Privatizing Public Hospitals for Fun and Profit

Cerberus Capital Management, a major private-equity firm that recently bought a not-for-profit hospital chain in Boston, is now angling to pick up the Jackson Health System, a struggling Miami public hospital. The prospect suits Cerberus investors and Florida's newly elected Republican governor, Rick Scott, just fine -- although Miami's poor and uninsured residents might beg to differ.

Scott had barely been installed in office in January when we heard about his advisors' plan to cut off funding of the state's public hospitals. Scott's transition team recommended creation of a panel to study whether government-owned hospitals -- including Jackson and Broward County's two hospital districts -- were necessary. Alan Levine, an advisor who used to work for former governor Jeb Bush, suggested that the government-funded hospitals could convert to not-for-profit status or close.

Considering that Jackson has been tottering on the brink of extinction and only has enough cash to last through July, it would almost certainly close if it lost state funding.

Cerberus to the, uh, rescue
Enter Cerberus, which has offered to pay $1.1 billion for the hospital if it decides that the purchase makes sense after studying Jackson's books. The price would include $500 million to retire Jackson's debt and $600 million for capital improvements over time.

Cerberus' Steward Health System unit was set up to buy Caritas Christi, a six-hospital Boston chain that needed more capital to compete in the Boston market. The CEO of Caritas Christi -- and now Steward -- is Ralph De La Torre, a Cuban-American heart surgeon with families ties in the Miami area. At the time of the Caritas Christi purchase, De La Torre said he'd work with Cerberus to identify other acquisition targets, so it's likely that he suggested Jackson to the investment firm.

One of the conditions of the 2010 Boston buyout was that Cerberus would maintain the Catholic healthcare chain's traditional commitment to serving the poor. Cerberus will probably make the same promise if it decides to tender a firm bid for Jackson.

Give me your poor and uninsured... for a few hours
But there are significant differences between the situations of the two healthcare providers. Whereas De La Torre had turned Caritas Christi's losses into a positive margin of $31 million in 2009, Jackson is bleeding red ink. So it's hard to see how Cerberus could maintain Jackson as a safety-net hospital and still make money.

What's more likely is that a for-profit Jackson would stabilize uninsured and charity patients and then send them on to not-for-profit facilities in the area. That would undoubtedly hurt some patients and competing hospitals, but would still be better than outright closure. And it would play right into the hands of Scott, who'd be able to cut the state's budget deficit by privatizing Jackson.

That still leaves the question of where Jackson's profit margin would come from. A pretty broad clue is the $600 million that Cerberus plans to invest in capital projects. If Cerberus can upgrade Jackson enough to attract more privately insured and Medicare patients, it could do pretty well -- especially considering that Medicare Advantage plans receive more from the feds in Miami than in any other city.

That could well be the game plan if Cerberus decides that Jackson can be saved. In that case, Scott would have a template to end government ownership of other public hospitals across the state. But it's a template that, as usual, would serve the haves better than the have nots.

Image supplied courtesy of Wikimedia Commons.
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Ken Terry

Ken Terry, a former senior editor at Medical Economics Magazine, is the author of the book Rx For Health Care Reform.

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