Vanguard Health Systems Inc. Business Information, Profile, and History

Company Perspectives:

Vanguard Health Systems aspires to be the pre-eminent organization of market-leading, top quality healthcare provider systems preferred by communities, patients, physicians, payers, employers and employees.

History of Vanguard Health Systems Inc.

Vanguard Health Systems Inc. acquires nonprofit hospital systems and converts them to investor-owned status. The company is active in several markets, including Phoenix, Arizona; Orange County, California; Greater Chicago, Illinois; San Antonio, Texas; and Massachusetts. Vanguard typically buys bankrupt or near-bankrupt facilities, then invests in capital improvements to help upgrade service. A series of regional boards provides more local input than at other corporate hospital chains.

Origins

Vanguard Health Systems was formed in July 1997 by group of healthcare executives led by Charles Martin, Jr. Martin, an Alabama native, had started successful companies before. He helped launch General Care Corp., a small nursing home firm that Hospital Corporation of America (HCA) acquired for $78 million in 1980. He then worked for HCA, one of the predecessor companies of industry leader Columbia/HCA Healthcare Corp., eventually taking over 104 poorly performing hospitals spun off as Healthtrust. Martin was chairman and CEO of OrNda HealthCorp. (formerly Republic Health Corp.) from 1992, when it was bankrupt, to its $3 billion acquisition by Tenet Healthcare Corp. in January 1997.

Many nonprofit hospitals were struggling to meet their capital requirements in the changing healthcare industry. Vanguard foresaw the potential for consolidation in areas other consolidators were avoiding. "The name 'Vanguard' means literally the foremost or leading position in a trend," said Martin in a January 1998 statement.

With $1.5 billion in backing, mostly from Morgan Stanley Capital Partners of New York City. Vanguard aimed to consolidate community hospitals into investor-owned systems where the conditions were favorable. It was focused primarily on smaller markets within urban areas. What made the company unique, reported Modern Healthcare, was its governance by regional advisory boards, each comprised of both eight hospital and three Vanguard representatives.

First Acquisition in 1998

Vanguard acquired its first hospital, Maryvale Samaritan Medical Center of Phoenix, from the nonprofit Samaritan Health System in 1998. Maryvale had 213 beds.

Several early acquisition attempts failed, including that of New Jersey's Barnert Hospital. A deal to acquire six Philadelphia-area hospitals from the bankrupt Allegheny Health, Education and Research Foundation (AHERF) also fell apart.

Vanguard's revenues for the fiscal year ended June 30, 1999 were $91.5 million, twelve times those of the previous year. The company lost $6.4 million in fiscal 1999 and $2.6 million in fiscal 1998. The net loss was narrowed to $1.4 million in fiscal 2000, when revenues were up to $304.7 million. Vanguard was profitable in fiscal 2001, with net income of $10.7 million on revenues of $667.8 million.

In late 1999, Vanguard acquired hospitals in Anaheim and Huntington Beach, California. West Anaheim Medical Center had 219 beds, while Huntington Beach Hospital had 130. The seller was Triad Hospitals, a Dallas-based spin-off of Columbia/HCA.

Vanguard boosted its Arizona operations with the acquisition of the 222-bed Phoenix Baptist Hospital in 2000. The company also expanded into major new markets. MacNeal Health Network, which included a 333-bed hospital in the Chicago suburb of Berwyn, Illinois, was added during the year. MacNeal, a nonprofit facility, had net income of $11.6 million on revenues of $268 million in fiscal 1998.

Also in 2000, La Palma Intercommunity Hospital of Orange County, California, was acquired from Long Beach-based Memorial Health Services. Vanguard had attempted to buy La Palma a year earlier but had lost out to Memorial, which had acquired La Palma along with another hospital from Catholic Healthcare West. La Palma lost $4.5 million on net patient revenues of $36.1 million in fiscal 1998. In 2001, Vanguard opened the Magnolia Surgery Center in Orange County.

