Vanguard Health Systems will be able to pick and choose the employees of PMH Health Resources if it completes a deal to acquire the troubled Phoenix-based hospital and health plan operator this spring.
But PMH President Reginald Ballantyne, a past American Hospital Association chairman, has secured his near-term future. As part of the proposed sale, he and Phoenix Health Plan President Nancy Novick would negotiate an employment agreement if for-profit Vanguard completes the acquisition by early May.
Both Ballantyne and Novick are beneficiaries of a deliberate strategy used by Vanguard, and that's to retain the top executives at acquired hospitals-even hospitals that filed for reorganization.
"It's not unusual for an entity to take on the current management team . . . you don't generally have a bench around to immediately bring in," says Robert Galloway, Vanguard's senior vice president of development. Galloway says Ballantyne and Novick are critical to PMH's ongoing operations and that Vanguard had asked them to stay on after the acquisition was completed.
Not-for-profit PMH, which operates 195-bed Phoenix Memorial Health System and Phoenix Health Plan, a 50,000-enrollee Medicaid HMO, filed for Chapter 11 bankruptcy protection on Feb. 1. The filing in federal bankruptcy court in Phoenix was made under Section 363, a provision allowing for a quick disposition of the debtor's assets. Vanguard intends to acquire PMH for $39 million in cash and debt assumption as part of an auction supervised by the bankruptcy court, according to legal documents.
Vanguard is acquiring virtually all of PMH's assets, except for accounts receivable, $12.3 million in Medicare disproportionate share payments from HCFA and real estate holdings, including three medical buildings. If no other bids are received, those assets will be used to pay off PMH's bondholders, who should receive about 70 cents on the dollar, Ballantyne says. Assets held by an affiliated charitable foundation are also excluded from the sale, Ballantyne adds.
"Vanguard had asked which executives were important and should be retained," Ballantyne says of the three-line provision about his and Novick's retention, which is tucked deep into the 61-page agreement and doesn't mention their names. Ballantyne adds that Novick would remain in her current position, while he would join Vanguard in a yet-to-be-determined strategic post. A high-ranking Vanguard official says the decision to retain the two senior executives is the way it normally conducts business-a position later confirmed by one of its own executive recruiters.
The bankruptcy filing didn't state Novick and Ballantyne's salary requirements. As head of PMH, Ballantyne earned a salary of $469,545 and benefits worth an additional $145,023 for the fiscal year ending June 30, 1999, according to PMH's most recent Form 990 filing with the Internal Revenue Service. Novick's salary and benefits weren't disclosed in the filing. If Ballantyne becomes a Vanguard employee, he says he would give up any severance benefits.
A different bankruptcy deal
The proposed deal has some passing similarities to a high-profile bankruptcy sale executed at the end of 1999, involving 305-bed not-for-profit Greater Southeast Community Hospital in Washington and other notable not-for-profit hospital executives.
Greater Southeast filed for bankruptcy in May 1999. One of the hospital's trustees at that time, Carolyn Lewis, is a past AHA chair like Ballantyne. However, the $22.3 million cash purchase of that hospital by the for-profit Doctors Community Healthcare Corp. in Scottsdale, Ariz. came after a more typical Chapter 11 reorganization, according to court documents and those familiar with the deal. Unlike PMH, there was no buyer in line when Greater Southeast filed for bankruptcy.
"(Greater Southeast) wanted to go it alone, but they were unable to turn it around. It was either make a deal or be liquidated by the creditors," says Paul Tuft, chairman and chief executive officer of Doctors Community. "The Vanguard-PMH deal looks like a prearranged bankruptcy, which wasn't the case here."
As soon as the Greater Southeast acquisition was completed, its management was merged with that of 109-bed Hadley Memorial Hospital, a nearby facility also owned by Doctors Community. Many of Greater Southeast's senior managers left the hospital at the time of the deal, including CEO George Gilbert, M.D., who retired.
