CHICAGO — Detroit Mayor Dave Bing said he was “elated” by Friday’s announcement that a for-profit health care system is interested in buying the Detroit Medical Center — Michigan’s largest charity-care provider — and infusing $800 million into the center’s Detroit campus.
The deal would mark the single largest investment in the city’s history, DMC officials said.
Tennessee-based Vanguard Health Systems would pay $417 million to buy DMC, according to a letter of intent the two parties announced Friday. The purchase price includes taking over center’s outstanding bonds and other long-term debt, such as pension obligations.
As part of the deal, Vanguard said it would spend $850 million on capital improvements in DMC over the next five years, including more than $800 million in Detroit. Of that money, $500 million would go toward building a new children’s hospital, a new physician office space, and other projects. The remaining $350 million would finance improvements at existing facilities.
The deal requires the city to set up a tax-free Renaissance Zone on DMC’s city campus, allowing Vanguard to avoid local taxes for the next 15 years. Detroit, Wayne County, and the state would need to approve creation of the new zone.
“This kind of commitment and investment in the city of Detroit is a watershed day,” Bing said at a press conference announcing the agreement Friday morning. “This is going to send a message to the rest of the country: We as a city are open for business.”
Vanguard, which owns 15 hospitals in large cities across the country, promised it would keep open all of DMC’s hospitals for the next 10 years. The largest provider of uncompensated care in the state, the system operates eight hospitals, five of which are located in downtown Detroit. It serves as the main safety-net hospital for Detroit.
“Vanguard’s commitment to DMC and to the city of Detroit will be the single-largest private investment in the city’s history,” DMC board chairman Steve D’Arcy said in a statement.
The letter of intent will expire in June.
DMC has $490 million of outstanding bonds, all of which are in a fixed-rate mode.
The center rarely issues debt — it last sold bonds in 1998. Management had planned to issue $340 million of new-money and refunding bonds in October 2008, but pulled out as the market crashed.
Standard & Poor’s rates DMC’s debt BB-minus with a stable outlook. Fitch Ratings maintains a BB rating on its debt with a stable outlook.
In October 2008, credit analysts noted the system had enjoyed three consecutive years of positive and increasing operating income and was significantly bolstered by new revenue from Medicaid matching programs.
As of October 2008, the system’s pension plan was fully funded and frozen, with no new members or benefits. Managers at the time said they expect future contributions to drop considerably.
The fully funded pension plan now is one of the bright spots in the system’s fiscal profile, along with a costly decision a few years ago to invest in a sophisticated medical records system that won DMC national recognition for its information technology.
Though just announced Friday, the proposed deal is expected to spark opposition from groups that fear it could mean less care for the state’s uninsured.
The Michigan Health and Hospital Association said the deal revealed the lack of financial support for community hospitals, according to local reports.
Moody’s Investor Service issued a statement after the announcement, saying it was taking no immediate action.
“The LOI is nonbinding and extends until June 1, 2010. We will continue to monitor the situation as it progresses,” Moody’s said.
Standard & Poor’s said it too was not taking any action, but was watching how the agreement plays out.