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becomes Affinity Health
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becomes Affinity Health
See also the web page "The Companies Buying Mayne Health" which descibes the less than open and transparent nature of this sale by Mayne to Citigroup, a US multinational financier with a massive record of fraud and deceit.
Goodbye Mayne Health
Hello Affinity Health
Goodbye Affinity Health (Update August and October 2005)
Probity problems in NSW (Update September 2006)
Cooke recalls: "For the first six months, we all sat in awe of Peter Smedley. We knew his reputation and you see how he was approaching business, so you question your own judgment and strategies. The centralisation strategy had intuitive appeal but the implementation of it, the lack of experience and arrogant communication style were fundamental flaws."
By May 2002, relationships between Mayne management and the medical community had reached a low point. Many of the better hospital managers had gone, specialist doctors were referring patients elsewhere, occupancy rates were falling and nurses were leaving. To stem the tide, Cooke was appointed head of the division. Repair Man Business Review Weekly December 18, 2003
Mayne Group Ltd. (MAY.AU) agreed Tuesday to sell its ailing hospitals portfolio for A$813 million, ending a tumultuous foray into an industry that led to financial heartache at the Australian health care company.
A group that includes Citigroup Inc.'s (C) CVC Asia Pacific and the Singapore government's GIC Special Investments, will buy Mayne's 53 hospitals in Australia and Indonesia. Australia's Mayne Group Sells Ailing Hospitals Dow Jones International News October 21, 2003
That Peter Smedley and his business practices would be a disaster for Mayne hospitals was predictable. His predecessor Catchlove and Wooldridge, minister for health had failed to gain control over the doctors who rejected the contracts they were offered. The business structure introduced by Smedley was seen to be compromising care and doctors took their patients elsewhere. Hospital profits plummeted. Mayne sustained a $456 million loss in the year ending 30 June 2003. The loss in the hospitals was buffered by profits from diagnostics services and the pharmaceutical business purchased by Smedley.
Smedley was for practical purposes fired and Robert Cook was brought in to sort out the wreckage and undo the mess. He fired Smedley's men and brought back doctors and nurses with administrative skills. This seemed to stem the rot and the losses ceased.
It was clear that the profits which successive Mayne executives had promised since 1994 could not be generated while the medical profession stood firm on staffing and standards. Shareholders had been burned and no longer believed anything the company said about hospitals.
The broad market driven philosophy of bigger is better, which drove the merger frenzy of the 1990s had been shown to be flawed. Large vertical and horizontal profit generating integrated networks providing one stop medicine had failed across the world. Smedley was hopefully the last to hold these dreams. Focusing on core skills has become the latest corporate buzz word.
Institutional shareholders led by Citigroup have been keen to break Mayne up into a series of core businesses since about 1999. This pressure increased following the Smedley debacle. Mayne sold off 7 unprofitable hospitals. In spite of Mayne's claims that it had no need to sell the remaining hospitals it probably could not wait to rid itself of this millstone.
Hospital management was perhaps also eager to escape from Mayne before it imposed some new and equally inappropriate management structure. They wanted to leave the Mayne heritage behind.
They did this by selling the hospitals to Venture Capitalists during the latter part of 2003. The new name is Affinity Health. The worry is that the hospitals and their patients may be jumping from the frying pan into the fire.
Mayne Group's hospital portfolio will be rebadged Affinity Health in the coming months as its new owners distance themselves from the group's troubled history.
The portfolio will be run by Mayne's hospitals general manager, Robert Cooke , who said the implementation of the new brand would be closely managed. He said Affinity Health would be a corporate sub-brand alongside each hospital's name. It would not be overtly visible as it was with the red dot Mayne brand developed by former chief executive Peter Smedley. New Name For Mayne Hospitals Australian Financial Review November 12, 2003
Spinning the money losing hospital section off as a separate market listed group would not have been well received by the market. Instead it was elected to sell to venture capitalists. The way this was done was through a management buy out. This is currently a very popular way for Venture capitalists to operate.
This sale to dominant multinationals interested only in the money which can be generated by selling the business changes the dynamics for patient care. It introduces a whole range of different business pressures.
I am not aware of this management buy out approach being used in health care provision before. It is the latest market strategy for turning companies around and has been successful for the Venture capitalists in the wider marketplace. What is most worrying is the buyers.
A number of issues consequently arise.
What is a venture capitalist and how does this work? Will it increase profit pressures and so compromise care?
What is a management buy out?
How can the hospitals be made profitable?
What companies are involved, what is their degree of control, their business philosophy, their health care experience, and their track record?
Segue to the modern world, where start-ups are financed by venture capitalists. Once they and their entrepreneurs polish their story to a high shine, both of them get a chance to take a lot of money out of the company with an initial public offering. But the earnings of the business itself are not the source of the repayment of the initial investment in the venture. That money comes out of the pockets of the brokerage customers who buy the stock in the I.P.O. And those customers then sell to those who know even less than they do. Banking's Future Lies in its Past The New York Times August 25, 2002
Venture Capitalists are groups with deep pockets which are not market listed although market listed companies may invest money in them. Local venture capital groups have large multinational backers who support them.
First, local institutions, such as AMP Henderson Private Equity, Catalyst, Castle Harlin Australian Mezzanine Partners (CHAMP), Gresham and CVC Asia pacific. They have affiliations with overseas funds. Fitting the jeans pool The Australian November 20, 2001
They are not immediately accountable to the market for profits and can take a medium to long term view. They can take bigger risks but when they do so they expect the successes to more than make up for the failures. They provide the capital needed to take research and develop it into commercial enterprises that can be floated later at a massive profit. They also know that this can fail with the loss of their investment.
In practice more of their money goes to something safer. They buy companies or subsidiaries that are in trouble because of the owners' or managers' mismanagement . They supply the business expertise to make them profitable. The intention is to keep the companies for a few years to do this before floating them on the stock market. CVC Asia Pacific has already indicated that this is what they plan for Mayne's hospitals specifying a 3 year goal. Repco is an Australian example of what is planned.
The other side of the tale was seen in the pricing of the coming Repco float with an enterprise value of about $600 million, giving vendors GS Private Equity and Macquarie Direct returns of roughly five times the $122 million invested in the business. The original purchase price was $250 million - - - - . Private Equity The Mayne Event Australian Financial Review October 25, 2003 Saturday
Superficially there seem to be some advantages for hospitals in that the pressure for month by month profits is decreased. There is more room for long term planning. Privately owned health care businesses share this advantage. Most of these are run by dedicated individuals who are socially fulfilled and make their living by caring for their fellows. Motivated private individuals often use this latitude to provide better services.
The situation for Venture capitalists is different. They can ignore the corporate governance constraints which public accountability imposes and might be able to use business strategies that would otherwise be unacceptable in health care.
The way CVC Capital Asia's Andrew Cummins sees his role as a private equity manager is to take companies offline for a while before returning them to the full glare of public listing.
In the three to five years that Cummins and fellow private equity investors typically manage the assets of a company, they act like a board of directors but without having to worry about corporate governance rules.
