Capital partner withdraws from Hill Hospital purchase

With settlement weeks away, Vanguard Health Systems exited a proposed joint venture with Penn. The hospital is looking at another suitor.

by MICHAEL J. MISHAK

A little more than a week after its centennial celebration, Chestnut Hill Hospital saw the merger deal that it believed guaranteed a vibrant future die on the negotiating table.

On Oct. 11, Vanguard Health Systems of Nashville informed Chestnut Hill HealthCare of its decision to withdraw from a proposed joint venture with University of Pennsylvania Health System. The partnership was expected to close a $25 million acquisition deal by November.

Approved by the Chestnut Hill HealthCare board in July, the sale of the hospital and its attendant facilities, which include Chestnut Hill Rehabilitation Hospital and Springfield Residence, brought the promise of cash-infusion to an ailing institution.

According to the Pennsylvania Health Care Cost Containment Council (PHCCC), Chestnut Hill has logged losses since the 2002 fiscal year. In fiscal 2003 (the last year of available data), the system lost more than $3.5 million on operations.

Chestnut Hill's losses are consistent with many of the state's general acute care hospitals. According to PHCCC's 2003 financial analysis, 48 percent of Pennsylvania's hospitals reported negative incomes. With 60 percent of hospitals reporting a 3-year average income below 2 percent, more than half of the state's hospitals may find it difficult to replace worn-out or obsolete equipment, in addition to financing improvements, the report said.

Beset by poor insurance reimbursements and labor shortages, Chestnut Hill HealthCare began its search for a strategic partner in January 2003. After courting Temple University Health System and Albert Einstein Health Network, the independent, nonprofit system settled on the Vanguard-Penn joint venture.

As part of the sale agreement, the partnership had committed to invest at least $50 million in the first five years after settlement, in addition to establishing new clinical programs in the areas of cancer, cardiology and obstetrics and gynecology.   

Details surrounding Vanguard's exit are unclear. According to Chestnut Hill HealthCare spokeswoman Barbara Wilson, all parties had completed due diligence and were negotiating a definitive agreement at the time of the announcement. Vanguard provided little explanation for its withdrawal, Wilson said. "There's never really any guarantee until all the documents are signed," she said.

A Vanguard spokeswoman declined comment on the health system's decision.

For-profit Vanguard, which owns and operates 16 acute care hospitals in four states, announced the closure of a $100.3 million deal to acquire three Massachusetts hospitals on Oct. 12, one day after its exit from the Chestnut Hill deal.

Late last month, Vanguard became subject to a new parent company as a result of a $1.75 billion merger with the Blackstone Group, a private equity firm. It is unclear if the recent merger had any bearing on the Chestnut Hill purchase.

Penn has declared its commitment to Chestnut Hill HealthCare as it works to find another capital partner.

"The Penn piece is still intact and stronger than ever," Wilson said. "We're going to take all the work we've done and use it to accomplish our goal."

The University of Pennsylvania Health System has been affiliated with Chestnut Hill HealthCare since 1995 when Penn specialists began providing clinical care in fields like fertility, on a part-time basis.

Community Health Systems (CHS), based in Brentwood, Tenn., has expressed interest in a new partnership. Chestnut Hill Healthcare is currently negotiating a letter of intent with CHS, which owns and operates 74 hospitals in 22 states.

"This is a great opportunity and a nice hospital, but we're only in very preliminary discussions," said CHS spokeswoman Rosemary Walsh.

Describing itself as the "leading operator of general acute care hospitals in non-urban communities throughout the country," CHS owns seven hospitals in Pennsylvania, including ones in Brandywine and Phoenixville, the latter of which was purchased from Penn in August. Community Health is a for-profit, publicly traded company.

"We're really excited about the potential of a new capital partner and we're committed to working with Chestnut Hill Healthcare," said Penn spokeswoman Rebecca Harmon.

"This remains a way for us to look to the future," Wilson said.

Community Health's Web site contains the phrase "Promises Made … Promises Kept."