Amid Mounting Debts, Physician-Owned Arizona Heart Institute Files for Bankruptcy as Part of Acquisition Deal

Shelley Wood

August 04, 2010

August 4, 2010 (Phoenix, Arizona) — In what may be a sign of the times, one of the oldest physician-owned heart institutes in the US has filed for bankruptcy as part of an acquisition agreement with a for-profit healthcare management company. The Arizona Heart Institute and Abrazo Health Care, a subsidiary of Vanguard Health Systems, announced the deal late Monday; the affiliated Arizona Heart Hospital, almost half of which was once physician-owned, is also in discussions with Vanguard.

World-renowned cardiovascular surgeon Dr Edward Diethrich is the medical director of both the hospital and the institute, which he founded nearly 40 years ago. He explained to heartwire that the institute filed the bankruptcy petition only after the agreement with Vanguard was in place, allowing Vanguard to buy the institute's assets free and clear of liens and other claims under what's known as a 363 asset purchase agreement.

News of the Arizona Heart Institute's bankruptcy petition and Vanguard agreement comes as physician-owned specialty hospitals, as well as independent cardiology practice groups, struggle for survival in what is seemingly an increasingly hostile healthcare environment for both types of institutions.

In the Red

In the institute's bankruptcy petition, the number of unsecured creditors is listed as between 200 and 999, while the institute's assets are listed as being between $10 million and $50 million and liabilities at $1 million to $10 million.

Among the list of creditors holding the 20 largest unsecured claims in the bankruptcy petition are GE Healthcare, with an unsecured claim of more than $780 000 for the lease of ultrasound and other equipment, plus a second claim of almost $200 000 for repair and maintenance services. VAS Communications, a medical marketing company, is listed with a claim of $470 400 for "services." Two separate lease claims, one for the Casa Grande office and another for the Surprise office, total over $250 000. The remaining unsecured claims listed in this top-20 list range from $36 000 to $150 000. There are 62 additional pages of creditors listed in the petition.

Mary Wheeler, a spokesperson for the institute, emphasized that a 363 sale is part of the reorganization plan, decided upon prior to filing the petition by both the buyer and the seller. "The buyer, Vanguard, purchases the Arizona Heart Institute, and the proceeds from the purchase are then redistributed toward our outstanding debt owed to our creditors, including vendors, as determined and directed by the courts," she explained to heartwire . "Our voluntary decision to pursue this reorganization, along with the execution of the Vanguard definitive agreement, was strategic and in everyone’s best interest, including the institute's employees and physicians, vendors, and most important, our patients."

A Solution? Not Soon Enough for Some

Dr Fredric Klopf, who with Dr Murli Raman left West Valley satellites of the Arizona Heart Institute in June to join the competing physician-owned practice group Cardiac Solutions, told heartwire they showed up for work June 1 at the institute's Peoria office to find they'd been evicted for not keeping up on the rent. According to Klopf, the Arizona Heart Institute owed almost $100 000 in lease payments at that specific location dating back at least six months. Klopf and Raman actually were minority owners of the building at the time but were not part of the decision to evict the Arizona Heart Institute branch, Klopf said.

According to Klopf, the institute's arrears at the West Valley satellites included unpaid bills for medical transcription, cleaning, laundry services, and answering services, as well as salaries that weren't paid according to contracts. In fact, fearing the worst, Klopf said he and Raman, aware that the satellite offices were in dire financial trouble, had been in discussions with Vanguard for months about ways to salvage/reopen the clinics, including an offer from Vanguard of back pay to make up the shortfall in their wages over the previous two years, an amount ranging from $500 000 to $1 million each, depending on the calculation used. The proposed temporary solution was for Klopf and Raman to continue to see patients out of the downtown Phoenix offices after the satellites were shuttered, until the Vanguard acquisition was finalized and the debts paid off, something Klopf says was not a reasonable solution, even temporarily, for their largely elderly clientele, "who don't like to drive five miles, let alone 20," Klopf said.

Exactly what kind of debts will now be settled as a result of the bankruptcy filing and acquisition agreement, and to what extent, remains to be seen.

Wheeler could not discuss the institute's outstanding debts, saying only that "the courts [will] determine how the proceeds from the sale are redistributed among our outstanding debts to creditors." Without addressing any of the debts specifically, Wheeler added that at no time was patient care affected in any way.