Whether the new owners can achieve the 30 per cent-plus internal rates of return they will be gunning for remains to be seen.
Behind closed doors, all sorts of adjustments can be made before the asset is primed for sale on the public market again. Private Equity The Mayne Event Australian Financial Review October 25, 2003 Saturday
"The most logical exit longer term is to put it (Mayne Hospitals) back in the public markets," CVC Asia managing director Andrew Cummins told Dow Jones Newswires.
"This is a big autonomous business and it is big enough to stand on its own," Cummins said. The business needs at least two years to improve its performance before the new owners consider exiting via a share offer or selling to any buyers that may emerge, he added. CVC Plans Australian Hospitals IPO In 2-3 Yrs Dow Jones International News October 22, 2003
Venture capitalists differ crucially from privately owened companies in that at the end of the day this is still medicine for the profit of the investors and not medicine for personal fulfilment or for the benefit of the patients. To survive the private companies must make a minimum profit.
Venture capitalists expect much larger profits and these must come from the care of patients. The pressure to make money is as great as in the marketplace, and the incentive for management to do so is greater. Venture capitalists either appoint their own management team or use existing management if they are compliant.
That management is not constrained or accountable is more worrying because of the central position held by Citigroup's CVC Asia Pacific. Citigroup has a well established track record of hiding business activities and deceiving investors. It has paid out hundreds of millions of dollars in fraud related settlements because of this.
The nature of venture capital is that from the moment a venture capitalist invests in a company, they are thinking about how they will withdraw from the business.
That can come as a shock to some investee businesses, which might be surprised to find that the VC investor could be thinking about getting out in as little as three years. This could drastically alter the management team's long-term plans for growth and development of the business, not to mention their own careers. VC Deals Include Exit Plans Australian Financial Review July 31, 2001
However, this also begs the question of how governments or doctors for that matter would react to having such a large chunk of private hospital infrastructure owned by offshore private-equity funds that have been notorious for cost-cutting and setting high performance hurdles. Mayne Not Out Of Hospital Yet Australian Financial Review October 13, 2003 Monday
Depending on progress in boosting performance and the state of the market, Affinity could be floated in as little as two years, Cooke says. With a price tag of more than $900 million, the venture-capital groups would surely want a market capitalisation on listing of at least $1.2 billion. If Cooke and his team can achieve this, Affinity hospitals will have proved a very healthy investment. Repair Man Business Review Weekly December 18, 2003
Michael West in his column Margin Call satirises the issue and the anxiety generated by describing ludicrous ways in which profits might be squeezed from the hospitals.
Angles of mercy
IN the footsteps of Repco, Just Jeans and Pacific Brands, the Mayne hospital portfolio will float again in a couple of years.
It's the old leveraged buy-out play. The bankers buy the distressed asset, belt it into shape and flog it for twice the price when the market is in the kind of mood it is right now. High.
The lads from the leveraged buy-out mob CVC will be taking the scalpel to these hospitals. Don't you worry about that. Bankers run a mean hospital. Margin Call The Australian October 23, 2003
This is an arrangement where the current managers come to own a share in the company. As I read the material it is not the managers that own the company, but they do put their own money in and this is at risk if the enterprise fails. It has not been disclosed what percentage of the company the Affinity management team will own. Usually this is about 10%.
This is probably one of the strongest incentives linked to profits there is - greater than bonuses or share options. There is a chance for managers to make a killing, yet failure will cost them dearly, as their investment will be lost. Incentivisation of health care management has been the prime tool for generating the 20-30% profits secured in the USA. This has also been the prime cause of fraud and the misuse of patients. Managers desperate to protect their careers and make themselves wealthy have buried their consciences and ignored the welfare of patients.
The dangers which kickbacks pose for health care are well recognised. Kickbacks in medicine are kickbacks even when they are legal, are called incentives or shares options, and when they are paid to managers. The general intention is similar. Companies are paying someone to do something they would not otherwise do. Why else would they pay extra.
The intention of the Venture capitalists is to make the company as profitable as possible in as short a time as possible and then float it on the share market at a large profit to themselves The only reason for improving patient care will be if this improves profits, which it seldom does.
Clearly the venture capitalists will want the management in the subsidiary to be bought to be capable of turning a large profit in the reasonably near term. Mayne may have waited until Robert Cooke had made the business look more attractive in order to inspire confidence in his management. Alternately Cooke's relations with Mayne may have deteriorated and this may have been a way of escaping from Mayne. Mayne claimed that the hospitals were profitable by the time they were sold, something Business Review Weekly questions.
Julian Knights (Gresham) says: "The most important thing to stress is that a good company must come with good management." Fitting the jeans pool The Australian November 20, 2001
In the 12 months to June 30, not including the $373-million writedown of asset values, pre-tax profit for the Mayne hospitals was $54.6 million on revenue of $1.3 billion. This was worse than 2002, when pre-tax profit was $71.6 million on revenue of $1.4 billion, and way down on the results Mayne was getting in the late 1990s.Repair Man Business Review Weekly December 18, 2003
As in the Mayne case venture capitalists may promote the continuing role of the existing management in guiding the company. That this may be an illusion is revealed by an analysis of the problems venture capitalists must overcome published in the AFR. They will not let management step off the prescribed path to profits. If profits do not rise they will step in.
The management team is often untested, the business idea may prove unenticing to the market and there are often difficulties in convincing the current owners to part with control of the company. Switch From Start-ups To Turnarounds Australian Financial Review May 9, 2001
Some of these companies are called turn around specialists claiming skills in imposing profitable business practices. They have generic business skills but often little experience in the areas in which they operate. They are there for the money and they chase it. They will not tolerate a management which does not look as if it is going to make the business profitable enough to attract buyers in the marketplace.
Following the 2001 to 2003 banking scandals management buyouts have been used by major banks to cast off their Venture capital arms claiming to remove conflicts of interest. They still maintain a large financial interest, and probably considerable say in what the company does. London based Gresham is a good example. It looks more like a paper exercise that does not really change the conflicts at all? I quote
Some investors expect the separation of private equity units from banks to ease potential conflicts of interest, at a time when banks' handling of conflicts is under close scrutiny. In some deals, a bank could easily be advising on a disposal, while its private equity group was competing to buy the company. Setbacks force banks on to new tack: Chastised by investors, institutions are rethinking their approach Financial Times (London,England) December 13, 2002
Restructuring by Making Money out of hospitals
CVC Asia Pacific is described as the turnaround specialist for Mayne hospitals. While Venture capitalists are from the very nature of the businesses trying to turn around companies, corporate rescues and bankruptcy management are now very largely specialised businesses.
CVC Asia Pacific was only formed in 1999 so its expertise will come from Citigroup. Citigroup's Salomon Smith Barney has both a well established restructuring group and a health care group. It operates in Australia. The subsidiary's integrity has been compromised by scandal after scandal in the USA.
