U.S. healthcare providers who have closely followed the agreement for investor-owned Vanguard Health Systems to purchase tax-exempt Detroit Medical Center must wait a little longer to learn the outcome of the $1.27 billion deal.
Vanguard/DMC deal delayed
Providers await approval from state and feds
The two health systems said last week they had extended their purchase agreement to Dec. 31—two months later than the expected completion date—because the state and federal approval processes for the deal are not finished. Announced in March, the deal has been touted as the largest private investment in Detroit’s history, with a purchase price of $417 million and $850 million in capital investments. Vanguard also will fund a $184 million pension shortfall over seven years.
“This is the largest hospital deal in the United States in 10 years, and the first time Michigan has ever had to review a sale to a for-profit,” DMC CEO Mike Duggan wrote in a letter to employees. (The Michigan attorney general in 1996 blocked a proposed joint venture between the former Columbia/HCA Healthcare Corp. and a not-for-profit system in Lansing.). In his letter, Duggan said the biggest concern is the delay could hinder plans to build a children’s specialty center, scheduled to open in January 2012. For this reason, DMC and Nashville-based Vanguard established a joint venture expected at deadline to allow construction to begin, as planned, Nov. 1.
In September, the Federal Trade Commission said it would not block the sale of six-hospital Detroit Medical Center. But Michigan Attorney General Mike Cox’s office has devoted considerable time to its review, hiring financial consulting firms AlixPartners and Focus Management Group to assist, said Joy Yearout, a spokeswoman in Cox’s office.
“The goal of our review is to determine if the charitable assets were properly valued and then if it’s in the best interest of the people of Michigan,” Yearout said in an interview, adding that she could not offer more specific details because the review is ongoing.
Those charitable assets include about $140 million in gifts from donors for restricted purposes, such as cancer-prevention programs and toys to children’s hospitals, Duggan said in an interview. Those assets will not be acquired by Vanguard in the deal. Rather, the not-for-profit, 501(c)(3) corporation that is DMC will steward and manage those philanthropic gifts and ensure the contract between DMC and Vanguard is followed, according to David Katz, DMC’s senior vice president for development. This foundation is separate from the corporation that will be formed in the Vanguard-DMC deal, which will make DMC the Michigan subsidiary of Vanguard. There has been talk of changing DMC’s name, but that has not yet been decided, Katz said.
Crain’s Detroit Business, a sister publication to Modern Healthcare, reports that the deal also is being delayed because Vanguard is seeking to replace DMC’s eight Medicare provider numbers with a single provider number. Such a change, according to the report, would boost disproportionate-share payments.
There are several reasons why this agreement is of interest to healthcare providers, said Joel Lee, Vanguard vice president of marketing and communications. He said the lack of for-profit hospitals in Michigan, the poor economy in Detroit, the deal’s size and the system’s affiliation with the medical school at Wayne State University all heighten interest in the deal.
“People across the country are watching this transaction and the Caritas Christi transaction because there are a number of challenged healthcare systems—given the decreases in reimbursement and the need for capital—so these for-profit entities and private-equity firms are making attractive offers to the institutions,” said Doug Swill, a partner at Chicago-based law firm Drinker Biddle & Reath, where he chairs the national healthcare practice. Late last week, a Massachusetts judge gave final regulatory approval for the $830 million sale of six-hospital Caritas Christi Health Care from the Archdiocese of Boston to a subsidiary of Cerberus Capital Management, a private-equity group based in New York (See story at right).
“You have a number of independent hospital systems faced with the same issue,” Swill said, “and while they may have a certain priority to look for other not-for-profit acquirers with a similar mission, I’m not surprised that they may be at least looking at for-profit companies to compare offers.”
Send us a letter
Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.