Hospital decision now due in late June

Financially solid Northeast Health System’s CEO Ken Hanover Monday cited the need for investment capital for “information, clinical and medical technology” as the driver in the Beverly based non-profit’s search for a buyer.

With four initial proposals now undergoing evaluation by Cain Brothers, a New York investment banking and strategic advisory, Hanover said the due date for a decision has been pushed back May to late June.

Offering investment capital support to Northeast are publicly traded Vanguard Health Care, based in Nashville, Tenn., and Steward Health System, created last year to acquire the six Caritas hospitals from the Archdiocese of Boston with $895 million from Cerberus Capital Management.

A New York-based equity investment house, Cereberus is best known for its short-lived hold on the Chrysler Corp. before the economic decline devastated the auto industry, and Ceberus decided against pumping in money.

The Northeast trustees could also choose what Hanover readily agreed was the legally “easier” option, and negotiate an absorption into one of two brands for traditional nonprofit health care.

They are Beth Israel Deaconess, a Boston based giant, and the smaller but equally lusterous Leahy Clinic, which has moved its base fro from Boston to Burlington, and could link to Northeast in a network that stretches across the wealthy Middlesex County suburbs from the main campus in Burlington to the outer tip of Essex County here in Gloucester.

“Northeast and Lahey have both made major commitments to serve the residents of the North Shore,” Leahy spokesman Steve Danehy said Monday. “We share a common goal to improve the health of individuals and families in this region, and we enjoy a history of successful and trusted collaboration in clinical programs. The continued partnership would result in growth of services for the region and would be beneficial to residents of Cape Ann.”

One of Boston’s teaching hospitals, Beth Israel Deaconess — which recently signed a memo of understanding with Milton Hospital and an affiliation agreement with Lawrence General Hospital — has provided tertiary cancer treatment to Northeast patients, moves that reflect the accelerating pace of consolidation in the shadow of the Partners Health Care colossus built around Massachusetts General Hospital and Brigham and Women’s.

“Everybody is looking to adjust in the climate of health care reform,” said Beth Israel Deaconess’ media director Jerry Berger.

Ever since Northeast acquired Addison Gilbert in 1994, Northeast has been struggling to break out of the regional confines as Partners — via Cape Ann Medical Center physicians in the Partners network — seemed to constrain and then overwhelm it with easy access to Partners know-how and communications.

The creation of Mass General North in Peabody two years ago was just the latest provocative act.

Peggy O’Malley, who leads the Partners for Addison Gilbert, a watchdog community group that emerged in the 1990s as the trustees of then independent Addison Gilbert conducted their own smaller scale strategic consolidation and sold the community’s hospital into the Northeast system, warned last week that the community would lose its last suasion in the future of local hospital services if the trustees choose a for-profit buyer.

“Our goose is going to be cooked,” O’Malley told the City Council in a special presentation of about 15 minutes. “Now is the time to fly the flag.”

She promised to find ways to assert Cape Ann’s unique interests in the impending transaction to one of the four suitors.

Alan Sager, a professor of public and management at Boston University, said he believes the patient base on Cape Ann would fare better with stronger government regulation of a non-profit than if Northeast decides to take the offer of either of the for-profit corporations.

He explained that, for the for-profit option to work, a functioning free market would need to be in place.

That, he said, was far from the case. Indeed, Sager said, all of the components are absent — small buyers and sellers, consumers that are autonomous from providers and capable of making marked based value decisions, easy entry and exit from the industry, good information about price and quality, and costs that reward efficiency.

“For-profit companies’ first duty is to their stockholders,” he said, noting the for-profit sector aspires to “nimbleness” — not what a community is looking for in a hospital system.

The trend over the past half century has been dynamic consolidation of hospitals.

“We had about 140 in Massachusetts when JFK was president,” Sager noted. “Now, we have about 70.”

Yet, Chris Murphy, spokesman for Steward Health Care, said it was the investment capital of Ceberus that kept alive the Caritas hospitals by acquisition, a deal that was modified and then approved by Attorney General Martha Coakley and the Supreme Judicial Court, as for profit acquisitions of non-profits must be.

Northeast, however, is the strongest non-profit system to offer itself for sale to for profits.

As hospitals, said Murphy — who came over to Steward with the management of Caritas after the deal was done — the Caritas group was doing well, but was being dragged down by unfunded pension liabilities and archaic infrastructure.

The deal involved Ceberus capital investments of $495 million to shore up the pension accounts and another $400 million for modernizing the facilities.

A transaction that was announced Monday — Steward’s acquisition of two hospitals, Merrimack Valley in Haverhill and Nashoba Valley in Ayer — brings into the network two facilities that had been nonprofit failures in the last decade before being acquired by a previous for-profit owner, Essent Health Care.

In its release, Steward said it was “investing hundreds of millions of dollars of capital into its hospitals.”

“This investment in technology, infrastructure and equipment is designed to give patients at Steward hospitals a downtown Boston experience, without leaving their community,” the Steward statement indicated.

Hanover said the Northeast trustees have “thought at length” about the obligation of a non-profit charitable hospital system to remain consistent with its charter — and in this case, the charter of Addison Gilbert as well.

The trustees, he said, are weighing decisions in the context of legal advice that “it is a certainty that a nonprofit option would be the easier transaction.”

But, he added, “first and foremost, the trustees will do what they think is best for the community,” even if it is the more difficult and legally riskier thing to do.

Richard Gaines can be reached at 978-283-7000, x3464, or at rgaines@gloucestertimes.com.

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Hospital decision now due in late June

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