As a result, the work is ever more complex. "The business of restructuring is now a professional business" with people whose careers are devoted exclusively to it, said Mr. Newman, who started in the business in 1966, - - - - -
In the 1990's, he (another experienced restructurer) ran the restructuring groups at Salomon Smith Barney, Prudential Securities and, most recently, at Dresdner Kleinwort Wasserstein. Bankruptcy Doctors Are Most Definitely In The New York Times July 14, 2002,
As I have indicated elsewhere caring for people is a labour intensive activity which costs money and uses costly equipment. Efficiencies which do not compromise care are limited.
Nor does it appear to disturb them that, as Mayne discovered, the hospital business is one where 70 per cent of revenues are determined through negotiations with health insurance funds whose generosity is limited because their prices are regulated by government Mayne survives hospital stay The Age October 22, 2003
A CVC Asia Pacific senior executive said the investor would work on turning around the money-losing Mayne hospitals within three years. "Thereafter, we can think selling shares," - - - - . "There is much potential in this business." CVC scores Australian hospitals Yahoo! News October 22, 2003
That is not to underplay the job ahead for Cooke and his team. The private-hospital business is not easy. The sector is heavily regulated and hospitals are caught in the middle: it is difficult to increase prices and they have little control over some of their biggest costs.
In 2002-03, for example, there were two cost increases over which the hospitals had little control: hefty wage rises for nursing staff and increases in insurance premiums. The main source of funding for hospitals are the health insurance funds, but the funds are themselves under great pressure to keep member premiums down, and they have been resisting paying higher rates to hospitals.
With a federal election due in 2004, in which health will be a key campaign issue, negotiating hospital rate rises with health funds will be tough.
On the revenue front, a big challenge is negotiations with the health funds, Cooke says. - - - - - - "KPMG has certified that, over past year, cost increases were 6%-plus," he says. "The purpose of the exercise was to move the negotiations with the funds to a factual basis. If we can't get the sort of increases we need just to cover our costs, it is inevitable that there will be moves towards co-payments."
Health funds are also under pressure to limit premium increases so it is hard to see Affinity getting the 6% it wants to cover its cost rises. A co-payment for patients would have its own risks. Doctors who had the choice of referring patients to an Affinity hospital that charged a co-payment, or to another hospital that didn't charge extra, are highly likely to choose the latter. Repair Man Business Review Weekly December 18, 2003
The money comes from government or from insurer. Both are in powerful positions and are not going to pay for large profits. Caring for patients legitimately and ethically is never going to produce the sustained profits demanded by the competitive share market. In the mature US health care marketplace none of the successful companies have done it this way.
The venture capitalists expect to push hospital profits up to 30%. This is what has been accomplished by some US health care corporations. Citigroup which both advises and lends them money in the USA knows how this was accomplished and would see no reason why it could not be done here.
If Affinity expects to generate 30% profits then the insurers will expect to share equally in the largesse and take 30% themselves. My calculations suggest that this leaves a little under $50 of every $100 paid for health care. Add to this the costs of marketing and other business activities. We are looking at less than $40 out of every $100 spent on care; worse than the USA. Something has to give somewhere! The danger is that it may not be profits!
US health care businesses have used a number of unsavoury strategies to boost their profits. These have severely distorted the US health system.
1. Rationing care by cutting costs:- Nursing is the single largest cost. Typically the quantity and quality of staffing is reduced. In addition to this standardised or cheaper equipment is purchased. As Peter Smedley discovered this can only be accomplished when the nurses are relatively disempowered (as in the USA) and the doctors are controlled, which he failed to do.
2. Providing profitable services only:- This is accomplished by not providing or by discouraging services which do not generate a profit. Hospitals target services which are profitable and set up units to provide them. They encourage and support doctors who provide these services. Because they are there for money rather than the community they see this as a legitimate business practice. Columbia/HCA did this in the USA. This is simply a distorted form of rationing for profit. Equity is compromised. Mayne was accused of cherry picking and Smedley's comments at one time suggest that he did not have a problem in restricting the care provided to that which was profitable.
3. Marketing:- Marketing profitable services, and the doctors who perform them to the community so creating a demand which can be exploited. This is likely to result in over servicing and there is a risk of unnecessary care.
In the USA large numbers of children were incarcerated in psychiatric hospitals for months on end as up to US $1000 of therapies which did not help them were provided each day. More recently large numbers of subjects with normal coronary arteries had invasive procedures and risky bypass operations performed. Investigation of this problem is ongoing and its full extent remains to be revealed. Tenet has paid a US $54 million fine and many hundreds of patients are seeking compensation.
4. Screening clinics:- Population screening can be used to draw in people for treatment. Scare marketing is an extremely effective way of pulling in the numbers. It builds contacts and loyalty with potential customers.
This was the way vast numbers of people were drawn to Tenet Healthcare's hospitals in the USA. In the 1980s and 1990's large numbers of normal children and many adults came for free screening. Vast numbers spent months in hospital undergoing worthless therapies simply to generate up to US $1000 profit per patient per day. In 2002 another Tenet Healthcare scandal erupted when normal people who had come for advertised cardiac screening ended up with operations on their hearts.
It is worrying that Mayne was already supporting and running screening and other community services in some of its hospitals. Highly desirable they may be but not when the primary motive behind them is to increase profitable admissions and do surgery for profit.
5. Increasing turnover:- To do this Affinity must market itself to the public and to general practitioners. It must secure the allegiance and support of the specialists in its hospitals. It must draw in more specialists. It must bury Mayne and leave it behind. The difficulty for Affinity will be keeping doctors on side while at the same time taking more profits from care. The way this was done in the USA was to keep doctors wealthy, but only while they were team players.
6. Increasing fees:- In the marketplace economic power rests with the organised groups. Individuals are powerless and can be soaked as they bask in the illusion that they are getting the best because they are paying more. Most people want the best and with a bit of marketing they can be persuaded that this is what they are getting. Increased costs are not a deterrent in private health care.
The patients who had cardiac surgery in Tenet's hospitals were impressed by the service and had no idea that their surgery's only benefit was in enabling Tenet to fleece their insurers and Medicare.
Many Australians do not have private insurance but pay out of pocket rather than go on a public hospital waiting list. Insured citizens also pay additional out of pocket expenses. Patients may however get a nasty shock as additional bills role in. Mayne has already indicated that it will be charging additional co-payments. By charging more at some hospitals it can create the illusion that it is providing superior care. This is not only inequitable but breeches the medical ethic that the quality of care should be the best possible regardless of the patients' social position.
Mr Cooke said yesterday that "at some premium private hospitals I think a co-payment is inevitable under the current system". Gap Payments On Way Back Under Hospital Chain's New Owners Sydney Morning Herald October 22, 2003
Hopefully we will never get to the stage where the poor uninsured supplement the rich insured. This already occurs in the USA. People who pay out of pocket pay much more than those insured because they have no bargaining power. In that country hospital debt collectors force many into bankruptcy.
