HARTFORD — Following a private equity debacle that left three local hospitals on the verge of financial collapse, state lawmakers are considering a series of bills that would restrict the entry of private equity into Connecticut’s health care system and make it easier for for-profit hospitals to acquire other hospitals.
The bills arose in response to the cyberattack that affected Waterbury, Manchester Memorial and Rockville General hospitals, all owned by California-based private equity firm Prospect Medical Holdings. The August attack left the hospitals unable to bill insurance companies for six weeks, unable to bill Medicaid, and forced them to cancel half of their elective procedures and divert emergency services.
“In the recent past, there has been a situation where private equity and their presence and the way they have been functioning has threatened the well-being of half a million people in the state of Connecticut. Half a million people,” State Sen. Saud Anwar, D-South Windsor, told the Public Health Committee last week. “For us not to intervene and do things that are needed cannot be an option.”
But lawmakers, Gov. Ned Lamont, hospitals and the Office of Health Strategy have different ideas about how to prevent a similar situation from happening again.
The private equity problem
The legislature’s Public Health Committee is currently reviewing three proposals surrounding changes to the Certificate of Need, or CON, process — the state’s method for regulating the mergers, investments, elimination and addition of services in hospitals and health care facilities.
Lamont’s proposal would require the state to review any transfer of at least 10 percent of a hospital’s assets, or 20 percent in dividends over three years. The bill also requires these entities to show that the changes will not hinder patients’ access to care, but rather improve both its access and affordability.
In testimony on the bill, Lamont wrote that corporations have used “loopholes” to avoid review by the state’s Office of Health Strategy, and that the state needed to strengthen its oversight.
“Recent years have resulted in increasing consolidation in the health care industry, and as a result a greater share of our health care facilities are now owned by out-of-state, for-profit health care companies. This period of consolidation has revealed that our laws overseeing the industry are not up to the task,” the governor wrote. “The state must have a role in overseeing large financial transactions involving entities that provide critical, life sustaining services to Connecticut residents.”
The risks of private equity are a common concern for Democrats and Republicans alike, and health care experts expressed everything from skepticism to outright opposition to private equity-owned hospitals.
“There is an incredibly strong argument to be made that the state and its taxpayers and citizens have a very, very vested interest in trying to regulate this market a little bit better than it has,” said Howard Forman, director of the Health Care Management Program at Yale’s School of Public Health. “Private equity firms — they’re risk takers … and they don’t bear the consequences of all those losses. Their risks are limited to the amount of money they put up, and the consequences may be vastly larger than that.”
John Cogan, a UConn law professor, agreed with requiring state approval for asset transfers and said the Certificate of Need could be repurposed to regulate corporations that want to financially gut small hospitals.
“The major problem is private equity. It’s not about running a health care process. It’s about extraction. And if you’re really worried about that as a state, I would think the thing to do is use the tools you have to try to prevent private equity from stripping out your health care system, and then make other amendments that the hospitals and other health care facilities would need so that the new process doesn’t impair them,” he said.
A long time coming
State Sen. Heather Somers, R-Groton, told CT Examiner that the governor’s requirements of reporting asset transfers were too strict, particularly since the proposal involved reporting on shares that made up less than a majority of a hospital’s assets.
“I don’t like the fact that this is reactive legislation based on problems that may have happened in the past with a particular hospital system — Prospect,” Somers said. “Because we made mistakes in the past does not mean that we need to legislate for all the other hospital systems that haven’t had this issue.”
The Connecticut Hospital Association has also voiced opposition to the governor’s bill, arguing it fails to address the actual problems with the Certificate of Need process.
Hospitals have long complained about the bureaucratic headaches and delays caused by the CON system. Yale-New Haven Hospital, which offered to purchase the three hospitals that were under the ownership of Prospect Holdings, waited over a year for state approval, while hospital administrators insisted that the purchase was urgent for their survival.
Instead, the Connecticut Hospital Association said it’s largely in favor of a bill out of the legislature’s Public Health Committee that allows hospitals to bypass state approval to open or expand certain facilities that are greatly needed — such as behavioral health beds for children, operating rooms, psychiatric facilities, substance use disorder units and rural health care facilities. It also decreases the amount of time that the Office of Health Strategy has for reviewing an application.
But during a news conference on Thursday, Office of Health Strategy Director Deidre Gifford said while the Public Health Committee and the governor’s administration had similar goals, there were conflicting pieces in the two bills.
“The CON process should be transparent, it should be efficient and it should be effective. We all agree on those goals and I know the Public Health Committee does as well. And so we want to make sure that whatever we do in legislation addresses those things but doesn’t undermine critical functions of the CON program,” she said.
Gifford also noted that the prolonged approval process for the Yale-New Haven Hospital purchase was partly due to negotiating an agreement regarding price constraints and increased community investments.
Though he supported Yale-New Haven Health’s acquisition of the three hospitals that were formally Prospect-owned, Lamont said he recognized that the ongoing hospital consolidations could increase costs.
“There is a lot of consolidation out there. It looks like we’re going to have three major hospital systems in this state: Hartford, Yale-New Haven and probably Northwood. And they have an awful lot of pricing power,” said Lamont, who added that he was working with the Office of Health Strategy to keep health care prices affordable.
Somers said she wants to eliminate the CON requirement for organizations that want to come into Connecticut, particularly cardiac and behavioral health facilities. Somers recounted an instance where a recovery organization aiming to establish a site in eastern Connecticut was denied a CON after a Litchfield County-based provider claimed it was unnecessary.