Gilbert had assumed control of Greater Southeast about a year before it was sold. Its previous CEO, Dalton Tong, resigned abruptly in June 1998. A subsidiary of Nashville-based Quorum Health Resources that specialized in turnaounds had been brought in to manage the facility in May 1999. Tong, who now teaches an occasional class at the Johns Hopkins School of Public Health in Baltimore, could not be reached for comment.
Indeed, executives of not-for-profit hospitals are more likely to be greeted by the pink slip than the red carpet after being acquired by a for-profit chain, according to healthcare recruitment firms.
"My instincts are, probably a majority of the time, that the team of the (for-profit) assumes responsibility," says Jack Schlosser, practice leader for healthcare services at recruiter Heidrick and Struggles in Los Angeles.
"It's not a common tendency for for-profits to retain not-for-profit executives," says Donald Wegmiller, CEO of Healthcare Compensation Strategies, a Minneapolis-based recruiting firm and himself a former AHA chairman. "(For-profits) usually have a big talent pool who understand their company, their philosophy, and how to do business in a taxable environment," Wegmiller observes.
Wegmiller was president and CEO of Health One Corp., a Minneapolis-based hospital operator, from its founding in 1986, but he left in 1993, shortly after it merged with LifeSpan to form HealthSpan.
Jeffrey Robbins, president of Health Search, a recruitment firm in Anaheim Hills, Calif., agrees that for-profits usually bring in their own people.
"There's always been a difference between the not-for-profit and for-profit mentality," he says. "The for-profit executives tend to be more aggressive and bottom-line-oriented, while the not-for-profit executives haven't always been as acclimated to business development."
No hard and fast rules
After polling his colleagues, Schlosser says that no distinct patterns were visible in terms of the retention of not-for-profit executives by for-profit operators. Robbins, who often recruits for Vanguard's hospitals in California, also notes that not-for-profit hospitals and systems also have become much more bottom-line-oriented in recent years in order to compete in tougher financial environments.
"There are good not-for-profit CEOs out there, and it's difficult to recruit these days, so you may not want to upset the cart," he says.
Jeff Prescott, spokesman for HCA-The Healthcare Co., says his current company and the firms spun off by predecessor Columbia/HCA Healthcare Corp. in 1999-Triad Hospitals and LifePoint Hospitals-don't have a hard and fast rule on retaining executives of the not-for-profit hospitals that the chain buys.
"It goes both ways," he says, adding that it often depends on the desires of the parties involved.
Wegmiller says that when not-for-profit executives are retained, it is usually those heading a larger institution, because their visibility in the community and their relationship to the rest of the staff are valued.
That was the case with Vanguard's $210 million acquisition last year of not-for-profit 315-bed MacNeal Hospital in the Chicago suburb of Berwyn, Ill. Many top managers at MacNeal, including President Brian Lemon, retained their posts after the deal closed in March 2000, Galloway says.
However, in January, Lemon told Vanguard officials that he was quitting his MacNeal post as of March 30, citing family considerations.
Meanwhile, Schlosser says he also believes Ballantyne's visibility and AHA experience bring a "value-added" component to Vanguard's acquisition.
However, those not-for-profit executives who remain often leave after a short time, usually within a year or two, Wegmiller observes.
Running an organization that files for bankruptcy can have a mixed impact on the future of that executive's career, says Thomas Dolan, president and CEO of the American College of Healthcare Executives.
"I know some very successful healthcare executives who came out of a bankruptcy, and it didn't taint their reputations," Dolan says. "It depends on the situation and the environment. If it's an inner-city hospital that's heavily dependent on federal reimbursement, then that would be taken under consideration. How long a person is there is also a factor. Very often a person is brought in to run a system on the verge of bankruptcy, and there's little they can do to salvage the situation."
Ballantyne has just entered his fourth decade with PMH and has held top posts in the organization for 25 years. And though PMH is headquartered in a sun-bleached, low-income neighborhood near downtown Phoenix, the setting doesn't conjure the typical images of an urban ghetto.
"It's a good example of a hospital making extraordinary contributions to the community in a difficult environment," Dolan says. "A lot of people have great adminiration for the organization, but it was heavily dependent on government reimbursement, and reductions from the (Balanced Budget Act of 1997) were probably devastating to it."