History-making bid for Allegheny links for-profit chain, Drexel

Tenet Healthcare Corp. will purchase Allegheny's eight area hospitals. It was another unprecedented turn in a saga that has made the unprecedented routine. Just after 2 a.m. last Tuesday, Tenet Healthcare Corp., a national for-profit hospital chain, tendered a $345 million offer for eight Philadelphia-area hospitals owned by the now-bankrupt Allegheny Health System. If details can be hammered out by an October 21 deadline, the deal will make history: No Philadelphia hospital has ever been operated by a for-profit corporation. Within hours, Tenet's apparent entry into the Philadelphia market led Moody's Investor Services to change the outlook from stable to negative on bond ratings for the area's three largest academic health systems -- University of Pennsylvania Health System, Jefferson Health System, and Temple University Hospital. "The entry of Tenet will heighten already intense competitive pressures [in the Philadelphia health-care market]," Moody's said in a report. The prominent New York-based bond rating agency added that it expected Tenet's presence to "erode financial performance at the three major health systems." A bond rating is an index of the likelihood that an institution will repay bond holders in a timely fashion. In a separate decision, Moody's confirmed Tenet's "Ba1" rating in the wake of the planned purchase, citing "the size and strength of Tenet's overall system." The company's chain of 125 hospitals, second to Columbia/HCA Healthcare Corp., spreads over 18 states with revenue of $9.9 billion and profit of $261 million in fiscal year 1998. The changed outlook affects about $800 million in outstanding Penn Health System debt and $1.5 billion in total debt for the three systems. Penn's bond rating remains at "A1," considered excellent for an academic medical center. The change in outlook also indicates Moody's belief that a downgraded rating is possible in the foreseeable future. Side Effects Bond ratings are only the first area likely affected by the sale. Philadelphia is already a market with too many health care beds and a buyer's market dominated by two big insurers, cutting profit margins for hospitals to the bone. In its report, Moody's characterized Philadelphia as one of the nation's "most competitive and difficult health care markets." As a result, Moody's said, all three systems lost money in the last fiscal year. Penn's loss was more than $100 million. Nevertheless, Penn is "not intimidated by Tenet," said Tom Beeman, the Penn Health System's senior vice president for hospital operations. "We believe most people in the marketplace want Penn to be in their [health] plans." As a result, Beeman said he is confident that Penn will return to profitability. Beeman also noted that it remains to be seen how much of an investment Tenet will make in its new area holdings. He said the company's pledge to keep all eight hospitals open does not preclude transforming some of them into long-term care facilities or other more profitable uses. Tenet officials did not return repeated calls for comment. Just how much of an investment Tenet intends to make will not be finalized until October 21. But the company has preliminarily committed itself to capital investments of $50 million a year for a period of "several" years to fund refurbishment of its new hospitals. Level of Care But for some, no amount of investing could sufficiently guarantee that standards of care remain high at the for-profit chain. "Medicine just should not be practiced like that," Pat McNamara of the Coalition for Patients not Profits said of for-profit ownership. "[The community] owned the hospitals, and we should not lose any services as a result [of the sale]." Tenet does enjoy something of a reputation for playing the role of good neighbor, however. One issue often cited as an example of problems with for-profit care is the amount of uncompensated care provided by a hospital to those unable to pay. Indeed, activists at Allegheny's bankruptcy hearing repeatedly interrupted the session to make such a point. In response, Tenet -- through city attorney Frank Mayer -- told the bankruptcy court that the company would match the level of uncompensated care Allegheny provided last year. The pledge is one that Tenet has made in other markets it has expanded into recently, including St. Louis and North Carolina. In both areas, such pledges helped increase public support for Tenet's arrival and led Fortune magazine to proclaim Tenet Chief Executive Officer Jeff Barbakow "Mr. Nice Guy." But Beeman is skeptical. "For-profit hospitals in other parts of the country have not been successful at keeping these levels [of uncompensated care] where they should be," he said. "I'll wait and see." The Company Founded as National Medical Enterprises in 1969, Tenet faced a series of lawsuits during the early 1990s alleging Medicare fraud, malpractice and insurer fraud. Settlements have cost the company $600 million to date. The company divested itself of a chain of psychiatric units and hospitals in 1993 and 1994, and reorganized under the Tenet name in 1995. Today, the company says it is under new management and its old legal problems are entirely a thing of the past. Tenet's winning bid for Allegheny -- to date, the nation's largest nonprofit health-care bankruptcy filing -- came two hours after a court-imposed deadline had passed with no offer for all eight hospitals on the table. A $225 million offer for six of the hospitals by rival for-profit chain Vanguard Health Systems Inc. was the only other offer under consideration. Vanguard had initially signed an agreement to buy all eight hospitals for $460 million. A ninth hospital, Rancocas, received a bid of $45 million from Our Lady of Lourdes Medical Center of Camden, N.J. However, the night before the September 29 hearing, Vanguard backed out, citing "documented financial deterioration," according to company spokesperson Beth Brisbane. Negotiations over Vanguard's new offer foundered on the company's reluctance to include Allegheny University in its plans.