DMC Invests In Itself For The Community

Story first appeared in the Detroit News. 

With more than half a year in the books with its new for-profit owner, Detroit Medical Center President and CEO Mike Duggan said patients and doctors are returning to the eight-hospital system, spurred by Vanguard Health System Inc.'s planned construction improvements.

Vanguard, which bought the DMC on Dec. 31 and promised to spend $500 million on construction, expansions and renovations and $350 million in routine capital during the next five years, said Thursday its shareholders lost $9.9 million during its fourth quarter.

The loss, compared with earning a $2.8 million profit a year ago, was driven largely by charges related to its June initial public stock offering. But patient service revenue soared 75 percent to $1.28 billion, largely attributable to the acquisition of the DMC.

Keith Pitts, Vanguard's vice chairman, said Detroit's seeing good volume in the marketplace, so they have been very happy with some of the volume trends there, and they will continue to work to improve the operations there over the next few years.

While Duggan isn't talking volume or revenue specifics — and neither are his Vanguard bosses in Nashville, Tenn. — Duggan said Vanguard ownership has boosted employee morale and hospitals have been busy.

Duggan said he has talked to doctors and patients all the time that have chosen to come back to DMC because of the momentum from Vanguard.

The DMC, which last year generated nearly $2.1 billion in revenue, now represents more than a third of revenues for Vanguard, which operates 26 hospitals in five states. With such a large exposure in Detroit, some analysts expect much of Vanguard's stock earnings will be all about Detroit during the next few years.

One anyalst said with over $2 billion in revenue solely in the Detroit market, they believe investors should get used to almost all focus on this one particular market, as the stock will likely live and die by the success of the transaction.

While some have questioned Vanguard's wisdom in buying the DMC, several analysts predict the DMC will continue to increase revenue, improve its margins and help Vanguard's stock price grow over the next several years.

But some, such as Citi research analyst Gary Taylor, have lowered outlooks on Vanguard's stock price from earlier this month in the wake of the stock market slide tied to concerns about the economy, Standard & Poor's downgrade of the U.S. credit rating and government talks of possible cuts to government reimbursement programs hospitals rely on.

The DMC and Vanguard hope to recapture some of the 30 percent-plus of Detroiters with commercial insurance who now head to suburban hospitals for surgeries and other services, analysts said. This insurance typically pays higher reimbursement than government programs.

Vanguard expects that infrastructure investment will improve physician recruitment, volume and payer mix, and new DMC facilities could directly contribute to revenue growth starting in 2013. Better facilities and more physician affiliations are expected to stem the outmigration of surgical volume from the city to the suburbs and to pull in some demand from the suburbs to the city.

A senior health care services analyst said Investing in the facilities will make them … to varying degrees more user-friendly, and if you can keep some of that care closer to where they live, it would be more convenient for the patients and (could generate) more patient revenue for Vanguard.

Gallucci, whose firm within the last year managed securities offerings for Vanguard, said if the DMC is successful on capitalizing on infrastructure investments, margins eventually will improve.
But Vicki Bryan, a senior high yield analyst for Gimme Credit, a research service on corporate bonds, doubts Vanguard's recent entry into Detroit and other markets will help revenue. She expects Vanguard will need to borrow more money to fund a projected cash flow shortfall.

She said the acquired assets are money losers and/or bankrupt operators, and this has resulted in even weaker operating margins and cash flow and massive capital expenditure obligations over the next five years.

Construction already is under way on some DMC building projects, and Duggan said the DMC is getting ready to contract out other projects. Vanguard officials are pleased about Detroit saying it's progressing as they hoped.

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