Detroit Medical Center Sale Raises Concerns About Charity Care

Detroit Medical Center, Michigan's largest charity care provider, signed a letter of intent to negotiate the eight-hospital system's sale to private Vanguard Health Systems, Inc., according to a joint media release today.

The purchase price will include approximately $417 million to retire all outstanding DMC bonds and other long-term indebtedness, and also requires Nashville, TN-based Vanguard to assume all DMC liabilities. Vanguard has also pledged to invest $850 million in capital improvements over the next five years at every DMC hospitals, which DMC Board Chair Steve D'Arcy called "the single largest private investment in the city's history. It represents great confidence in the future of the city of Detroit."

"For years, DMC has had significantly less cash-on-hand than any of our competitors," D'Arcy said. "Now, we have found the solution to allow us to continue our mission to provide quality care for all, despite state and national economic conditions."

DMC CEO Mike Duggan said the nonprofit health system has been in the black for seven consecutive years, "but each year it has been a struggle."

"We've had to sit by and watch while West Bloomfield and Novi and Ann Arbor make huge investments in new modern hospitals and we've been frustrated we can't do the same in the city of Detroit," Duggan said. "Now we can. Detroit will no longer take a back seat to anyone in the quality of our hospital facilities."

DMC hospitals will keep their historic names, but will be owned and operated by a Vanguard subsidiary known as VHS Michigan, which will establish a regional advisory board consisting of four members appointed by Vanguard and three appointed by the DMC board.

Though DMC is obviously pleased with the move, stakeholders in Michigan expressed concern about the sale of Michigan's largest charity care provider to a private, for-profit company from out-of-state.

"The Detroit Medical Center has been a cornerstone in the healthcare safety net for several years. We are hopeful that Vanguard will work with physicians to continue to provide patients in Detroit with the care they need," said Richard E. Smith, MD, president of the Michigan State Medical Society.

Blue Cross Blue Shield of Michigan President/CEO Daniel J. Loepp welcomed the investment in Detroit and the opportunity to improve DMC facilities with the capital investments, but he wants assurances that "the health system's nonprofit mission to provide charitable access to medical services for the poor is not compromised as a result of this deal."

"Michigan has a strong foundation of 144 nonprofit hospitals that serve the interests of local communities and local people—particularly access to healthcare for the underinsured," Loepp said. "Ownership of the state's largest charitable care provider by a for-profit health system has the potential to permanently alter this safety net. We encourage careful consideration and review of this transaction by stakeholders and regulators."

Vanguard said it has agreed to a 10-year commitment to keep all eight DMC hospitals open and to maintain the health system's charity care policy.

"Vanguard has consistently demonstrated our commitment to working with community boards and resources to ensure the best possible outcomes for patients," said Trip Pilgrim, Vanguard's chief development officer. "We have the opportunity to continue this tradition in Detroit, and believe that with the access to capital Vanguard brings, the existing management team will grow DMC into one of the pre-eminent hospital systems in America."

The capital improvements list earmarks $500 million for specific projects approved by the DMC board, including a new Children's Hospital of Michigan tower, new patient units at Detroit Receiving Hospital, doubling of the Sinai-Grace Hospital emergency department, a major renovation of OR space at Harper University Hospital, and new physician office buildings at Harper and Sinai Grace. The other $350 million will be for ongoing repairs and capital and equipment needs at DMC.

The existing DMC Board chaired by D'Arcy will remain and administer the existing $140 million in charitable funds given to DMC over the years and will make sure all donor funds are spent as intended. The DMC Board will also have the legal right to enforce Vanguard's commitments under the purchase agreement.

The letter of intent is non-binding and extends through June 1, when both parties are required to have completed a mutually acceptable agreement. If they haven't, the letter of intent terminates unless they agree to extend it. The final agreement must be approved by the DMC and Vanguard boards, and will be reviewed by the Attorney General of Michigan, and other state and local government entities.

DMC's eight hospitals include Children's, Detroit Receiving, Harper, Sinai-Grace, Huron Valley-Sinai Hospital, Hutzel Women's Hospital, Rehabilitation Institute of Michigan, and DMC Surgery Hospital, with a combined 1,734 licensed beds and 2008 total revenues of approximately $1.9 billion.

Vanguard operates 15 acute-care hospitals in Rhode Island, Texas, Illinois, and Arizona, with 4,135 licensed beds. The company's total revenues in fiscal 2009 were approximately $3.2 billion.