5. Fraud:- The majority of the successful chains in the USA have built their empires by defrauding the patients, the insurers or the Medicare system. The most recent scandal involved simply cooking the books to create profits which were not there. The US giant HealthSouth which operates the HealthSouth Cedar Court Physical Rehabilitation Hospital in Melbourne is charged with inducing shareholders to invest large sums by dishonest accounting. They are alleged to have overstated their profits by US $2.7 billion over 5 years to keep share prices up. Much of this investment was funnelled into the pockets of management. The fraud goes back 16 years and the company itself gives a total fgure of US $4 billion. The Australian division is accused of participating n one of the frauds. Tenet paid over $1 billion in the mid 1990's and is currently being investigated again for dishonestly exploiting loopholes in Medicare funding. Columbia/HCA paid US $1.7 billion in fraud settlements.
6. Rewarding doctors:- In the USA success has been achieved by getting staff including doctors and nurses on side and getting them to identify with the corporate mission and practices. Compliant doctors have been bound to the corporate mission through contracts, by paying them kickbacks, marketing their skills and their units to the public, promoting them to positions of power in hospitals, putting them in charge of units, and giving them shares in the hospitals. Linking their rewards and their career prospects to the corporate mission is a powerful inducement.
Columbia/HCA (also) and HealthSouth were two companies that successfully used joint ventures, shared ownership and similar structures to get doctors into the corporate pocket. Columbia/HCA was forced to unwind these relationships under the terms of its fraud settlement. While these may be legal they function like kickbacks in linking doctors financial interests to the company rather than their patients. Affinity has indicated that it will follow this path.
Those unwilling to be team players have been pushed out. Doctors in Australia have refused to enter contracts and are wary of attempts to infringe on their clinical independence but they are not immune to research grants, increased status, joint ventures etc.
Mr Cooke wants to avoid comparisons with the disastrous centralisation and rebranding policy instituted by Mr Smedley , under which doctors and staff rebelled, profit was downgraded and Mayne shares tumbled. Mr Cooke said the Affinity Health strategy was "diametrically opposed" to the Mayne policy.
"It's designed to not be in your face. Hindsight is a wonderful thing and we've learnt from the mistakes of the past," he said. New Name For Mayne Hospitals Australian Financial Review November 12, 2003
Some doctors are also contemplating joint ventures with Affinity, under which they buy what's usually a small hospital operation and Affinity runs it. But it'll be the margin and profit numbers that will satisfy Affinity's venture capitalist backers, who are likely to look for a tidy return on their investment over two years before quitting. The exception is GIC, which is said to be in for the longer haul. Affinity to find what ails them, with feeling The Australian January 12, 2004
7. Structured finance:- The manner in which Citigroup used banking deals, called "structured finance" to hide the real situation from the investing public and from analysts was exposed in the Enron scandal. By using structured partnerships or by deceptive "prepaying" arrangements such as those designed for Enron, loans can be made to appear on balance sheets looking like profits. This is a perfectly legal banking strategy and banks like Citigroup have departments that specialise in structured finance. Structured finance is used for a number of purposes including tax avoidance.
The deals demonstrate the aggressiveness in recent years of major banking institutions in putting together structured finance deals, which combine complex investment vehicles with efforts to evade or maneuver around accounting, tax or other rules. Inquiry Said To Examine Citigroup Role In Enron Deal The New York Times December 9, 2002
If Citigroup structured Affinity Health's business in this way hidden loans would appear as a profit and the company could look to potential investors as if it had achieved its 30% profit. This would be easier for a private company, which was not subjected to the same tighter scrutiny as market listed companies.
The share price of US companies floated by Citigroup's investment banks have been artificially boosted by dishonest positive analysts reports, from analysts employed by these banks. Citigroup like other Wall Street financiers have profited royally from this, then richly rewarded analysts for their complicity. This dishonesty is at the heart of the recent Wall Street frauds and scandals. Citigroup was the prime culprit. Similar practices have now been reported in Europe where investors are responding.
Australia has made no attempt to investigate analysts reports. Reports on Mayne and General Practice corporations would be a good place to start. Unreliable reports can be identified but it is almost impossible to prove the intent to deceive without documentary evidence. It was only un-destroyed personal emails that exposed this fraud in Citigroup's case. At the very least Australian investors need to be wary.
Structured finance deals are perfectly legal in the USA and elsewhere. The deals often involve offshore companies. Multinational global trade agreements embrace financial institutions. "Obstructions" to legitimate trade have been removed and Australia has participated enthusiastically. It is therefore likely that similar structured financial deals would be legal in Australia.
If Affinity's bottom line were supported by similar strategies to those Citigroup set up for Enron then the hidden loan would have to be paid back later. Affinity's profits would fall again after the float. While this deception may be totally immoral it is not necessarily illegal. Affinity may elect not to go this way but its US parent Citigroup had no qualms about it.
We should be warned by the fate of several companies floated by Citigroup's Salomon Smith Barney (and later by UBS Warburg) for the health care giant HealthSouth and its directors. HealthSouth's directors and Smith Barney profited handsomely at the expense of the investors who bought shares in companies that soon made large losses. We should also look critically at the floating of companies like Foundation Healthcare in Australia. We should ask whether the real prospects for these companies bore any relationship to the reports put out by analysts and swallowed by trusting investors?
8. Knowing something the rest of us don't:- Large financial institutions in the USA and Australia have close links with politicians and work closely with government in addressing policy and international relations, particularly trade agreements. In the USA Citigroup is well represented on the business round table set up to address domestic and international policy issues. It meets regularly with government officials and with the president.
Press reports indicate that US health care hospital giants are currently in serious financial trouble. Profits are down. This always results in attempts to look for profits globally. Recent press reports in Australia indicated that the professional services aspects of the current US/Australian trade agreements had been agreed to and were even more extensive than those proposed for the WTO. CVC Asia Pacific was very bullish and confident about its future profits. Perhaps this is because its parent Citigroup already has a US buyer lined up and knows that faced with no Australian buyer prepared to pay their price a US one will step in and the trade agreement will allow this. This is pure speculation but a company so skilled in structured finance will have many strategies up its sleeve to hide anything which it wishes to conceal.
In the light of Citigroup's track record and the deception practiced in regard to CVC Asia Paciific we have every right to be suspicious of every move these people make.
None of these money making strategies is good for the patients or for the health care system. My guess is that the new Affinity Health will go for the image (?illusion). It will market itself as the very best and seek to draw those who want the best. It will create the illusion that its doctors are the best and that it provides the best care. It will try to attract big names. It will push for more and earlier treatment by its doctors. Actually providing that sort of care is costly and in the USA at least marketing claims have not been matched by clinical performance and humanitarian service.
We are all easily drawn into this trap. Money making will be equated with care. We may once again hear the argument that care must be good if profits are high and if the hospitals are accredited. This has not been the case in the US marketplace. Profitable medicine and the best care do not go together in the competitive marketplace.
Having learned from Smedley's mistake Affinity are likely to go to the other extreme by supporting and promoting doctors and making them part of the system. Pleasing doctors will be seen as the key to success. Investment in their wellbeing will be seen as a profitable investment. This may ultimately lead to the sort of relationships where doctors find themselves out of step and uncomfortable when they oppose corporate plans and practices.
