Allegheny Health, Education and Research Foundation, a seven-hospital system in Pittsburgh, has assumed management of Graduate Health System's operating units in an initial step toward consolidation.
The no-cash transaction adds another venerable Philadelphia system to Allegheny's ranks, representing $1.7 billion in total assets. In November 1993, Philadelphia's Hahnemann University agreed to merge with Allegheny, which operates the Medical College of Pennsylvania. Hahnemann University is now part of the newly renamed Allegheny University of the Health Sciences, and the former Hahnemann University Hospital is called Allegheny University Hospitals Center City.
The Graduate deal involves the transfer of its operating units, including six hospitals and a physician practice management company, to SDN, a subsidiary managed by Allegheny. The deal does not involve an immediate acquisition of Graduate's $427 million in assets.
"It is expected that the operations and assets of the individual entities will continue to support and carry the existing level of debt service for the respective organizations independent of (Allegheny) or any of its obligated groups," said Tom Cha-kurda, a system spokesman. GHS, the parent of Graduate's operating units, will continue to manage the system's liquid assets.
Harold Cramer, Graduate's longtime chairman and chief executive officer, said he pursued the deal because Graduate needs to be part of a larger system in today's contracting environment. Cramer will end his 22-year association with Graduate and may rejoin his old law firm. "You can't have two leaders, and I decided it's better to get off at the top of the curve rather than the bottom of the curve," he said.
Although Graduate has a good reputation and historically has performed well financially, it is now highly leveraged and suffers from thinning operating margins. It also faces a major loss of business because of a contract dispute with Independence Blue Cross (Aug. 5, p. 12).
The Philadelphia-based system is rated BBB+ by Standard & Poor's Corp. and Baa by Moody's Investors Service, but both rating agencies have a negative outlook on the credit. In the first nine months of the fiscal year ended June 30, 1996, Graduate's flagship facility, Graduate Hospital, lost $7.8 million on net patient revenues of $104 million, Moody's said.
But Donald A. Cramp, president of the Hospitals and Higher Education Facilities Authority of Philadelphia, said the system's record of repayment on its tax-exempt debt "has been impeccable."
Debt affiliated with Allegheny's Philadelphia operations is insured by MBIA. Pittsburgh-based Allegheny General Hospital is rated A+ and A1 by Standard & Poor's and Moody's, respectively.