LATE NEWS

VAN­GUARD’S MICHI­GAN MOVE /

Modern Healthcare - - Late News - Vince Gal­loro Ed­i­tor’s Note: Keith Crain, chair­man of Crain Com­mu­ni­ca­tions Inc., Mod­ern Health­care’s par­ent cor­po­ra­tion, is a mem­ber of the DMC board of trustees.

Chain signs let­ter of in­tent to buy the Detroit Med­i­cal Cen­ter, which would give Van­guard 16 hos­pi­tals.

In­vestor-owned hos­pi­tals have long been a prod­uct of—and found in—the Sun Belt, with spir­i­tual homes in Nashville and Dal­las. Em­blem­atic of the Rust Belt, Detroit does not nor­mally come to mind when con­tem­plat­ing for-profit hos­pi­tals. For the next few months, how­ever, Detroit could be the cen­ter of the for-profit health­care world, as Van­guard Health Sys­tems works on a $1.27 bil­lion deal to ac­quire six-hospi­tal Detroit Med­i­cal Cen­ter. The deal would boost the num­ber of hos­pi­tals Van­guard owns to 16; it also has a let­ter of in­tent to buy two hos­pi­tals from Res­ur­rec­tion Health Care in Chicago.

Van­guard and DMC an­nounced a non­bind­ing let­ter of in­tent in which Van­guard agreed to pay $417 mil­lion to ac­quire most of the as­sets of DMC and also in­vest $850 mil­lion in its fa­cil­i­ties within five years of com­plet­ing the deal. Van­guard also agreed to a 10-year pledge to keep all of the hos­pi­tals open and to main­tain DMC’s char­ity-care poli­cies.

About $140 mil­lion in donor-re­stricted as­sets would not be part of the trans­fer and would re­main un­der the con­trol of the DMC board, the not-for-profit sys­tem said. A sev­en­mem­ber lo­cal board would over­see op­er­a­tions, with Van­guard nam­ing four mem­bers and DMC nam­ing three, the par­ties said in their an­nounce­ment. The let­ter of in­tent ex­pires on June 1, un­less both par­ties agree to ex­tend it. Van­guard and DMC ex­pect to ne­go­ti­ate a de­fin­i­tive agree­ment by then. Once there is a bind­ing agree­ment, the Michi­gan at­tor­ney gen­eral’s of­fice will de­cide whether to ap­prove the deal and un­der what con­di­tions. The deal also is sub­ject to fed­eral an­titrust re­view.

“We have been un­able to sell bonds on Wall Street, largely be­cause we’re in the city of Detroit, which the bond mar­ket con­sid­ers poor and not a good long-term risk,” Michael Dug­gan, DMC’s pres­i­dent and CEO, said in an in­ter­view. “Once we de­ter­mined that our non­profit struc­ture was chok­ing us and pre­cluded us from in­vest­ment, we pur­sued an in­vestorowned strat­egy.”

Ac­cord­ing to Fitch Rat­ings, DMC sold $342.1 mil­lion in bonds in Septem­ber 2008, al­though the bulk of that went to re­fi­nance older bonds, not to fi­nance new cap­i­tal ex­pen- di­tures. Of the $850 mil­lion cap­i­tal com­mit­ment, $500 mil­lion would be for ex­pan­sion and ren­o­va­tion projects at DMC’s six hos­pi­tals. None of the projects would add beds, but they will re­quire cer­tifi­cate-of-need ap­proval, Dug­gan said. Chil­dren’s Hospi­tal of Michi­gan would be in for the big­gest share—more than $208 mil­lion—to fund a new bed tower and a pe­di­atric spe­cialty cen­ter.

The fi­nal agree­ment is con­tin­gent on state, county and mu­nic­i­pal of­fi­cials agree­ing to a “re­nais­sance zone, which, un­der state law, elim­i­nates state, county and mu­nic­i­pal taxes for 12 years and then pro­vides dis­counts of 75%, 50% and 25% in the next three years be­fore the busi­nesses fully go on the tax rolls, Dug­gan said.

