Now David Vandewater has the chance to show he's really back.
Sure, the former No. 2 executive at Columbia/HCA, the nation's largest for-profit hospital chain, has been back in the pool of acute-care hospitals since last July. That was when Vandewater announced that his new company, Ardent Healthcare Services, Nashville, would seek acquisitions of acute-care hospitals using $145 million in start-up capital. Privately held Ardent, a renamed psychiatric hospital company, was his new pool pass.
Vandewater had been out of the water since 1997, when he resigned as president and chief operating officer of what was then Columbia/HCA Healthcare Corp., Nashville, amid a wide-ranging federal Medicare fraud investigation that has yet to be resolved (See story below).
In the past five months, Ardent's two purchases of for-profit hospitals from HCA and one of its spinoffs, Triad Hospitals, Dallas, were like a walk in the shallow end of the pool with old friends. Ardent is adding the acute-care hospitals to the 22 psychiatric hospitals of its precursor, Behavioral Healthcare Corp. BHC, also no stranger to HCA, got its start in 1993 with the purchase of six of HCA's psychiatric hospitals (See chart, p. 5).
Now Vandewater and Ardent are diving into the deep end-acquiring not-for-profit hospitals. The company announced earlier this month that it has signed a letter of intent to purchase three-hospital Carraway Methodist Health Systems, Birmingham, Ala.
Ardent and Carraway hope to close the purchase by Feb. 28, although the deal requires certificate-of-need approval and must withstand the scrutiny of the Alabama attorney general's office. The approval processes aren't expected to be contentious, as Alabama is well-acquainted with for-profit hospitals. Of the state's 129 hospitals, 37, or nearly 29%, are for-profit, according to the Alabama Hospital Association.
For now, Ardent and Carraway executives are tight-lipped about the details of the transaction, including the purchase price. Through spokesmen, both Vandewater and Kenneth Eshak, Carraway's interim chief financial officer and administrator, declined to be interviewed by Modern Healthcare. In a prepared statement, Vandewater said Ardent and Carraway officials would be more forthcoming about their future plans as the deal nears closing.
Two sources familiar with the bidding, who asked to remain unnamed, said Ardent's offer is worth at least $150 million for the three hospitals-363-bed Carraway Methodist Medical Center, Birmingham; 99-bed Carraway Burdick West Medical Center, Haleyville, Ala.; and 56-bed Carraway Northwest Medical Center, Winfield, Ala.
"Ardent has an ideal profile in what they're looking for in a hospital, and Carraway fits that to a T," said Michael Drescher, an Ardent spokesman. Ardent is seeking hospitals with at least 150 beds that are in communities whose populations are at least 150,000 and growing faster than the national average.
Vandewater's Columbia/HCA pedigree has been nothing but a benefit, he said.
"When he was at Columbia, they had 347 hospitals, so from that standpoint, it was a successful company," Drescher argued. "His experience there and that of others on (Ardent's) medical-surgical side-people recognize that experience. The Columbia thing hasn't come up as an issue during any conversation for which I've been around."
Outside observers also think the not-for-profit water is warm for Vandewater.
David Cyganowski, who runs the not-for-profit side of Salomon Smith Barney's healthcare investment banking group, said that Vandewater's reputation is good despite the friction between Columbia and not-for-profits during an acquisition spree of the early- to mid-1990s, when the company grew to 343 hospitals by the end of 1996 from 199 at the end of 1994.
With the prestige Vandewater brings to Ardent, and the company's backing by majority owner Welsh, Carson, Anderson & Stowe, a New York investment firm, "it's not surprising that they were able to break out with a marquee transaction," Cyganowski said.
Linda Miller, a frequent critic of HCA and other for-profit hospital companies, said there was "no significance" to Vandewater's involvement. "The issue here is (never) who is doing the buying but what kind of deal it is for the community, and that's the only question it's ever been," said Miller, president of the Volunteer Trustees of Not-for-Profit Hospitals.
Ardent won the bidding for Carraway over two of its for-profit competitors-Tenet Healthcare Corp., Santa Barbara, Calif., and Vanguard Health Systems, Nashville, Carraway spokesman David Smitherman confirmed. Tenet, which owns 497-bed Brookwood Medical Center in Birmingham, was more interested in the system than Vanguard, a source familiar with the transaction said. During a recent conference call with analysts, Tenet Chief Executive Officer Jeffrey Barbakow said of Carraway, "It's just a situation that's not a home run for us, and we didn't have to reach (by offering a higher bid)."
Some Birmingham healthcare observers wonder if Ardent may have reached too far. Dennis Hall, president and CEO of 10-hospital Baptist Health System, Birmingham, said Baptist investigated acquiring Carraway's three hospitals for the assumption of its debt, which Hall estimated was about $115 million. Eshak said in local news reports that the system owes a total of $146 million, including $111 million in bonds.
Carraway turned down the Baptist offer because Baptist proposed ending acute-care services at Carraway's Birmingham hospital and turning the facility into an outpatient center, Hall said. He added that Ardent's offer apparently includes both debt assumption and cash to fund a healthcare foundation.
"I must say that I am convinced that nobody can operate that medical center in an economically stable manner without some severe reductions in services to the community," Hall said.
The letter of intent did not make promises about Ardent's keeping or keeping open any of the hospitals, or maintaining community or clinical services, Drescher said. Carraway's board insisted that all of its employees be hired and have their seniority maintained, that four residency programs be continued, that the Carraway name remain and that future capital needs be funded, Smitherman said.
All three Carraway hospitals are struggling financially. In its Medicare cost reports for fiscal 2000, which ended June 30, 2000, the Carraway hospitals reported total losses of $15.3 million on operations, with net patient revenue of $180 million (See chart, p. 4), according to the American Hospital Directory. Including investment and nonpatient revenue, the system's net loss for fiscal 2000 was just more than $5 million.
When asked how the sale would affect the two rural Carraway hospitals, Hall said he has talked with individuals connected to two for-profit companies that are interested in buying the facilities. He wouldn't name the companies. Drescher said Ardent is not far enough along in the process of acquiring Carraway to have made any decisions about the rural hospitals.
Although Ardent may dismantle its first multihospital deal, the company doesn't want to slow its growth. Drescher said the company will continue to seek deals nationwide, although Ardent hasn't decided how big it should be in terms of revenue or number of facilities. "There are a lot of hospitals that are out there looking for help in management or access to capital," he said.
Indeed, Salomon's Cyganowski said he sees the Ardent-Carraway deal as a sign of what's to come in 2002 (For a review of 2001's mergers-and-acquisitions activity, see p. 22). He predicted that many not-for-profit hospital board members would wrestle with whether to find a partner or sell their system's assets this year.