Investor-owned hospitals have long been a product of—and found in—the Sun Belt, with spiritual homes in Nashville and Dallas.
On to the Rust Belt
Vanguard readies deal for Detroit Medical Center
Emblematic of the Rust Belt, Detroit does not normally come to mind when contemplating for-profit hospitals. For the next few months, however, Detroit could be the center of the for-profit healthcare world, as Vanguard Health Systems works on a $1.27 billion deal to acquire six-hospital Detroit Medical Center. The deal would boost the number of hospitals Vanguard owns to 16; it also has a letter of intent to buy two hospitals from Resurrection Health Care in Chicago.
Vanguard and DMC announced a nonbinding letter of intent in which Vanguard agreed to pay $417 million to acquire most of the assets of DMC and also invest $850 million in its facilities within five years of completing the deal. Vanguard also agreed to a 10-year pledge to keep all of the hospitals open and to maintain DMC's charity-care policies.
About $140 million in donor-restricted assets would not be part of the transfer and would remain under the control of the DMC board, the not-for-profit system said. A seven-member local board would oversee operations, with Vanguard naming four members and DMC naming three, the parties said in their announcement. The letter of intent expires on June 1, unless both parties agree to extend it. Vanguard and DMC expect to negotiate a definitive agreement by then. Once there is a binding agreement, the Michigan attorney general's office will decide whether to approve the deal and under what conditions. The deal also is subject to federal antitrust review.
“We have been unable to sell bonds on Wall Street, largely because we're in the city of Detroit, which the bond market considers poor and not a good long-term risk,” Michael Duggan, DMC's president and CEO, said in an interview. “Once we determined that our nonprofit structure was choking us and precluded us from investment, we pursued an investor-owned strategy.”
According to Fitch Ratings, DMC sold $342.1 million in bonds in September 2008, although the bulk of that went to refinance older bonds, not to finance new capital expenditures. Of the $850 million capital commitment, $500 million would be for expansion and renovation projects at DMC's six hospitals. None of the projects would add beds, but they will require certificate-of-need approval, Duggan said. Children's Hospital of Michigan would be in for the biggest share—more than $208 million—to fund a new bed tower and a pediatric specialty center.
The final agreement is contingent on state, county and municipal officials agreeing to a “renaissance zone, which, under state law, eliminates state, county and municipal taxes for 12 years and then provides discounts of 75%, 50% and 25% in the next three years before the businesses fully go on the tax rolls, Duggan said.
Daniel Loepp, president and CEO of Blue Cross and Blue Shield of Michigan, said in a statement that the insurer welcomed the investment, but hoped that DMC's role as safety net provider is not compromised in the deal.
Vanguard's interest in expanding to Southeast Michigan comes as another big hospital system, not-for-profit Ascension Health, is pulling back. An Ascension-owned system is closing one hospital in the area and considering closing two more (March 15, p. 12).
The deal would transform Vanguard. Adding DMC's $2 billion in annual revenue would boost Vanguard's annual turnover by about two-thirds; the company posted revenue of $3.2 billion for its fiscal 2009, which ended June 30, 2009. Vanguard sees great opportunity in DMC and in Southeast Michigan, said Keith Pitts, vice chairman of Vanguard, even at a time when its economy has been especially battered by the recession and the troubles of the auto industry.
“We've always been committed to urban markets. That continues to be our strategy, to invest in urban markets—the four we're already in and new ones in which we can enter in a significant way. I think there's a lot of opportunity to serve southeastern Michigan. Southeastern Michigan deserves to have access to quality healthcare no matter what part of southeastern Michigan you're in,” Pitts said.
“The whole country is feeling the effects of the recession over the past few years,” he added. “Detroit doesn't own that territory by itself. We continue to see unemployment pressure and the pressure of the uninsured in other parts of the country.”
DMC closely studied a failed attempt by the former Columbia/HCA Healthcare Corp. to acquire a not-for-profit healthcare system in Lansing, Mich., Duggan said. The Michigan attorney general successfully sued in 1996 to block Columbia/HCA's attempt to form a joint venture with, and later acquire, what was then known as Michigan Capital Healthcare System (now known as Ingham Regional Medical Center). That deal did not provide fair market value from the buyer for the charitable assets, Duggan said. “If you follow the law and sell the assets for fair value, you expect the attorney general to approve it,” Duggan said. The attorney general's office did not respond to requests for comment before deadline.
Greg Moore, leader of the healthcare practice at Detroit-based law firm Clark Hill, noted that two years ago, physician investors converted a not-for-profit hospital to for-profit status in Pontiac, Mich. The Vanguard-DMC deal seems to offer much stronger protection of charitable assets, Moore said, including the provision that leaves the not-for-profit board in place to administer the programs that donors have funded. Moore said the scuttling of the Michigan Capital deal wrongly left the impression that Michigan law doesn't permit for-profit hospitals.
“That deal received a lot of public scrutiny. It was not really set up the proper way,” Moore said. “This is a very different deal.”
Editor's Note: Keith Crain, chairman of Crain Communications Inc., Modern Healthcare's parent corporation, is a member of the DMC board of trustees.
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