deal that hospital officials say will allow the chain to shed debt and make major improvements.

Under the agreement, Cerberus’s first investment in hospitals, Caritas Christi’s management in Boston will continue running the Catholic community hospitals. In addition, Cerberus has pledged to keep the system’s 12,000 employees and won’t sell the hospitals or take them public for at least three years.

The firm said it hopes to expand its hospital holdings nationally and in Massachusetts, potentially making Caritas a more formidable competitor with large Boston hospitals for many routine procedures.

All six Caritas hospitals, including the flagship St. Elizabeth’s Medical Center in Brighton, will remain open and follow the Catholic Church’s ethical and religious directives, among them a ban on abortions. But they would convert from nonprofit to for-profit businesses and begin paying taxes to state and local governments.

This deal is so new that it has not yet generated the sort of breathless enthuisiasm fostered by the Detroit Medical Center/ Vanguard Health/ Blackstone Group deal. But the Fall River (MA) Herald-News did note,

Officials with the Caritas Christi Health Care system and St. Anne's Hospital say an agreement to sell the system to Cerberus Capital Management will have a significant impact on improving services locally.

The agreement with Cerberus, announced Thursday, will not only ensure the system maintains religious and ethical directives, but also infuse the system with millions of dollars in capital to make infrastructure improvements in the system's facilities.

At St. Anne's that will mean vastly expanding the facility's emergency room, and allow for construction of planned operating and recovery rooms. The change will also allow St. Anne's to convert the recently acquired former St. Anne's School into a medical office complex.

'There will be more construction and expansion of the facility than any time in the history of the hospital,' Caritas Christi Chief Operating Officer Robert Guyon said.

It certainly does look like a trend now. In fact, today a Wall Street Journal blogger suggested that this trend may be an immediate, although perhaps unintended result of the health care (insurance) reform legislation that just passed in the US Congress:

Cerberus is planning to turn the Caritas Christi Health Care chain into a for-profit corporation in what it is likely the first sizable M&A bet on the newly minted Obama health-care overhaul law. [seemingly ignoring the Detroit Medical Center/ Vanguard Health/ Blackstone deal - ed]

Hospitals that serve the poor and previously uninsured are expected to benefit from Obama’s plan, which is expected to extend insurance to 32 million previously uninsured Americans. That means such hospitals are likely to have more patients who can actually pay their bills. It is hard not to see how that new cash-flow stream wouldn’t have private equity licking its chops.

That's funny, I did not think that a major reason to pass the bill was to benefit private equity.  Also, somehow the image of private equity honchos licking their chops over cash flow does not seem to fit with the breathless pronouncements above about improving quality, serving poor patients, etc.


Will Private Equity and Health Care be Good for Each Other?
In fact, it is not clear that these sorts of deals in the long run will be good for private equity, hospitals and health care providers, or patients. Barely mentioned in the coverage of the Caritas Christi / Cerberus deal was that at least one major past Cerberus deal, ironically located mainly in Detroit, home of the Detroit Medical Center/ Vanguard Health/ Blackstone deal, started with similar enthusiasm, but ended in disaster.

As the New York Times reported in 2009, Cerberus' buy-out of Chrysler was once also heralded with breathless enthusiasm.

'I thought, wow, this really signals a real change in the landscape here,' recalls a person who attended a Cerberus session who asked to remain anonymous because of agreements he signed. 'I guess it gave me hope. The auto companies needed an enormous amount of capital, and where else was it going to come from?

John W. Snow, a former Treasury secretary in the Bush administration and Cerberus’s chairman, also heralded Cerberus as Chrysler’s savior, likening the firm’s investment to the government rescue of Chrysler in 1979.

'Over 25 years ago, when Chrysler faced bankruptcy, it turned to the United States government for assistance,' Mr. Snow said at a National Press Club meeting in 2007. 'Today, Chrysler again faces new financial challenges. But it is private investment stepping in to inject much-needed support.'

However, the end results never did live up to the hype:

For [Cerberus Capital Management CEO] Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.

Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April.

One problem in retrospect seems to be the hubris of the private equity leaders:

Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size.

Even after the beautiful plan turned to ashes, it is still not clear that these leaders realized their limits:

But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. 'I don’t know what we could have done differently,' he says, crossing his arms on his chest. 'From the day we bought it, we worked hard to improve it.'

One wonders if Mr Feinberg has learned more about his previous failure as he now grasps Massachusetts' second biggest hospital system.

Summary
The Chrysler debacle, however, suggests there should be concerns about private equity firms buying out hospitals and other health care providers, for example:

- Will making a not-for-profit health care organization into a for-profit corporation really lead to more efficiency and lower costs? For-profit leaders tend to expect even larger compensation that not for-profit CEOs. Their decisions tend to driven by their short-term compensation, rather than the good of the organization.  For-profit corporations are supposed to generate profits for investors which may reduce re-investment in the corporation. 

The thirst for more executive compensation may be a driving factor in the deal, as hinted in the Boston Globe coverage of the Caritas Christi/ Cerberus deal:

While [current Caritas Christi CEO Ralph] de la Torre and other senior executives will retain their current salaries and benefits, they would be eligible for additional compensation from Cerberus based on the financial performance of the hospitals, Caritas officials said. They said the details of those financial incentives have yet to be worked out.

- Can private equity cost-cutting techniques and other turn-around techniques really work in the health care environment? The Chrysler/ Cerberus case reveals how private equity leaders may get out of their depth in complex business contexts. Health care is even more complex than the automobile industry.

- Finally, and more important, are for-profit hospitals and health care providers run by private equity really likely to be better at fulfilling their health care missions than they were when they were not-for-profit? I doubt there is any evidence that previous conversions of not-for-profit health care organizations to for-profit status improved health care, much less while simultaneously lowering costs and improving access. (Remember that many big health care insurance companies were once not-for-profit Blue Cross plans. Does Angela Braly's WellPoint provide better care to more people at lower cost?

But then again, when a Catholic charity teams up with an organization named for the three-headed dog that guards the entrance to Hades, maybe they will need to put ski lifts in there too.