Could Mass. Insurance Mess Affect Caritas Christi Sale?

Last month, Cerberus Capital announced an agreement to buy Boston-based hospital chain Caritas Christi for $830 million (including the assumption of pension obligations). It promised to maintain the company’s Catholic identity, which includes significant charitable contributions, and to not sell/shut any of the hospitals or take the company public for the first three years.

My question isn’t about how Cerberus plans to turn the hospitals into for-profit institutions – there actually is a road map for that in Massachusetts, as evidenced by Vanguard’s work on St. Vincent’s hospital in Worcester – but rather if that $830 million pricetag will stand.

Shortly after the deal announcement, Massachusetts’ insurance commissioner vetoed a boatload of proposed insurance premium hikes. I don’t want to debate the policy/politics of it, but here’s the upshot:

The insurers are now suing, thus throwing future reimbursement projections into limbo. If the insurers lose, then one possible outcome is that they’ll pass the extra costs onto hospitals, thus lowering future revenue (and potentially crippling a relatively small, non-teaching chain like Caritas, which has less bargaining power than the local Harvard-affiliated hospitals). If the insurers win, then the state may need to rework its existing healthcare plan, since it will have lost its built-in ability to control rate hikes.

All of this uncertainty is one big reason why so many PE shops shy away from buying medical services facilities. It will be very interesting to see if Cerberus tries to add some sort of additional hedge, or if it somehow already baked such actions into the original price. There also is a chance that Cerberus could try to claim some sort of material adverse change (MAC), although that would depend on how the original contract was written.

Cerberus, of course, declined to discuss the situation.