Who bested whom?
That's the question on everyone's mind after for-profit Vanguard Health Systems earlier this month agreed to buy six Philadelphia-area hospitals for $400 million in cash and assumed debt from not-for-profit Allegheny Health, Education and Research Foundation.
Desperate to grow, did 9-month-old Vanguard jump at some hospitals Pittsburgh-based Allegheny was eager to get rid of? Or was it a tough sell, with Allegheny hesitant to part with a promising set of Philadelphia-based facilities, four of which it had owned for less than a year?
While selling the six hospitals, Allegheny is keeping its three other Philadelphia-area hospitals (March 16, p. 16). The sale is expected to close within two to three months.
"In terms of what it's buying, I don't know why Vanguard is doing this," said David Peknay, director at Standard & Poor's, New York. "I think there are definite questions as to the future viability of parts of these hospitals."
The six hospitals have been a drain on Allegheny. Last fall, it pumped $90 million into its Philadelphia operations and laid off 1,200 workers there (Oct. 20, 1997, p. 2).
Allegheny purchased the four Graduate Health System hospitals in Philadelphia in May 1997 and closed one, 170-bed Mount Sinai, in October. It bought the other three hospitals to be sold to Nashville-based Vanguard in separate deals: two in 1991 and one in 1997.
An Allegheny spokesman said Vanguard approached the system about the six hospitals two months ago. He said Allegheny wasn't shopping the hospitals around.
Meanwhile, New York-based Moody's Investors Service placed the three Philadelphia hospitals' B2 rated Series 1991 and 1993 bonds that Vanguard plans to buy on its watch list with an uncertain outlook after the sale was announced. If the sale goes through, the three hospitals' outstanding debt of $161 million more than likely would be retired, Moody's said. But if it's delayed or called off because of something found during due diligence, bondholders "will likely be exposed to a more volatile and risky position," Moody's said.
However, the hospitals Vanguard intends to buy seem to be in better shape than the ones Allegheny is keeping.
According to data from HCIA, a Baltimore-based healthcare information company, the six hospitals Vanguard hopes to buy earned $10.5 million on total revenues of $462.9 million in 1996. The three facilities Allegheny is keeping earned $6.7 million on $691.1 million in total revenues.
When news of the sale went public, Charles Martin Jr., Vanguard's chairman, president and chief executive officer, said the company plans to invest $50 million to $100 million into the system in new and expanded services.
This may be a risky bet for Vanguard, observers said, because Philadelphia's market needs to consolidate, not expand.
According to the Delaware Valley Health Care Council, between October 1996 and October 1997 the city's acute-care bed count dropped 3% to 12,865 from 13,270, and its acute-care occupancy dropped to 65.9% from 67.4%. Council Vice President Leonard Karp said a drop in beds should have meant a more efficient market and a rise in occupancy. The occupancy drop shows the city still needs to cut beds.
"We know we need to shrink in Philadelphia, but it's like musical chairs: Nobody wants to do it," said Mark Pauly, professor of healthcare systems at the Wharton School at the University of Pennsylvania.
Peknay of Standard & Poor's said the city's larger systems provide an array of services in locations more advantageous than those of the Vanguard hospitals.
Martin said the company's strategy is convert existing acute-care inpatient beds to other inpatient uses, such as subacute, rehabilitation and psychiatric services.
"We're not here to try the same things with new money," Martin said, adding that this isn't the first time he has entered an overbedded market. "We're here to get in a different kind of business."
Gerald Katz, president of Katz Consulting Group, Philadelphia, was more confident of Vanguard's strategy: "If they added one to two services and were able to attract new physicians, I'd be very optimistic they'd be able to make (the hospitals) hop."