Acting just before a looming deadline, Grady Memorial Hospital launched a surprise bid to acquire financially ailing Southern Regional Medical Center, Clayton County’s sole hospital.
The Grady proposal, valued at more than $20 million, sets up a bidding war between Grady and Prime Healthcare Foundation for the 331-bed Riverdale hospital and related assets.
California-based Prime signed a letter of intent in July to purchase the hospital, and that agreement was followed by the owner of Southern Regional filing for Chapter 11 bankruptcy reorganization.
Grady submitted its bid for Southern Regional on Friday, the last day other offers could be made. A bankruptcy court Wednesday moved the date of an auction for Southern Regional to next Wednesday, allowing the Grady bid to move forward.
Grady still needs approval of its corporate board in a vote set for Tuesday, the day before the auction, for its bid to go to auction.
News of the Grady proposal stunned many in the hospital industry Wednesday, largely because the Atlanta safety-net hospital has its own history of financial struggles. Yet Grady has achieved a turnaround in recent years, thanks to major foundation investments and improved financial practices.
John Haupert, the Grady Health System CEO, said the hospital sees the purchase of Southern Regional as an investment that would be paid for with “cash on hand.’’
“Within the first year, [the purchase price] will be returned,’’ Haupert said. He added that savings would come from better financial management at Southern Regional and from improved billing and collections.
“It will create a larger footprint for Grady Memorial Hospital Corporation,’’ Haupert said. A deal would bring more patient referrals to Grady and also boost its negotiating clout with health insurers and suppliers, he said.
Grady gets tax money from Fulton and DeKalb counties, and some experts predicted that could raise political questions. But Haupert said no Fulton or DeKalb money would go to the purchase or operation of Southern Regional.
“The dollars that Fulton and DeKalb contribute are 100 percent locked into [providing] primary care to [uninsured] patients in those counties,” he said.
The deal, if consummated, “will make Grady Health System stronger and preserve an important safety-net institution,” Haupert added.
Prime Healthcare Foundation, whose bid was valued at about $18 million, has pledged to maintain Southern Regional as an acute care hospital, offering emergency services among others, for at least five years.
In addition, the nonprofit foundation has agreed to invest $50 million in capital improvements over the next five years. It also has agreed to hire “substantially all employees currently at the hospital”; to maintain charity care at or above existing levels; to maintain a local governing board and independent medical staff; and to spend at least $1 million in new physician recruitment.
Grady’s bid, according to court documents, was $2.5 million more than Prime’s. “We believe we matched Prime’s bid in every way and exceeded it,’’ said Tim Jefferson, Grady’s chief counsel.
Southern Regional declined to comment on the Grady bid.
Fred Ortega, a spokesman for Prime Healthcare, said in a statement, “We find it surprising that Grady Health System would decide at the 11th hour to submit its bid, given their own recent financial issues, their reliance on significant financial support from the taxpayers of Fulton and DeKalb counties, and the fact that Southern Regional has been in distress for quite some time.
“The board of Southern Regional approached Prime Healthcare because of our proven track record and expertise and asked for help to rescue their hospital,” the statement continued, “and we remain wholly committed to doing so and seeing this process through.”
Southern Regional, saddled with a heavy load of uncompensated care, has been in danger of closing its doors. It has posted annual financial losses since 2007.
Several years ago, Grady itself was in danger of closing, having trouble making payroll and paying its bills. But the positive trend in recent years is reflected in the fact that Grady had net income of $34 million in its 2014 fiscal year.
Still, Grady, Atlanta’s biggest safety-net hospital, has been hurt financially by the state’s decision not to expand Medicaid under the Affordable Care Act, which would have allowed struggling hospitals to have a bigger share of insured patients. And a recent Grady proposal for a “waiver’’ to cover more uninsured people has run into a roadblock at the state Department of Community Health.
Is a turnaround possible?
Dave Smith of Kearny Street Consulting said Wednesday that if Grady wins the bid, the biggest issue will be how the deal is financed.
“All in all, they’ll have a tough time selling it to the commissioners of Fulton and DeKalb,” Smith said.
“It makes sense for Grady to expand,’’he said. “Twenty million is a bargain. I think the biggest hurdle they have is the political piece.”
Smith added that he believes Grady can stem the financial losses at Southern Regional.
Greg Charleston, with consulting firm Conway MacKenzie in Atlanta, also speculated on the impact on taxpayers who currently fund Grady. “If I’m a taxpayer, I’m not too happy about it,’’ he said.
But Charleston added that from Clayton County’s standpoint, a winning Grady bid “would be a great outcome, being tied in with a local hospital.”
Under Grady’s plan, Clayton County and its hospital authority would retain the assets of the hospital.
Haupert compared the situation at Southern Regional to Grady’s turnaround from a dismal financial state. Southern Regional, he said, looks “a whole lot like Grady looked in 2008.”
“We decided that Clayton County as community, the hospital employees … would be much better off’’ with Grady running Southern Regional, he added.
This article was written in collaboration with Kaiser Health News, an editorially independent program of the Kaiser Family Foundation. Andy Miller is CEO and editor of Georgia Health News.
Southern Regional Medical Center
2014 Revenue: $270.5 million
Outpatient Services: Spivey Station in Jonesboro includes a multi-specialty ambulatory surgery center, two diagnostic imaging centers and several physician offices.
Grady Health System
2014 Revenue: $710.8 million
Outpatient Services: 6 neighborhood health centers, 3 primary care centers and specialty outpatient centers at the hospital