The intention will be to seduce doctors into corporate thinking and get them to identify with the corporate mission. This has succeeded spectacularly in the USA where in some situations doctors have connived in the misuse of their patients. Critics were swept aside and ignored.
Getting doctors and nurses on side will be the key to financial recovery but getting them to cooperate to the extent of taking a 30% profit out of the money paid by insurers to look after their patients is going to take some smooth talking and a lot of rationalising.
These Corporate managers are not necessarily deliberately corrupt. They are incredulous that others dispute their self evident arguments. In many instances they think very differently to the rest of us and simply do not see what is happening.
The worry is that doctors like other humans too easily come to believe the illusion and the arguments that support it. It is very difficult to continue to be ungracious and suspicious when confronted by magnanimous conduct. This sense of gratitude can be exploited. If Affinity are planning a 30% profit then every magnanimous gesture will have been carefully evaluated and costed.
Who for instance can criticise Mayne Health's large $55,000 rural specialist establishment grants to help surgeons establish themselves in country areas without seeming churlish. How many specialist colleges are being offered similar grants? Mayne were only just breaking even yet considered this a worthwhile exercise.
The shortage of rural and regional doctors has become so severe that Australia's largest private hospital chain is offering $55,000 scholarships to graduate specialists to help them set up private practices in NSW, Victoria and Queensland.
Affinity Health, which operates 41 hospitals nationwide, requires only that the doctors practise in their assigned region for a year. They will not even demand that they practise in Affinity hospitals.
Affinity's chief executive, Robert Cooke, said the program was designed to rebuild the company's relationship with the medical profession as well as to help staff its regional hospitals.
"Now all our sponsorship dollar goes into either this program or the Royal Australasian College of Surgeons. We do hope other doctors recognise what we are doing," Mr Cooke said. Private Grants Plug Doctor Shortage Outside Cities The Sydney Morning Herald 17 May 2004
Quite obvously Mayne cannot require doctors receiving large donations to use their hospitals. That would be illegal and a form of kickback. But if someone is giving a doctor $55,000 then there must be a high expectation that that doctor will support Mayne. Not to do so would be churlish.
One must point out that it would be very profitable to buy in doctors who owe allegiance into under doctored areas where you have hospitals. We need to know more about the assigned regions. Are these regions in which Affinity owns hospitals? If so then the $55,000 must be seen as a large "relocation bonus" similar to those for which Tenet Healthcare is currently being investigated in the USA. Instead of being grateful as Cooke suggests doctors and citizens should be distrustful and suspicious. This is a company which has deceived all Australians about Citigroup's ownership. We should not trust them. Any fnancial dealings with doctors should be suspect - even when they are legal.
I am aware of Mayne hospitals hosting screening clinics, again a worthwhile exercise. I do not know if they funded this or only provided facilities.
Affinity may promote itself and its image by running wellness clinics and screening services. An ominous pointer to the future was a report to the market, which indicated that post-Smedley Mayne was tracking the performance of its top hundred doctors. The company is likely to promote and favour these doctors. This is of course a perfectly normal business exercise. How can the company possibly run a commercial enterprise without evaluating the commercial performance of those providing services and rewarding them. It is just business but what is the impact on care?
Does any chief executive have a tougher job ahead of him than Robert Cooke? The head of Affinity Health has to repair one of the health sector's biggest basket cases: the hospitals Affinity is buying from Mayne. Whether he succeeds or fails, it will easily be the industry's biggest story in 2004.
Cooke, an experienced hospital manager, was appointed head of the Mayne hospitals division in May 2002 when the extent of the division's troubles became apparent. He had joined Mayne as a senior manager in May 2001, having spent the previous two years as head of Melbourne's St Vincent's and Mercy Private. For nearly 20 years before that he worked in health administration, in the private sector and for federal and state public health departments. He was appointed to Mayne by its then chief executive, Bob Dalziel, but by the time he turned up for work Dalziel had been replaced by Peter Smedley.
Frequently referred to as a "nice guy", Cooke describes himself as a straight-shooter who welcomes interaction with staff and colleagues. In that he knows the business inside out, and is capable of rebuilding relationships with doctors and medical staff, Cooke is a good choice to run Affinity. Still, it is a big career move for him and will test his ability. From running just one hospital in 2001, he leapfrogged to run Mayne's hospital division, which had 62 hospitals, 6000 beds and about 14,000 employees.
A former colleague notes: "A lot of people underestimate Robert because he is not the stereotypical modern manager. He is very friendly, such an ordinary bloke. But he is also very bright, very ambitious and some of the things he's done in the past year, like move hospital managers on when they haven't been performing, shows he is committed to improvement and will make tough decisions."
Cooke says: "When I took over, it was a low point for the hospitals. It sounds corny now, but one of the first things we implemented was a program of '100 issues in 100 days'. The issues came from the doctors and the hospitals and staff. It showed we were prepared to listen and take action, and the fact that we were able to fix many of the problems gave me and my management team credibility."
Affinity's main hospital rivals - Ramsay Healthcare and Health-scope - run lean and mean on head-office costs. Cooke says Affinity will do the same and is confident that simply eliminating many head-office expenses will take it a good way down the road to matching the margins of its competitors.
Not surprisingly, Cooke is cautious when talking about cost-cutting plans at the hospital level. One of the issues for Affinity management is to distance itself, in the eyes of staff, from the Mayne culture. This will be no easy task because, essentially, there has been no change in the people running the business for the past six to 12 months. In trying to achieve better relationships with staff and boosting morale, the last thing Cooke and his team want is to be seen as aggressive cost-cutters. Repair Man Business Review Weekly December 18, 2003
Giving back the hospitals their identity, but with the benefits and discipline of belonging to a corporation, is an integral part of Robert Cooke's strategy.
He's the man in the hot seat, charged with turning round the poor performance of the hospitals, in the hope of refloating the group on the stock market within two years.
"To do that we need some runs on the board." For the hospitals to increase profits and run more efficiently, Mr Cooke and his team need to get disillusioned staff and doctors back onside; a defection by doctors and lack of co-operation were central to the failure of the Smedley model.
One way of achieving this, Mr Cooke says, is to focus on people rather than follow the arm's-length attitude of Mayne.
"You've really got to get out and see the hospitals and doctors," Mr Cooke said. Affinity to find what ails them, with feeling The Australian January 12, 2004
Macquarie bank, Ramsay Healthcare, and Benchmark were the favoured local Australian grouping with health care experience. They lost out at the last minute in the bidding to a multinational consortium dominated by US interests. A British backed bid dropped out. The new owners are Ironbridge Capital, Singapore government's GIC Special Investments, CVC Asia Pacific, and the Mayne management buy out team. Hidden behind them is the gigantic US financial services conglomerate Citigroup. It is the only one of the participants with any health care experience.
A Macquarie Bank -led syndicate comprising Ramsay Health Care, Benchmark Healthcare and a listed fund to be known as the Macquarie Social Infrastructure Group is widely seen as the frontrunner. However, the Macquarie camp is facing tough competition.