“I know people that have loved ones that are suffering. They didn’t want to drive 2.5 hours to Litchfield to go visit their loved one in a facility,” she said.
However, legislators emphasized that state oversight is critical when hospitals seek to shut down specific facilities. In December, the Office of Health Strategy approved a plan to end delivery services at Windham Hospital, a Hartford Healthcare facility in the northeast corner of the state. Two other hospitals located in rural parts of the state — Nuvance-owned Sharon Hospital in the northwest corner and Trinity-owned Johnson Memorial Hospital in Enfield — also requested closing their birthing centers.
In some cases, Somers said, a small hospital will have to shut down because it becomes too difficult to compete with the large hospital conglomerates.
But State Sen. Jeff Gordon, R-Woodstock, said community hospitals needed to stay independent if possible.
“I’m concerned that we are really at a point where you only have a couple of big systems in this state, and if they get bigger, you’re getting more and more into a kind of a monopoly situation,” Gordon told CT Examiner. “Nothing about the care they provide, but I’m always concerned when you have big systems get bigger, and that’s been a trend nationally and it’s kind of tough to stop it.”
At the very least, he said, if a rural hospital was acquired by a larger health system, there needed to be protections so that vital services like birthing centers are not shut down.
“I can tell you in northeast Connecticut, if some of these services aren’t provided … then where are people going to go? It’s not that easy to travel, especially if it’s the winter. Where are you going to get to? So we just need to have to regulate them better, and oversee it better and have a better structure legislatively to tell OHS, this is what you need to do and how to do it. And OHS has to do things in a timely manner.”
Saving private practice
Physician groups have also weighed in on the Certificate of Need process, particularly on a proposal from the Office of Health Strategy that mandates medical practices with at least eight doctors undergo a state review in the event of a transfer of ownership.
Gifford noted in testimony that more physician practices were being absorbed by private equity, and said the bill was meant to close legal loopholes that allowed these corporations to avoid scrutiny.
But Robert Russo, president of the Connecticut State Medical Society, told CT Examiner that the bill ignores the real problem — that independent physician practices can’t survive because of the billing and administrative work. Thus, he said, they look to merge.
Cogan said merging allows physicians to negotiate higher rates with insurance companies and deal with major administrative pressures.
“The administrative burden on medical professionals now is enormous, right?” he said. “All the laws ranging from documentation to HIPAA to licensure to having contracts with 10 different private insurance companies, plus different billing methods for Medicare and Medicaid. It’s a burden.”
Russo said doctor’s offices have two options: become affiliated with a large hospital system or turn to private equity. And private equity, he said, promises doctors more independence.
“The State Medical Society for years has been telling the state Legislature and the governor that you’ve got to do something to save private practice — keep the diversification so that the health equity issues and the patient care, the quality that we have in Connecticut, we can maintain,” he said.
According to Russo, high malpractice rates, regulations and taxation makes Connecticut one of the least friendly states for physicians, and the state desperately needs more doctors. Additional reporting requirements from the state could push even more physicians to join groups, he added.
Anwar, who is also a physician, expressed surprise at the number of physicians they heard from who have investments from private equity. He said that no legislative decisions had been made around this point.
“I can tell you we don’t have a consensus around this, and perhaps one of the things that may happen is that we don’t address this during this session, but look at this more broadly and have more in-depth discussions, and then identify protections for the patients more so in a future session,” Anwar said.
Russo said private equity could function as one option for physician groups in a market that includes a variety of options for patients, including hospital-based groups and independent private practices.
But others, like Forman, said they doubted private equity could have any positive role.
“I used to be much more optimistic about the role of private equity. I thought that they were not going to be necessarily a negative in the health care space, and that it was a reasonable business model to consider,” he said. “I still sort of believe that, but boy, the evidence recently, particularly in our area of the state, is not great.”
Financial instability
Whatever legislation the lawmakers decide to advance will likely not address the true problem that is driving physician practices and small hospitals into the welcoming arms of private equity: financial instability.
On this issue, Anwar, Gordon and Russo all pointed to Medicaid rates.
“[The Medicaid rates] are one of the lowest in this entire region, and they’re not sustainable,” said Anwar, adding that Medicare payments were also low.
Russo said the state could also make changes, like allowing pre-authorization for certain procedures and capping deductibles that make it difficult for people to pay their bills. Gordon suggested that the state make grant money available for community hospitals, and ensure that federal grant money is prioritized to rural areas.
Lamont’s bill includes requirements for hospitals to report their finances in a more frequently and in-depth manner.
“Our hospital systems across the state are in good shape. We have some of the very best in the country right here,” Lamont said at a news conference on Wednesday. “Some of our hospitals are going through some real stress. Some of that stress is related to operating issues. Some of that stress is related to financial issues, and changes and destruction put a lot of financial stress on our hospitals. This bill allows us to get in front of it.”
In response to the proposed requirements, the hospital association also called on the state to do more to help hospitals, whether through Medicaid or in modifying state regulations.
“[The Association] is dismayed that nowhere does [the state] provide assistance: not in Medicaid underfunding, not in addressing the significant increases in expenses caused by the health care workforce shortage, and not in addressing the burdens of state and commercial payer regulatory burdens.”
Anwar said the Public Health Committee continues to have meetings nearly every day with the Office of Health Strategy, hospitals, physician groups and others to find a compromise that could be drafted into a single bill.
“We need to protect our citizens in the state of Connecticut and their health and their well-being. We also want to have a sustainable health care system,” he said. “And I think that’s where we’re trying to identify the common areas of opportunity.”