Daniel Loepp, pres­i­dent and CEO of Blue Cross and Blue Shield of Michi­gan, said in a state­ment that the in­surer wel­comed the in­vest­ment, but hoped that DMC’s role as safety net provider is not com­pro­mised in the deal.

Van­guard’s in­ter­est in ex­pand­ing to South­east Michi­gan comes as an­other big hospi­tal sys­tem, not-for-profit As­cen­sion Health, is pulling back. An As­cen­sion-owned sys­tem is clos­ing one hospi­tal in the area and con­sid­er­ing clos­ing two more (March 15, p. 12).

The deal would trans­form Van­guard. Adding DMC’s $2 bil­lion in an­nual rev­enue would boost Van­guard’s an­nual turnover by about two-thirds; the com­pany posted rev­enue of $3.2 bil­lion for its fis­cal 2009, which ended June 30, 2009. Van­guard sees great op­por­tu­nity in DMC and in South­east Michi­gan, said Keith Pitts, vice chair­man of Van­guard, even at a time when its econ­omy has been es­pe­cially bat­tered by the re­ces­sion and the trou­bles of the auto in­dus­try.

“We’ve al­ways been com­mit­ted to ur­ban mar­kets. That con­tin­ues to be our strat­egy, to in­vest in ur­ban mar­kets—the four we’re al­ready in and new ones in which we can en­ter in a sig­nif­i­cant way. I think there’s a lot of op­por­tu­nity to serve south­east­ern Michi­gan. South­east­ern Michi­gan de­serves to have ac­cess to qual­ity health­care no mat­ter what part of south­east­ern Michi­gan you’re in,” Pitts said.

“The whole coun­try is feel­ing the ef­fects of the re­ces­sion over the past few years,” he added. “Detroit doesn’t own that ter­ri­tory by it­self. We con­tinue to see un­em­ploy­ment pres­sure and the pres­sure of the unin­sured in other parts of the coun­try.”

DMC closely stud­ied a failed at­tempt by the for­mer Columbia/HCA Health­care Corp. to ac­quire a not-for-profit health­care sys­tem in Lans­ing, Mich., Dug­gan said. The Michi­gan at­tor­ney gen­eral suc­cess­fully sued in 1996 to block Columbia/HCA’s at­tempt to form a joint ven­ture with, and later ac­quire, what was then known as Michi­gan Cap­i­tal Health­care Sys­tem (now known as Ing­ham Re­gional Med­i­cal Cen­ter). That deal did not pro­vide fair mar­ket value from the buyer for the char­i­ta­ble as­sets, Dug­gan said. “If you fol­low the law and sell the as­sets for fair value, you ex­pect the at­tor­ney gen­eral to ap­prove it,” Dug­gan said. The at­tor­ney gen­eral’s of­fice did not re­spond to re­quests for com­ment be­fore dead­line.

Greg Moore, leader of the health­care prac­tice at Detroit-based law firm Clark Hill, noted that two years ago, physi­cian in­vestors con­verted a not-for-profit hospi­tal to for-profit sta­tus in Pon­tiac, Mich. The Van­guard-DMC deal seems to of­fer much stronger pro­tec­tion of char­i­ta­ble as­sets, Moore said, in­clud­ing the pro­vi­sion that leaves the not-for-profit board in place to ad­min­is­ter the pro­grams that donors have funded. Moore said the scut­tling of the Michi­gan Cap­i­tal deal wrongly left the im­pres­sion that Michi­gan law doesn’t per­mit for-profit hos­pi­tals.

“That deal re­ceived a lot of pub­lic scru­tiny. It was not re­ally set up the proper way,” Moore said. “This is a very dif­fer­ent deal.”

Chil­dren’s Hospi­tal of Michi­gan would get cap­i­tal im­prove­ments un­der the pro­posal.

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