Tenet Healthcare’s acquisition of Vanguard Health Systems could be bad news for some not-for-profit hospitals. In an early July credit outlook by Moody’s Investors Service, the ratings agency said the acquisition would be “credit negative” for some not-for-profits, particularly for small stand-alone hospitals that operate in the Tenet and Vanguard markets, because it increases competition.
The credit negative declaration does not indicate a change in credit rating or outlook, Moody’s cautioned in its report. Rather, it indicates the potential impact of a particular development on a company’s credit rating.
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On July 1, Tenet said it would buy Vanguard for $4.3 billion, including the assumption of about $2.5 billion of Vanguard’s debt. The proposed acquisition consolidates two large systems into a bigger company with pro forma revenues of $15 billion (as of March 31).
The merged entity will operate 77 hospitals in 30 markets, an increase from Tenet’s 49 hospitals in 24 markets and Vanguard’s 28 hospitals in six markets. Tenet also owns Conifer Health Solutions.
Tenet currently operates in 10 states. California, Florida and Texas accounted for approximately 60 percent of its 2012 revenue. Tenet’s purchase of Vanguard expands its geographic base to Michigan, Illinois, Arizona, Massachusetts and new parts of Texas. According to Moody’s, Massachusetts, Illinois and Michigan have historically been overwhelmingly dominated by not-for-profit providers.
The potential shared savings and combined resources of the enlarged Tenet will allow it to engage in new and enhanced competitive endeavors that could threaten not-for-profit hospitals, especially those with fewer resources, Moody’s noted in its credit outlook.
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While strategic plans have not been finalized, Tenet’s acquisition will give it greater market power. Smaller hospitals are particularly at risk given their challenges with physician retention, lack of negotiating leverage and an inability to achieve savings through economies of scale, according to Moody’s.
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