Lisa Levi, a spokesperson for Vanguard, also declined to discuss the extent of the institute's debts, but noted that the 363 bankruptcy filing is "in essence, a prepackaged bankruptcy filing in which Abrazo was represented as the intended purchaser subject to the judge granting a sale order."

The Winds of Change

For the physicians remaining at the Arizona Heart Institute, almost all of whom also work at the hospital, the Vanguard acquisition may offer some stability for the beleaguered institute, which has closed a number of other satellite facilities over the past year. There are 15 physicians who work at the downtown offices, Diethrich said. None of the physicians who have an ownership interest in either the hospital or the institute have made dividends from either business, he added.

Over at the Arizona Heart Hospital, the majority owner is Medcath Corp; according to Wheeler, physician ownership of the hospital is now just 28%, down from a high of 49% in the past. Any decision on whether the hospital will also be sold to Vanguard remains MedCath's, Diethrich said, adding that he expects an announcement this week.

According to Diethrich, having a single owner of the institute, the hospital, and ideally the affiliated Arizona Heart Institute Translational Research Center as well, would "make sense" from a business perspective. Over the past few years, he said, MedCath has "felt challenged" by the increasing legislation limiting physician-owned hospitals: section 6001 of the recently passed Patient Protection and Affordable Health Care Act prohibits physician-owned hospitals that see Medicare patients from expanding (as of March 23, 2010) and bans any new physician-owned Medicare hospitals that are not certified as Medicare providers before the end of the year.

In the current healthcare environment, says Diethrich, MedCath has also "by necessity" become increasingly uninterested in supporting activities beyond clinical care.

"All of that has been very hard for us here at the Heart Institute, because as the philosophy of the hospital environment changes . . . it changes the orientation of your program," Diethrich explained. "We've been very involved in research, education, cutting-edge technologies, and being on the leading edge . . . but when your hospital partner becomes less interested, is a public company, and is not sharing the enthusiasm for the expenditures for research and education that we have, the institute has had to take over this [expense] more and more," he said.

"Very, Very Costly"

Over the past three years, the institute has "spent an exorbitant amount of money" building new labs and investing in imaging and other state-of-the-art technology, Diethrich told heartwire . "It was very, very costly to us: big expenditures without much help from our hospital partners. As time went on, it was pretty clear to us that we'd have to make some different kinds of relationships."

Vanguard's Abrazo group, which already owns five other hospitals in the Phoenix area, "is the best fit," Diethrich is quoted as saying in a press release, which also notes that the acquisition of the Arizona Heart Institute is the first independent cardiovascular specialty physician practice Abrazo has added to its local network.

Diethrich believes some of the pressures his institute has faced are also being felt by physician groups around the nation. "I do think that we're going to see a reduction in physician-owned hospital practices, and on the other hand, you're going to see an accelerated number of physician groups going with the hospital and working for the hospitals under contracts."

Physicians are "very nervous" about the changes going on in US healthcare, he continued. "[There's] a lot of angst about this, and I think physicians are unsure what the direction is going to be, and what kind of practice they are going to have if they are alone and solo; a lot of things are very scary. You see this happening already, all over the US, where entire groups have now joined a hospital and work for the hospital."

Other Factors Behind Woes

Klopf, however, who witnessed firsthand many of the changes taking place both within and outside of the Arizona Heart Institute, says the blame does not rest solely with a changing healthcare environment. While he spoke glowingly of Diethrich and his vision, calling him "a great guy and a great, innovative surgeon who has really built a great institute," Klopf believes the era of "extravagant" investment in specialized institutes is probably over.

He points to a decline in the number of referrals to specialized institutes like Arizona Heart for the big money-making procedures, as regional practices and hospitals have expanded to include more open-heart and complex interventional services; an increase in the number of high-cost/low-reimbursement procedures by institute physicians; and its expensive international development arm, which sought to open a heart hospital in Singapore, known as Arizona Heart International.

"It's not a secret that [the Arizona Heart Institute] has accumulated a lot of debt over the years," Klopf told heartwire . "I think their problems have much less to do with the changing climate in terms of physician-owned hospitals and subspecialty hospitals and more to do with the debt they've accrued over the years, and the fact that they had to file bankruptcy in order to reorganize. There are really a lot of bigger issues that are independent of the broader healthcare environment."

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