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ProvidenceWatch Exclusive:
September 14, 2006

PH&S to spend $2 billion on massive investment program.

An apparent $80 million allocation to try to buy two Tenet Healthcare Corp. hospitals in southern California is the plan’s single biggest surprise. Such a purchase would make Providence Health & Services the dominant hospital company in what is currently its most competitive market.

The report projects a rosy financial future including:

• A 29% increase in Providence’s operating profits over three years, soaring to a projected $350 million by 2008.
• Rapid growth in the company’s accumulated wealth, rising by 13%, to $4.4 billion, in 2006 alone.

Providence’s profits soared in recent years. As a result, Providence Health & Services has more accumulated wealth — net assets — in accounting language — than any other west coast-based hospital company.

Where will capital funds come from? Providence plans to:

• Rely on $1.6 billion in cash generated by its increasingly profitable hospitals to cover most costs.
• Borrow $240 million.
• Spend more on expansion than it devotes to "community benefits."
• Rely on charitable donations for a mere 3% of its capital budget.

How and where will Providence grow?

In 2006, the only year for which the plan provides a specific listing of projects, Providence is making major investments in the two markets where it faces its toughest competition — southern Oregon and California’s San Fernando Valley. This year’s plans include:

ProvidenceWatch has compiled the full list of the 87 projects on which Providence has proposed spending a combined $578 million in 2006.

• An $80 million cancer center in Alaska.
• The $33 million first phase of a medical office complex on Portland’s west side
• A $47 million new home office in Washington State.

The California surprise.

The purchase is not a sure thing. Press reports have named for-profit gian HCA — which already owns a 25% minority stake in the Encino-Tarzana operation — as a potential buyer. Tenet officials have also spoken with other potential buyers .

If Providence fends off other bidders to win the Tenet hospitals, it would increase its share of San Fernando Valley hospital discharges from 20% to 29%, according to Office of Statewide Health Planning and Development data analyzed by ProvidenceWatch. This would increase Providence’s currently narrow lead over the SF Valley’s second largest hospital company, Catholic Healthcare West.

Nonetheless, analysts at Moody’s Investor Service recently expressed "concern that PHS has reversed its prior philosophy and is now considering future acquisitions in the difficult southern California market."

Focus on southern Oregon.

Among the $45.3 million in southern Oregon projects is a previously unreported medical office building and diagnostic center in the city of Central Point, near Medford. The list also includes a parking garage and medical office building on the campus of Providence Medford Medical Center, parts of a multi-phase expansion. News reports have said Providence plans to double the size of the hospital’s maternity center, open a cardiovascular center, and build a new patient tower on the campus as well.

Rogue Valley Medical Center recently completed its own major renovation and expansion including a new patient tower. Asante has expressed concern that some Providence plans could unnecessarily duplicate services already provided at Rogue Valley, such as that hospital’s award-winning cardiovascular center.

Meanwhile, in the Portland market it has traditionally dominated, Providence and competing systems are pouring "tens of millions of dollars into the most profitable services," in a fierce competition to dominate the lucrative market for "upscale care," according to a June 4 report in the Portland Oregonian.

Plans change...

In January, PH&S planned to fund all but $27 million of its Washington state capital investments from its own cash flow. However, in February PH&S asked the Washington Health Care Finance Authority to issue bonds which would finance $161 million worth of Washington state projects. This "new money" would be part of a $414 million bond which will also finance existing debt at a lower rate.

Who benefits?