Hahnemann University Hospital’s residency slots fetched a unexpectedly large $55 million winning bid from a team of six local health systems at Thursday’s bankruptcy auction, topping bids by Tower Health and a California company that says it wants to reopen the Center City hospital.
“I think it was a big surprise to everybody,” Ivy Baer, senior director of policy and regulatory counsel at the Association of American Medical Colleges, a Washington trade group, said Friday.
The auction, at the Center City offices of Saul Ewing Arnstein & Lehr LLP, which is representing Hahnemann and St. Christopher’s Hospital for Children in the bankruptcy case filed June 30, lasted until 11:30 p.m.
Christiana Care Health System, Cooper University Health Care, and Main Line Health joined Einstein Healthcare Network, Jefferson Health, and Temple University Health System in the winning bid. It illustrates the value provided by Hahnemann’s more than 550 residents, whose salaries and benefits are paid by Medicare.
“The move ensures access to patient care services — especially for the underserved — and stabilizes the education of hundreds of residents who will be the region’s health care providers of the future,” the coalition said in a news release.
Hahnemann’s residents bring in more than $100,000 a year each from Medicare, which has objected to the residencies’ sale in bankruptcy court, saying it illegally limits the amount Medicare can recoup for Hahnemann overpayments.
It’s not clear how the winning team decided the residents were worth $55 million.
One health care expert surmised that the health systems will benefit from the fact that they already have the infrastructure to train residents. The Medicare payments include money for overhead costs, but the hospitals won’t have additional overhead from the added residents, said Daniel M. Grauman, chief executive of Veralon, a Philadelphia health care consulting firm.
“Hence, the financial impact is completely incremental to each of the winner hospitals,” he said.
If Medicare ultimately blocks the sale, the residency slots would be redistributed, with no certainty that the bulk of them would remain in the Philadelphia region.
Baer and others said that Medicare, which objected to the sale on Monday, wants to avoid a precedent that would effectively create a market for residency slots.
Yet the amount of the winning bid is so significant in the context of the bankruptcy case that Medicare will likely come under pressure to strike a deal that would allow lenders and other Hahnemann creditors to collect the $55 million. One possibility is that the sale could be allowed to go through with the stipulation that it sets no precedent.
The senior secured lender in the bankruptcy, MidCap Financial, is owed about $55 million. Altogether, the bankrupt parent company of Hahnemann and St. Christopher’s has more than $330 million in liabilities.
The starting bid for the residency slots was a $7.5 million offer from Tower Health, which was joined at the auction by Drexel University and the University of Pennsylvania Health System, sources said. The loss of the residencies could be significant for the new academic partnership of Tower Health and Drexel’s School of Medicine because it will be harder to build residency programs.
Drexel and Tower both said in separate statements that they remained committed to building a successful academic health system.
Another bidder at Thursday’s auction was KPC Health, a privately held company that operates seven hospitals in Southern California, according to its website. KPC, which wants to continue operating Hahnemann, did not respond to a request for comment.
The coalition that won the auction for the residency slots said it “is open to discussions with a partner to discuss ways of providing care at Hahnemann or St. Christopher’s Hospital for Children.”
A family that owns Pontiac General Hospital in Pontiac, Mich., also wanted to buy Hahnemann to reopen it, but did not qualify to participate in the auction. “We’re working with investors to get enough money to fit our model and run Hahnemann hospital as a going concern,” Sanyam Sharma, Pontiac General’s chief executive, said Friday.
The closure of Hahnemann, which traces its roots to 1848, affects some of the city’s sickest and most vulnerable patients besides scattering the hundreds of medical residents. The 496-bed hospital employed more than 2,500 people.
The hospital’s current owner, Joel Freedman, a California investment banker, bought Hahnemann and St. Christopher’s from Tenet Healthcare Corp. early last year for $170 million. In April, Freedman said that the hospital was losing $3 million to $5 million a month, and would have to close without financial help from the state and others.
A hearing at which U.S. Bankruptcy Judge Kevin Gross will be asked to approve the sale of the residency slots is scheduled for Aug. 19.