Co. buys big into area health market

Vanguard's purchase of six hospitals bring a forprofit into the market. Philadelphia's newest hospital chain has a unique focus: profits. Last week, Vanguard Health Systems of Nashville, Tenn., announced it would buy six area hospitals from the Allegheny Health, Education and Research Foundation. With the $300 million deal, Vanguard -- a private, for-profit, start-up company -- becomes the first investor-owned health care company to enter a market whose other major players are all non-profit, academic health systems: Penn, Jefferson University and Temple University. The six hospitals -- Graduate, City Avenue and Parkview in the city, Warminster and Elkins Park in the Pennsylvania suburbs and Rancocas in Southern Jersey -- have a total of more than 1,500 beds and 5,000 employees between them. Although experts agreed that the short-term impact on the city's health care market would be minimal -- the number of doctors, hospitals and hospital beds in the Philadelphia area would not change -- the deal could have several long-term consequences, including increased competition and lower costs to consumers. "[If] you have a for-profit coming that's just able to manage everything better, it forces [the non-profit hospitals] to manage better," said Sean Nicholson, a Health Care Management professor at the Wharton School. In the long run, Vanguard needs to make money to survive. That may drive prices down and make a city that already has a 40 percent surplus in hospital beds into an even more competitive market. But promises by the company to offer jobs to all 5,000 workers affected by the deal have some wondering how Vanguard intends to cut costs. "Vanguard can not do all that it says because the math just doesn't add up," said John Ball, president of Pennsylvania Hospital, which is part of the Penn Health System. Ball said the company may not be able to honor that pledge for very long, explaining that cuts in staffing are a common cost-cutting technique at for-profit hospitals. Columbia/HCA Healthcare Corp., one of the nation's largest for-profit hospital chains, spends only 35 percent of its budget on staff salaries, Ball said. By contrast, Pennsylvania Hospital spends nearly half of its budget on salaries. Although Vanguard has promised not to cut staffing, Nicholson noted that there are other ways to decrease staffing levels. "There is serious attrition at hospitals, as much as 10 percent a year," Nicholson said. "Not hiring anyone for a year would substantially decrease staff." The largest impact from the sale could come if Vanguard decreases the number of beds at its hospitals. "If beds are taken out of service in the region, that's a really good thing," said William Kelley, chief executive officer of the Penn Health System. But he added that it is "hard to imagine they would do that." Indeed, many see only expansion in Vanguard's future. After all, the company, with $2 billion in capital, was founded solely to buy hospitals. Additionally, the prospect that Vanguard will pay taxes on its hospitals has city accountants salivating. While no one is predicting a windfall, David Glancey, head of the city's tax board, estimated in a recent interview with The Philadelphia Inquirer that such taxes could net the city $2 million. Vanguard's appointment of David L. Cohen to head its regional board of directors -- charged with overseeing the six Philadelphia-area hospitals for the firm -- may also help it navigate Philadelphia politics. Cohen, currently chairperson of the prominent law firm Ballard Spahr Andrews and Ingersoll, is Philadelphia Mayor Ed Rendell's former chief of staff. "The choice of David Cohen? was a brilliant choice," Kelley said. "And yes, it will give them significant clout." Allegheny's future in Philadelphia remains uncertain. After storming into the market in the late 1980s, the Pittsburgh-based hospital chain controlled nine area hospitals before the Vanguard sale. There had been recent warning signs of financial difficulties at Allegheny, including an October layoff of 1,700 employees -- 10 percent of its Philadelphia-area workforce. The three hospitals that Allegheny retained are all teaching hospitals for its University of the Health Sciences. "Allegheny's future decisions are very tied up to what they decide to do with their teaching operations here," Nicholson said. The primary benefactors of the sale may be consumers, who could receive lower-priced care deriving from increased competition. But for-profit hospitals also have a reputation for providing a lower quality of care. While such charges are largely unsubstantiated by research data, the motivations of for-profit hospitals remain far from traditional. "The reason Vanguard will take care of patients is to make a profit," Ball said. With increasing numbers of uninsured patients nationwide, the amount of care provided to those unable to pay is another concern. Although Nicholson said no conclusive studies have been performed, many studies have suggested that for-profit hospitals are less likely to care for patients who may not be able to pay.