As Cost Pressures Grab Health Care Industry, Tenet Seizes Opportunity In Buying Vanguard

Saint Vincent Hospital in Worcester, once part of Tenet Healthcare, will rejoin that company once its purchase of Vanguard Health Systems is complete.

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By Emily Micucci

As cost pressures mount from health-care reform efforts at the state and federal levels, hospitals are continually seeking out alliances within the industry.
Take, for instance, last year’s merger of Athol Memorial Hospital and Heywood Hospital in Gardner, a response that fulfilled both organizations’ desire to reduce administrative costs.

In June, Texas-based Tenet Healthcare Corp. moved to accomplish the same goal, yet on a much larger scale, in its decision to acquire Vanguard Health Systems of Nashville, Tenn., which owns Saint Vincent Hospital in Worcester and MetroWest Medical Center’s campuses in Framingham and Natick.

The deal, worth $1.8 billion after Tenet assumes Vanguard’s debt, is expected to close by the end of the year and has received unanimous approval from both companies’ boards. Once complete, Tenet, which owns and operates 49 hospitals and 126 outpatient centers in 11 states, will have increased its footprint to 79 hospitals and 157 outpatient centers in 16 states.

A Vanguard acquisition is an ideal fit for Tenet, said Lisa Phillips, editor at Connecticut-based Irving Levin Associates, Inc., which publishes data on the health care industry. She explained that Vanguard operates facilities in markets outside Tenet’s reach.

“They’re in very complementary markets where the (Federal Trade Commission) won’t come in and say ‘No, you can’t do this. You’re going to be a monopoly,” Phillips said.

But the two systems are operating in different markets in many of the same states, which will pave the way for administrative cost efficiencies, according to Phillips.

Supporting Phillips’ point was Tenet CEO Trevor Fetter, who discussed the benefits of the Vanguard acquisition in a June 24 webcast. Fetter said the two firms have distinct markets with no overlap, and he called Vanguard’s presence in the San Antonio and South Texas sub-markets the “crown jewels” of its portfolio.

Fetter noted that after the deal closes, Tenet will be the number-one or two health system in 19 key markets. And he indicated that bringing Vanguard into the fold would create future growth opportunities.

“Tenet’s track record in driving organic growth will now be augmented by an organization that has proven adept at generating growth through acquiring new facilities and creating partnerships with not-for-profit health systems to develop new markets,” Fetter said.

MetroWest, St. V's Return to Tenet

Founded in 1997 by Chairman and CEO Charles Martin, Jr., Vanguard took ownership of a number of nonprofit hospitals over the last 16 years. It also purchased MetroWest Medical Center and Saint Vincent’s from Tenet in 2004 for $127 million.

MetroWest Medical has struggled to turn a profit since 2003, though Saint Vincent has been among the best performing hospitals in Massachusetts, earning nearly $200 million between 2006 and 2012, according to state data.

Fetter did not address Saint Vincent or MetroWest Medical specifically in his webcast, but Tenet spokesman Steven Campanini called Vanguard’s position in Central Massachusetts “very strong.”

“They are in a market leadership position and that’s something that is very interesting to us as we look at the portfolio of Vanguard’s operations,” Campanini said.

Asked what impact the acquisition will have at MetroWest and Saint Vincent, which will be Tenet’s only Massachusetts presence, Campanini said it’s too early to say exactly what the impact will be on any particular hospital.

It’s also unclear who will lead the hospitals following the acquisition. Fetter said Tenet is interested in adding members of the Vanguard management team, but he did not name anyone other than Martin and Vanguard Vice Chairman Keith Pitts.

The Importance of Efficiency

In addition to increasing its reach, Tenet’s move to acquire Vanguard is a practical one. In a presentation to investors and analysts during the June 24 webcast, Tenet estimated it will save between $100 million and $200 million through efficiencies over two years, with half the savings to be realized in the first year post-acquisition. Specifically, Tenet said it will reduce costs through managing revenue, reducing overhead, improving supply chain management and other operational improvements.

Tenet’s health management division, Conifer Health Solutions, will also receive a boost through the Vanguard deal. Fetter said Conifer’s services will be leveraged across newly-acquired Vanguard hospitals and outpatient centers, and Conifer’s incremental annual revenue will increase an estimated $250 million as a result. In fiscal 2012, Conifer generated $488 million for Tenet, which reported annual revenue of $9.1 billion.

Efficiencies are important, said Phillips, the editor from Irving Levin Associates, because Medicare and Medicaid reimbursements are declining under federal health care reform as the Centers for Medicare and Medicaid is using data on patient readmissions to help determine how much hospitals will be reimbursed. The more patients a hospital re-admits following treatment, the lower the reimbursement.

Also, the cost of implementing government-mandated technology, like electronic health records, adds a strain on hospital budgets, too, according to Phillips. And she said that as more people receive insurance coverage through high-deductible plans, hospitals will have to watch pricing to entice consumers who are spending more out of pocket than they were before.

Given these factors, Phillips said mergers and acquisitions will be the name of the game in the hospital industry in the near future.

“Hospital CEOs are looking around and realizing they can’t make it on their own,” Phillips said.

Moore: That Trend Will Continue

Edward H. Moore, a member of the Massachusetts Hospital Association’s board of trustees and president and CEO of Harrington HealthCare in Southbridge, agreed that smaller hospitals will be forced to merge with others to remain competitive.
Often, hospitals consider merging because they need better access to capital, and combining with another hospital is the best way to achieve it. Without sufficient capital, a hospital can’t invest in new equipment and infrastructure, Moore said, and they can’t compete.

This was the case with the former Hubbard Hospital in Webster, which Harrington purchased in 2009. Now, Harrington is planning to reconstruct its emergency department beginning in the fall.

With an outpatient center in Charlton, Harrington itself is now a small system. But Moore was dubious about the possibility of joining forces with a larger system as the tendency toward new alliances grows nationwide. He believes local management is better equipped to meet the health care needs of the area it serves.

“Local control by a board ... in my opinion, is the right model of health care, at least in this part of Massachusetts,” Moore said.