Giant British private equity firm Catalyst Investment Managers - a subsidiary of Prudential investment group M&G - is backing a management buyout and is being advised by Deutsche Bank. A Credit Suisse First Boston-advised pairing of CVC Asia Pacific and Ironbridge is also in contention. Mayne Sell - Off Proves Complex Operation Australian Financial Review October 7, 2003
That Credit Suisse First Boston, Deutsche Bank, UBS played a part in the deal speaks for the primacy of market over health. These multinationals would back the big credible profit generating US groups with whom they have conducted business in the past. They would have little interest in the welfare of Australian citizens. All three have been involved in some way with the 2000-2002 investment banking scandal in which investors were deceived and defrauded.
A report suggests that banks are already interested in supporting the new business venture further.
There are also talks with at least three banks to expand the new health group.
He (Robert Cooke, Affinity Health's managing director) said Affinity would expand and there were no immediate plans to scale back any of the 600 staff at the three hospitals. Hospitals Group Vows To Expand Newcastle Herald (Australia) November 11, 2003
What those concerned have refused to disclose is the proportion of the $813 million paid by each of the buyers, and so the power or control each exerts. Nor is it revealed where the money paid by these Venture capitalists is all coming from. Do the advisers have investments in the buyers and if so how much? The people ultimately calling the tune will be the faceless bankers and financiers who put up the money for these venture capitalists.
Citigroup, the US multinational giant and financial services conglomerate is by far the largest of the bankers likely to be behind this venture. It may well be the major contributor. Since 1999 Citigroup has been agitating to break up Mayne, and spin off each section as a separate business.
The weakness in both the new serial acquirers and the failed acquirers of earlier decades is that managers did not understand the businesses they got into. They assumed that they could allocate the financial resources better than existing external financial markets could.
The academic research on diversified firms is unambiguous. They generally do not beat the market. The executives could not possibly remain knowledgeable about the changing technological and market requirements for such disparate businesses. It has been reported that Gary Winnick of Global Crossing, for example, so little understood his telecom businesses that he relied on a Salomon Smith Barney telecom analyst, Jack Grubman, to guide financial and strategic moves. Expanding Without Managing The New York Times June 12, 2002
It is unlikely that the venture capital groups will be so stupid as to once again fall into the old trap of generalised management fitting all situations - as Smedley did. They will recognise that health care market expertise is necessary. None of them have any.
It is likely that Citigroup's money and its turnaround experience in the US health care marketplace will be the driving force in making Mayne's old hospitals profitable. They will be watching Robert Cooke's team ready to step in if they falter. CVC Asia Pacific was founded in 1999 and it would have acquired restructuring expertise from Salomon Smith Barnet which has had both restructuring and health care sectors for many years.
Giant money making US health care corporate chains have made vast fortunes for the bankers on Wall street. In spite of the fraud and the misuse of patients these US corporations' business practices are still the market's model for success. No one else has succeeded like this in any other country - yet!
CVC Asia Pacific :- Citigroup's CVC Asia Pacific is the prime concern. It is the Asian venture capital subsidiary of the giant US multinational finance conglomerate Citigroup. CVC stands for "Citicorp Venture Capital". CVC Capital Partners is a joint venture partner in CVC Asia Pacific. It is Citigroup's European venture capital subsidiary structured so as to avoid restrictions placed by US regulations. CVC Asia Pacific is described as a turnaround specialist and most of the public announcements have been made by this group. It is "wholly owned by Citigroup" and is managed by Citibank staff. There can be little doubt that it is the leader and prime mover in this endeavour.
Citigroup has a truly dreadful track record in the USA. The largest of the Wall street financial conglomerates it has been at the centre of the massive scandals which have engulfed the USA in the last 3 years. It has had extensive experience of the US health system and press reports suggest that it may have turned a blind eye or even abetted some of the fraud in the health care sector. There are many concerns about this sale but by far the most worrying is that Citigroup may be the real turnaround expert.
One must ask whether the more benign business expertise and health care mission of Australians has taken second place to aggressive US know how?
Ironbridge:- Ironbridge Capital is an April 2003 breakaway group from Gresham private equity group, itself a February 2003 Zurich funded London management buy out from Zurich Financial. The problem with these paper buy outs is knowing who the real owner is. It is not clear where Ironbrdge's money comes from and who pulls the strings.
Singapore GIC:- Singapore GIC is a Singapore government foreign investment vehicle which does not release much information about its activities. The money comes from the Singapore government.
Wall street multinational financial services:- Credit Suisse First Boston, Deutsche Bank, and UBS Warburg are giant multinational financial operators. They are major players on Wall Street in the USA. Like Citigroup they were associated with the Worldcom and Enron scandals where they are all accused of aiding and abetting the fraud. They are also involved in the massive deception of the investing public which has cost so many US citizens their life savings. They have contributed to the preliminary US $1.4 billion settlement. Estimates of the final compensation payments to defrauded citizens range between US $10 and 30 billion.
Some were involved with Citigroup in the 2000 money laundering scandals in the UK, and in the 2001 Japanese scandal where banks illegally helped clients to conceal losses.
They have all had close contact and commercial arrangements in the US health care marketplace.
Catalyst Investment Managers:- This is a giant British private equity fund and a subsidiary of Prudential investment group in the United Kingdom. It dropped out of the bidding.
Catalyst, CVC Asia Pacific, Gresham and GIC Singapore, as well as the multinational bankers have all been involved in a number of financial projects together.
On another page I have explored the way in which the entire Australian press connived in hiding Citigroup's ownership of CVC Asia Pacific from Australian Citizens after Citigroup became involved in the US scandal. I describe the available information about each of these companies in more detail and the businesses they bought and sold.
The multiple frauds, the exploitation of vulnerable customers, and the scandals engulfing the financial services industry during the 1990s and then between 2001 and 2003 are explored on other pages using Citigroup, the prime offender as an example. The introduction of similar practices into health care by Citigroup and UBS Warburg is also described separately.
Hurdles for Affinity Health
A particular legislative issue for Australia and Australians will be the role of Citigroup as part of the turnaround team and as an owner of Affinity Health. In assessing this authorities must consider the degree of control and the influence Citigroup will have as the turn around specialist. Most regulations have some sort of probity requirements. Regulators have a responsibility to protect Australian citizens, a responsibility they have difficulty in meeting - not least because of a lack of support from their political masters.
The sale is also likely to be conditional on approval from the Foreign Investment Review Board and the agreement of several state governments on whose behalf Mayne operates hospitals in Western Australia, NSW and Queensland. Mayne Sells 53 Hospitals For $800m Australian Financial Review October 21, 2003
The investment by these multinationals must be approved by the Foreign Investment and Review Board (FIRB). State Health departments must approve the transfer of hospital licences from Mayne to Affinity. These authorities have all been notified of the concerns about Citigroup.
The problem for authorities is that corporate crimes in the USA are usually settled for large amounts by agreements through the civil courts in which no fault is acknowledged. State health departments are in no position to defend their actions against a multinational more wealthy than Australia when evidence must be sourced from another country. This is especially so when they lack the support of the minister responsible.