An HMO Acquired in 2001

A 2001 acquisition brought Vanguard its first HMO. Vanguard paid $39 million for bankrupt PMH Health Resources. PMH owned the 195-bed Phoenix Memorial Health system as well as the Phoenix Health Plan, a Medicaid HMO with 43,572 members and annual revenues of $107 million. It was rare for an investor-owned hospital chain to own a Medicare HMO, noted Modern Healthcare. A company executive told the publication it made sense for Vanguard to own an HMO due to the high numbers of Medicaid patients its Phoenix area hospitals treated.

Company cofounder William "Larry" Hough was promoted to president in mid-2001. Martin retained the titles of chairman and CEO. Hough had been an executive vice-president and chief operating officer for Martin both at Vanguard and at OrNda HealthCorp.

In 2002, Vanguard entered a joint venture with the University of Chicago Hospital Health System to buy the 200-bed Louis A. Weiss Memorial Hospital on the Windy City's North Side.

Vanguard opened the West Valley Hospital in Goodyear, Arizona, in 2003. This and the other Phoenix area (Maricopa County) facilities were grouped under the Abrazo Health Care banner.

The San Antonio-area Baptist Health System was acquired in 2003 in a deal worth $306 million. It had five acute care hospitals with a total of 1,537 licensed beds. Vanguard won the bid against spirited competition. It committed to invest $200 million in capital and soon set out renovating and expanding the Southeast Baptist Hospital, North Central Baptist Hospital, and Northeast Baptist. The area was booming and needed more capacity, reported the San Antonio Express-News.

Revenues for the fiscal year ended June 30, 2004 were $1.78 billion, up 33 percent largely due to the San Antonio acquisitions. Net income rose 137 percent to $40.1 million.

Blackstone Backing in 2004

Vanguard announced a major investment from the Blackstone Group in July 2004. Blackstone acquired two-thirds of the company's equity. The deal valued Vanguard, which then had 16 hospitals, at $1.75 billion. Morgan Stanley and Vanguard managers retained 30 percent.

At the end of calendar 2004, Vanguard acquired three Massachusetts acute care hospitals from Tenet Healthcare Corporation. These included the 348-bed Saint Vincent Hospital at Worcester Medical Center and the 420-bed MetroWest Medical Center, which was made up of two campuses: Natick's Leonard Morse Hospital and Framingham Union Hospital. Vanguard paid $100 million for the assets. Vanguard had reportedly been interested in MetroWest since 1998, when it was majority owned by Columbia/HCA Healthcare Corp. Saint Vincent had once been owned by Martin's previous firm, OrNda. In the mid-2000s, Vanguard was proceeding with a course of acquisitions that had kept the company growing since its inception and would likely continue to do so for the foreseeable future.

Principal Operating Units: Abrazo Health Care; Baptist Medical Center; Huntington Beach Hospital; La Palma Intercommunity Hospital; Louis A. Weiss Memorial Hospital; MacNeal Hospital; Magnolia Surgery Center; MetroWest Medical Center; North Anaheim Surgicenter; North Central Baptist Hospital; Northeast Baptist Hospital; St. Luke's Baptist Hospital; Saint Vincent Hospital; West Anaheim Medical Center.

Principal Competitors: HCA Inc.; Iasis Healthcare Corp.; Tenet Healthcare Corp.; Triad Hospitals, Inc.

Chronology

• Key Dates:
• 1997: Vanguard Health Systems is founded by a group of healthcare executives.
• 1998: Phoenix's Maryvale Samaritan Medical Center is acquired.
• 1999: Three hospitals are acquired in Anaheim and Huntington Beach, California.
• 2000: MacNeal Health Network (Illinois), La Palma Intercommunity Hospital (California), and Phoenix Baptist Hospital are bought.
• 2001: Vanguard opens Magnolia Surgery Center in Orange County, California; Phoenix Memorial and Phoenix Health Plan are acquired.
• 2002: Vanguard enters a joint venture with the University of Chicago Hospital Health System to buy Louis A. Weiss Memorial Hospital.
• 2003: West Valley Hospital opens in Goodyear, Arizona; San Antonio's Baptist Health System is acquired.
• 2004: Three hospitals are acquired in Massachusetts; Blackstone Group invests in Vanguard.