The clock is ticking louder for Allegheny Health, Education and Research Foundation in its search for a fix to its financial black hole in Philadelphia.
A bold plan by AHERF to sell six Philadelphia-area hospitals to for-profit Vanguard Health Systems fizzled last week on the eve of the first-ever public hearing on hospital conversions in Pennsylvania, scheduled for June 23.
Pittsburgh-based AHERF and Nashville-based Vanguard said their deal, announced in March, came undone because of several fundamental issues, including the purchase price, which was reported to be at least $300 million.
Now AHERF has thrown the doors open to all comers and any solutions, including the possibility of shuttering some of the hospitals. In a letter to employees last week, Anthony Sanzo, AHERF's new president and chief executive officer, wrote: "We will promptly evaluate all available options, including the potential sale of certain facilities to other organizations and/or the possible closure of some."
AHERF has been approached by other suitors, not-for-profit and for-profit, said spokesman Thomas Chakurda.
Even Vanguard hasn't ruled out another bid, which might be expanded to include all nine of AHERF's Philadelphia-area hospitals.
When it was unveiled, the six-hospital deal between AHERF and Vanguard seemed the healthcare equivalent of a showstopping magic trick for Sherif Abdelhak, then AHERF president and CEO. In one fell swoop, the deal would prune AHERF's money-losing operations in Philadelphia and reap fresh capital to retire more than $300 million in debt.
But Abdelhak's prestidigitation apparently yielded too low a price, and the deal was undone by Sanzo, his successor. He was unavailable for an interview at deadline. Abdelhak was ousted by AHERF's board earlier this month (June 15, p. 36).
From Sanzo's point of view, it seems cutting AHERF's losses was not to be done at just any price. "The financial challenges remain; however, we have to do what's best for our long-term interest in the region," AHERF spokesman Chakurda said.
Vanguard spokeswoman Beth Haglen said: "It really came down to the details of the financial structure that were the stumbling point."
The whirlwind deal, first scheduled to close this week and then delayed until July, crumbled quickly after new AHERF management came on the scene.
"Now you see it, now you don't," quipped Gerald Katz, a Philadelphia-based healthcare consultant. Given AHERF's financial trouble, Katz predicted that a new deal with Vanguard or other purchasers would be hammered out quickly, within a month or two at most.
He said a reworked deal with Vanguard seems most likely. But he said AHERF also might sell the hospitals to competing not-for-profit systems in the market. That approach would make sense if AHERF is considering a complete departure from Philadelphia. One-by-one sales to competitors likely would garner better prices for the properties than a package deal with an out-of-market company, Katz said.
Underscoring the urgency of the matter, the day the Vanguard deal was pronounced dead, Moody's Investors Service, a New York-based bond rating agency, placed $382 million in AHERF debt on its watch list for possible downgrade.
That move came fast on the heels of another vote of diminished confidence in AHERF by Moody's. In May Moody's downgraded $181 million of AHERF bonds to ratings of Baa2 and Baa1, respectively, for Allegheny General Hospital and Allegheny University Medical Centers, both in Pittsburgh, citing the financial drain of the Philadelphia hospitals. Both credits were previously rated A3.
The latest warning by Moody's sprang from increased uncertainty over whether AHERF could engineer a turnaround or sale of the Philadelphia hospitals, or, failing that, continue to pump money into them to cover operating losses.
In a stern assessment, Moody's reminded investors that AHERF "continues to experience significant operating losses in its Philadelphia operations, and Pittsburgh operations remain extremely erratic."
In fiscal 1997 AHERF had net income of $22 million on revenues of about $2 billion. However, in the current fiscal year, the system has had a cash deficit averaging $27 million per month, said AHERF spokesman Chakurda. More recently the cash deficit is running about $16 million per month. He attributed most of the deficits to the Philadelphia operations.
Both Vanguard and AHERF said they will discuss other deals, but no talks are scheduled. According to Chakurda, "the transaction we were exploring is off the table."
Separately, AHERF's Sanzo has called on the Hunter Group, a St. Petersburg, Fla.-based turnaround firm, to help tend the leaking dike in Philadelphia.
After Donald Kaye, M.D., resigned as president and CEO of AHERF's eastern operations, Sanzo personally took the post.
Now he has a helping hand in Dan Stickler, a Hunter Group consultant, who is the chief operating officer of the eastern region on an interim basis. All hospital and medical practice personnel will report to Stickler, AHERF said.