Boston Capital

Concerns on Caritas deal

By Steven Syre
Globe Columnist / March 26, 2010

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This isn’t the most efficient way to get a memo across town, but I’m counting on it getting to the right desk.

To: Attorney General Martha Coakley

From: Boston Capital

Re: Caritas Christi

Hello, Martha. I’m sure you’ve already heard from lots of people on the proposed sale of Caritas Christi to the private equity firm Cerberus Capital Management, since you are the public’s primary advocate when charities seek to convert to for-profit businesses.

That’s an important role to play in the conversion of six Massachusetts hospitals with long, charitable histories in the service of so many poor patients. We’re also talking about the most dramatic advance ever by for-profit hospital care in Massachusetts, a huge cultural issue.

But it’s also a confusing story, or at least an incomplete one, so far. It’s ultimately up to you to untangle the story and tell it in public.

Do you wonder how a hospital chain that has struggled on and off for so long as a nonprofit organization will be better off serving its patients and the financial interests of new private investors with a relatively high risk-high return slant to their portfolio? I do.

I know the people at Cerberus say much of the turnaround at Caritas has already happened and the organization’s biggest remaining problem is all about capital. Give it some money to relieve the pressure from debts and pension liabilities, not to mention invest in physical improvements, and the business will flourish. Win-win!

I suspect the investment calculation has something to do with the fact that Caritas hospitals are generally low-cost operations in a field that is going to become increasingly focused on expenses soon. Sounds like the right place for an investor to be.

But all that falls short of explaining how investors will make the kind of money they want while Caritas continues to serve patients the way it has in the past.

So here are a few questions worth asking:

Does the for-profit Caritas plan depend on attracting more patients? This is a basic business goal but admissions at Caritas hospitals have been headed in the wrong direction. Gaining hospital patients in Massachusetts usually means taking them from someone else. Caritas is competing from behind.

Will Caritas ever borrow money in the future to pay dividends to Cerberus investors? Cerberus promises not to take money out of Caritas for three years, but expect the hospital operations to start paying dividends to investors after that. How Caritas funds payments to investors will be critical to the operation of its hospitals.

What are the possible exit strategies? Private equity firms don’t stay forever, though Cerberus executives consider themselves long-term investors. I bet Caritas would eventually be sold to a bigger hospital company but a public stock exit is possible. The long-term ownership implications for Caritas are up in the air.

What happens if the Caritas investment doesn’t work out? No one will give you a straight answer on this question. But I think Caritas would be broken into pieces if the Cerberus acquisition turns out to be a mistake. A few hospitals would attract interested bidders; others would not. A breakup would probably raise the most money.

The most important question of all: How do for-profit hospitals that serve the poor do justice to their investors and their patients at the same time?

Steven Syre is a Globe columnist. He can be reached at