Typically, a hospital's worst enemies are Medicare, Medicaid, HMOs and uncompensated care. Another hospital is usually not on that list.
But for struggling Michael Reese Hospital and Medical Center on Chicago's South Side, a competing hospital holds its fate.
Edgewater Medical Center, a not-for-profit hospital on Chicago's North Side, holds a trump card that could doom for-profit Michael Reese.
Edgewater's ace-in-the-hole is a first mortgage note secured by prime waterfront real estate-the property atop which 225-bed Michael Reese sits. That land is potentially worth triple the value of the paper backing it. If Michael Reese's for-profit parent, Scottsdale, Ariz.-based Doctors Community Healthcare Corp., defaulted on the mortgage, 215-bed Edgewater could force the hospital into foreclosure.
Alternatively, Edgewater could retain its lucrative mortgage interest in Michael Reese. That would give it a leg up with creditors if Doctors Community lands in bankruptcy.
Those scenarios are merely theoretical, said executives at Edgewater and Doctors Community. Both sides expressed confidence that Doctors would make good on the $10.9 million note Edgewater holds as part of a complex financial transaction completed this summer. The possibility that Doctors won't make good on the note "hasn't come up on our radar screen," said Henry Zeisel, Edgewater's senior vice president of finance.
Paul Tuft, founder, chairman and chief executive officer of Doctors Community, said the company has a commitment from an undisclosed lender to pay the note, due Nov. 12.
But because the company lacks a large equity backer, some are skeptical that it can pay the note.
"I don't think (Doctors Community's circumstances are) very good," said a local finance expert who requested anonymity. "They're having trouble with all their facilities."
Nationally, the situation is a rare example of a not-for-profit's wielding financial leverage over a for-profit competitor.
"No, this is not a usual and customary structure," said Therese Wareham, a vice president at Kaufman, Hall and Associates, a Northfield, Ill.-based financial adviser, which was not involved in the deal. "This is a highly unusual transaction to begin with," she said.
Edgewater's potential foreclosure power over Michael Reese stems from a little-noticed detail in the not-for-profit's agreement to buy Grant Hospital, another Chicago hospital, from Doctors Community this summer.
Doctors Community originally purchased Grant and Michael Reese from Columbia/HCA Healthcare Corp. in November 1998.
As part of the deal, Columbia continued holding the mortgage on those properties. But when Doctors Community later decided to sell Grant to Edgewater, it encountered a snag.
"The whole thing was, we thought Columbia was going to release the mortgage (on Michael Reese)," Tuft said.
To close the Grant deal, Doctors Community persuaded Edgewater to assume a first mortgage interest on Michael Reese. Edgewater paid $10.9 million to Columbia to take out the mortgage.
"We were told by Doctors Community at the 11th hour that that's something they would need to get the deal done," said Edgewater's Zeisel.
Doctors Community has until mid-November to pay on the mortgage note, which bears 8.5% interest.
Enrique Beckmann, M.D., a pathologist and chairman of the board of Michael Reese, expressed faith in Doctors Community. "The physicians on the board are very well aware of the implications with this note," he said.