As it works to buy a financially troubled Washington hospital out of bankruptcy, a for-profit hospital company has paid off its mortgage on another financially strapped hospital on Chicago's South Side.
Scottsdale, Ariz.-based Doctors Community Healthcare Corp., a privately held hospital company that partners with local physicians to buy financially troubled urban hospitals, recently paid off a $10.9 million mortgage note for Chicago's Michael Reese Hospital.
In a complex financial arrangement, the mortgage had been held by an affiliate of not-for-profit Edgewater Medical Center, a hospital on Chicago's North Side. The arrangement resulted from a financing agreement with the hospital's former owner, Columbia/HCA Healthcare Corp.
Doctors Community bought both Michael Reese and Grant Hospital, also on Chicago's North Side, from Columbia in November 1998. Last summer, Edgewater bought Grant from Doctors Community. As part of the deal, Edgewater bought from Columbia what remained of the mortgage note on Michael Reese.
The complex seller financing arrangement Doctors Community used when it purchased Michael Reese from Columbia stemmed from a dispute between the two companies over the valuation of the hospitals' working capital, said Paul Tuft, chairman of the board and chief executive officer of Doctors Community.
Tuft said that when his company signed a letter of intent to buy Michael Reese in early 1998, the company anticipated the purchase price for the two hospitals would be about $75 million. The final price tag ended up being $93 million, including working capital, Tuft said.
"Among other things, we had a disagreement about what the net working capital was worth," he said. "One of our solutions for bridging the difference between the $75 million and the $93 million was that Columbia agreed to use seller financing, agreed to let us give them a note for the difference between the two."
The note was secured by the two hospitals.
When Doctors Community sold Grant, Columbia wanted the entire mortgage payment, but the proceeds from the sale didn't cover the payment, Tuft said.
Doctors Community paid off $6.5 million, leaving $10.9 million still to be paid. When Edgewater bought Grant Hospital, it bought the $17.5 million mortgage note from Columbia. Until Doctors Community paid off the remainder of the note last month, there was a looming possibility that Edgewater could force Michael Reese into foreclosure.
Doctors Community was able to pay off the mortgage with assistance from National Century Financial Enterprises, a Dublin, Ohio-based financing company that funds many of Doctors Community's deals and owns 11.5% of the company's stock.
In a final twist, after Doctors Community paid off the mortgage, an independent auditor concluded that Columbia owed Doctors Community more than $8 million, Tuft said.
Jeff Prescott, a Columbia spokesman, declined to disclose figures but said Columbia had paid Doctors Community significantly less than the $8 million Tuft cited.
"Working capital is always resolved after the closing of transactions," Prescott said. "Working capital changes over time by nature of the definition of it."
Doctors Community is in talks to acquire bankrupt Greater Southeast Community Hospital in Washington. It operates five other hospitals.