Only Victoria seems to have legislative protection. It has twice successfully challenged the probity of multinationals. Given the probable support for the Mayne buyout by pro-venture capital politicians like Victorian Treasurer John Brumby it is unlikely they will act. They have not acted against HealthSouth's operation in Victoria and its probity is in tatters.
Three of the hospitals sold are public facilities run under contract and six are colocated on public hospital campuses. These sales will have to be negotiated with state governments. This will give the states leverage. There is already a strong move in NSW for the state to take back the management of Port Macquarie hospital and to acquire the hospital when the lease of the facility expires in 10 years.
The NSW government will attempt to retake control of the Port Macquarie Base Hospital, which has been operated under contract by Mayne Group since 1994.
The Australian Medical Association has also raised concerns about the foreign ownership of the consortium that will take control of Mayne's hospitals if the deal proceeds.
The Western Australian branch of the AMA has called on the WA government to ensure ownership and control of Joondalup hospital stays in public hands because of its concerns over foreign ownership. Questions Over Contract - Based Hospitals Australian Financial Review October 29, 2003
Click Here to go to a page which examines the three venture capitalists involved in the sale in more detail and which describes the way in which Citigroups involvement and its scandals were kept from the public.
Click Here to go to the Citigroup pages which describe the many scandals.
Information released during the sale of notes in March 2004 (see below) indicates that Cooke owns 2.8%, of shares while Wise and Hickey own 1.2% each. They are, it is stated, likely to increase their holding. As several other members of the buyout team also own shares the likely holding of management is 10% or higher. If the company is valued at the $813 million paid for it then the buyout team may own about $80 million. Cooke's holding is $22.7 million. If the company floats for only $913 million (some analysts are suggesting much more) then the buyout team will divide up $10 million. Cooke will walk away with a handsome $2.8 million of this in his pocket - a tidy incentive bonus by any standards. If he fails he loses accordingly.
On the basis of the Ramsay multiple Affinity is now worth $1067 million and on the basis of Healthscope's it is worth $1855 million. Sense of add venture - Buyout consortiums can switch a sluggish company into a higher gear The Australian 27 March 2004
Affinity claims to be on track and to be increasing profits. It has raised $125, 000 from the market to repay a bridging loan and this was enthusiastically taken up by Mum and Dad investors, even though it was ranked behind the other debt and so more vulnerable. The talk is of a float after 2 years and the hype has started with off the cuff remarks about acquisitions. Some at least are still concerned about the fundamentals of the hospital business.
Affinity the former Mayne Group hospital division has continued the improvement in earnings seen before Mayne divested the group, according to the prospectus issued yesterday. Affinity Plans $125m Note Issue To Pay For Hospitals The Sydney Morning Herald 5 March 2004
The notes are secured over the assets of the Affinity Health Group but they are subordinated to, or rank behind, the senior debt. Investors Have Affinity With Double - Digit Return On Notes Australian Financial Review 17 March 2004
One fund manager specialising in debt products who preferred not to be named said that while the structure of the product itself did not look that unattractive, an in-house equity analyst who had covered the operation while it was owned by the publicly listed Mayne had voiced concerns about industry fundamentals.
Affinity is forecasting a 32 per cent increase in earnings before interest, tax, depreciation and amortisation from $112 million in 2002-03 to $148 million in the current year. Affinity Hits It Off With Mums And Dads The Sydney Morning Herald 25 March 2004
As with Pacific Brands and Repco, CVC has allowed Affinity management to spend capital on expansion and re-equipment.
Affinity has also been buying small properties near many of its hospitals to allow for expansion. Former Mayne Division Heals Doctors' Rift The Age 3 March 2004
With the debt hurdle out of the way, Cooke is already talking of further acquisitions and divestments to bring a more active management focus to the group. This may also stretch to new joint-venture arrangements with surgeons who operate day surgeries in close proximity to Affinity hospitals. Going Private Begins Healing Process Australian Financial Review 2 April 2004
A new chairman
Credibility and the close links with government have been maintained by the appointment of Mr McClintock, a past secretary to the cabinet and an HIC commissioner to chair the company. This may well be with a view to a float.
A former cabinet secretary, he is a director of Macquarie Infrastructure and is acting commissioner of the Health Insurance Commission. Affinity, which boasts 53 sites, aims to list on the share market within two years. Finance BRIEFS : Affinity chairman The Australian 30 January 2004
Managing director Robert Cooke said Mr McClintock had extensive experience in business, in the health-care sector and in government, as he was formerly Secretary to Cabinet reporting directly to the Prime Minister. Affinity appoints former secretary Wynnum Herald 4 February 2004
An impending float
The time frame for a float has been shortened from 3 years to two - some time in 2005. This is a short time frame and it might well reflect a desire by CVC Asia Pacific to be rid of the hospitals quickly while the illusion of profitability remains. It is interesting to reflect that this is a hospital business which has been promising to make big profits since 1995. In spite of repeated changes in policy it has never delivered. While there will be improvements as Smedley's changes are reversed we have to ask what Affinity has done which is different to Catchlove.
Quite suddenly as a float looms the press starts publishing glowing reports hinting at the prospects. One must ask whether this is about newspaper circulation, helping potential advertisers or mateship. It does not sound like objective advice to ordinary investors. Given Citigroup's track record in creating illusionary bottom lines those figures need very close scrutiny. It should be noted that the qualifying report, given to buyers of Affinity's notes (see above), by KPMG emphasised that in finding no evidence that the prospectus was inaccurate they had not carried out an audit and had not been supplied with the information needed to do so.
The Mayne hospitals business was sold last year to a group of leveraged purchasers who now look set to double their equity money.
Although Affinity is geared to around 70 per cent of assets, cash flow is strong. In the prospectus it shows that in the five months to November, Affinity's earnings before interest, tax, depreciation and amortisation (EBITDA) rose 44 per cent and in the full year to June 30 the company expects to have an EBITDA of $148 million.
On the basis of the Ramsay multiple Affinity is now worth $1067 million and on the basis of Healthscope's it is worth $1855 million. The truth is somewhere in the middle, but almost certainly Affinity is set to make bigger profits than the forecast $148 million EBIDTA in 2003-04.
Like Pacific Brands, once the company has a track record it will float as a public company to become one of the biggest health groups in the region. Affinity will almost certainly use its hospitals in Indonesia as a base for Asian expansion. Sense of add venture - Buyout consortiums can switch a sluggish company into a higher gear The Australian 27 March 2004
Cooke has been silent about plans to increase out of pocket costs. This could be one way to get profits up quickly and then sell before the word gets out and public anger gets too loud. One report suggests that excessive amounts are being charged.
FEES for the emergency department at the Hills Private Hospital have been blasted as too high for most people.
Standard admission fees charged by the private hospital on Windsor Rd at Baulkham Hills range from $238 to $408, depending on how severe the patient's needs are.
State Liberal MP for The Hills, Michael Richardson said he was shocked by what was being charged.
