Seeing their chance to call the healthcare shots, a group of Chicago-area physicians is putting together a bid for two Columbia/HCA Healthcare Corp. hospitals that are on the block.
Last month, Columbia announced that it is selling Michael Reese and Grant hospitals as part of a corporate restructuring. A consortium of about 4,000 local physicians hopes to get a letter of intent to Columbia early this month.
"Physicians first started speaking about this (a few months ago), and out of that came a desire to proceed with the steps necessary to purchase the hospitals back from Columbia," says Enrique Beckmann, M.D., vice president of the medical staff at Michael Reese.
Columbia, which is embroiled in a federal Medicare fraud investigation, is selling one-third of its 340 hospitals and last month offered to sell Michael Reese and Grant as a package. Columbia operates three other acute-care hospitals and three psychiatric hospitals in the Chicago suburbs that aren't for sale.
A task force of physician representatives from the eight area Columbia hospitals has been meeting for several months and recently retained Cain Brothers, a New York-based investment banking firm, to develop a business plan and secure strategic partners.
Cain Brothers is working on two physician buyout scenarios. In one, physicians from all eight Columbia hospitals would share ownership; in the other, ownership would be limited to doctors from Michael Reese and Grant. The task force will first gain medical staff approval before bringing anything to Columbia, Beckmann says.
Neither Beckmann nor a Cain Brothers spokesman would comment on specific financial terms. Terry Mieling, director of the healthcare finance department of investment bank Merrill Lynch & Co.'s Chicago operation, says the physicians are likely to favor a deal that would combine the deep pockets of a strategic partner and a significant upfront cash investment by the doctors. Under such a plan about 70% could be paid upfront, with the rest paid to Columbia in earnings over a period of time.
The physicians face competition from the University of Chicago, which has expressed interest in expanding its health system, and real estate developers, who are hungrily eying the prime property both hospitals sit on.
"The problem (the physicians face) is, despite the fact they are working there and know the facility, it's not a known commodity with a track record and cash," Mieling says.
Making the buyout even more of a challenge is the fact that both hospitals have struggled in recent years. In 1996 Michael Reese had net revenues of $182.5 million and a pretax loss of $23.4 million, following a $13.9 million pretax loss in 1995. Grant in 1996 had $60.5 million in net revenues and a pretax loss of $1.5 million, after a loss of $12.6 million in 1995, according to Crain's Chicago Business, a sister publication of Modern Physician.
In addition, the Illinois Department of Public Health found violations of Medicare rules at Michael Reese in 1996. And in December service workers at Michael Reese conducted a one-day strike.
Despite all the difficulties the physicians face, they have some advantages, according to Sheryl Skolnick, managing director and senior healthcare analyst at the investment banking firm BancAmerica Robertson Stephens. For one, Skolnick says, they may be able to lure back referring physicians that Columbia drove away.
"Properly marketed, a physician-owned hospital, even if it's for-profit, will have a perceived aura of higher quality care, " she says.
And, Skolnick adds, without outside stockholders the physicians could have a successful for-profit business that is an asset to the community with only a 3% or 4% profit margin.
Jay Want, M.D., medical director of Precedent Health Management, is one of the few physicians who can offer some experienced advice. Precedent is a physician group that came together last year to purchase the former Mercy Medical Center in Denver and turn it into a short-stay and ambulatory-care center.
Before making a bid, Want advises, the Chicago physicians should "look into your own group first. How committed are you to one another, what is your culture, are you willing to delegate authority to a group of physician leaders, and are you willing to follow them on a long-term basis?" Want says. "It goes beyond the financial integration."