Admission fees for the emergency department at the Seventh Day Adventist hospital at Wahronga vary from $190 to $280. Admission fees `outrageous' Hills Shire Times 10 February 2004
The difficulties in negotiating with the health insurers, a problem for Mayne, have shown no sign of abating. The insurers are as determined as ever to cut costs by restricting hospitals and limiting their profitability, although an error on their part resulted in a brief reprieve. The outlook for ethically making the sort of profits Citigroup's CVC Asia Pacific wants must be poor.
Medibank Private has had to shelve an aggressive plan to renegotiate contracts with 400 private hospitals worth a total of $1.2 billion after accidentally sending confidential information to some of them.
The nation's biggest health insurer sent letters to hospitals this week saying its big cost-cutting strategy would be postponed because some had been sent information about rivals in the tender documents.
Australian Private Hospitals Association executive director Michael Roff said the government-owned fund, which controls 30 per cent of the market, was trying to implement much tougher, two-year contracts. Faux Pas Sinks Medibank Plan Australian Financial Review 13 May 2004
Permission from the states
Mayne needed permission from state regulatory authorities to sell public and collocated hospitals, as well as the contracts it had entered into, on to Affinity. All states were informed of Citigroup's involvement and of its track record on Wall Street and in health care. It would have been difficult for states to reject the sale. These were normal commercial deals and Affinity could have appealed their decision. Government would then have been forced to prove actions taken in the USA and settled with large financial deals but in which guilt was never admitted. While the large sums paid indicate culpability to citizens this is not so in law. One can only hope that state authorities are exerting some leverage to protect Affinity hospitals from Citigroup's influence.
Affinity's press release that Queensland was thorough is reassuring. While the Royal Woman's Hospital in Melbourne agreed to the transfer of the Frances Perry House, an announcement that the Victorian authorities would approve the license transfer by 5 July has not eventuated more than a month later. There has been no announcement about Joondalup hospital in Western Australia. The NSW government have attempted to take back the privatised Port Macquarie Public Hospital and run it but this has resulted in a legal dispute. This hospital has been a bone of contention for residents and government since long before it was built in 1994. In the 10 months since Mayne sold to Affinity only Queensland seems to have approved the sale of public and collocated hospitals. The reasons for this delay can only be surmised.
Affinity is waiting for settlement to clear on nine hospitals, which are co-located on state government land, before the deal can be finalised. These hospitals need the approval of the health departments of Victoria , NSW and Queensland before they can officially pass into Affinity's control. Going Private Begins Healing Process Australian Financial Review 2 April 2004
Frances Perry House, which is expected to transfer to Affinity Health on July 5 2004, subject to the transfer of the hospital licence by the Victorian Department of Human Services, is a leading provider of private obstetric services in Melbourne with more than 2,700 births each year. FRANCES PERRY HOUSE ASSIGNED TO AFFINITY HEALTH Australian Company News Bites 17 June 2004
Affinity Health Ltd today announced the Queensland Government has consented to the transfer of Noosa, Caboolture Private and Logan Private Hospitals from Mayne Group Ltd.
Affinity Health's managing director, Mr Robert Cooke, said the relationship with Queensland Health had been strengthened during the process of transferring the hospitals.
"The process with Queensland Health has been thorough, but very productive, and I would like to thank them for their handling of this matter," Mr Cooke said. Three Mayne hospitals transferred to Affinity Health Australian Business News 2 July 2004
NSW Health Minister Morris Iemma said yesterday he was not optimistic that the NSW government would acquire Port Macquarie Hospital. The NSW government is in legal dispute with the hospital's operator, Mayne Health, over the company's plan to dispose of the hospital to Affinity News; Briefs Australian Financial Review28 May 2004
Comment:- While I am critical of Affinity and of its policies this should not be taken as an imputation on the integrity of Cooke and his team of managers. I have no reason to doubt that they are highly motivated to provide care and to make a profit. My concerns relate to the the difficulties in serving two masters, the economic pressures on them and the market belief systems integral to Citigroup's mode of operation. These managers are only human and we have seen how groups which started out with the best motives about care, and a belief in the market, ultimately bowed to market pressures in order to survive. How will Cooke's team perform when the market crunch comes? While government continues to cap funding and at the same time fan the fires of competition then something is likely to give - all too often it is care.
The NSW government bought back the Port Macquarie hospital. That Affinity was having difficulty in securing the transfer of licenses becaue of the probity of Citigroup was confirmed by NSW Health Department in a letter in which it indicated that it had done a thorough probity review, and then only granted licenses limited by clinical and business governance conditions, and director approval requirements to protect the hospital system in April 2005. This was a week after the hospitals had been sold to Ramsay.
The marketplace was buoyant for floats during 2004 but in 2005 this started to go rapidly off the boil. Affinity elected to float before the market dropped too far and before it was making the profits it had promised. Investors and banks were negative about the float and the price Affinity was asking. Other companies floated by CVC Asia Pacific had performed poorly. One of the worrying aspects of this float was a press report suggesting that doctors who had supported the company were to be given shares and this would be related to their past support. To the non-legal mind this is simply a kickback and kickbacks are illegal. As the float was abandoned this was never contested or prosecuted.
Ramsay Health Care seized the opportunity to buy Affinity's hospitals for $1.4 billion in April 2005. This was a profit of $600 million for the venture capitalists and the management buy out team. Cooke would have got 2.8% - ie 16.8 million - a healthy sum for only 18 months work and it must have been a strong inducement to do "whatever it takes".
The ACCC stipulated that Ramsay divest 19 hospitals and the arrangement was that 14 of these were to be sold back to Affinity for $406 million to be operated under the name "New Affinity". There were some problems in the negotiations. When Robert Cooke resigned from Affinity to join Mayne Health, Healthscope seized the moment and offered $490 million. Ramsay sold the hospitals to them with the ACCcs approval. Healthscopes legal challenge was unsuccessful.
The other five hospitals were sold to smaller operators and not for profit groups. Affinity Health ceased to be an owner or operator of hospitals.
Click Here to go to the page describing Ramsay's purchase of Affinity Health hospitals.
The implications for Healthscope of securing such a large parcel of large profitable hospitals is addressed on one of the Healthscope web pages.
The consequences of this consolidation which has left Australia with a two corporate hospital system are addressed on the main hospital web page.
New information may throw some light on the reasons why the Citigroup venture capitalists elected to sell the hospitals so soon. Not widely known is that NSW conducted an 18 month long probity investigation before granting licences in 2005. They then granted licenses with conditions which imposed restrictions and compliance procedures on the company's operations. The licenses were granted around the time Affinity announced its plans to float or sell. Whether NSW would have rejected the licenses had Affinity not sold, whether the restrictions imposed precipitated the sale, or whether the explanation offered publicly was the real reason Affinity sold so soon is a matter of conjecture.
That there were significant probity issues has significance for the recent purchase of DCA, a nursing home operator by the same group of venture capitalists. Nursing homes are far more vulnerable than hospitals.
The difficulty in securing licenses and their significance are explored on another web page.
Click Here to explore the issues and read a letter from NSW Health Department.
This page created January 2004 by Michael Wynne
Modified and updated August 2004, October 2005, September 2006