Three months after Temple University Health System and Fox Chase Cancer Center signed an affiliation agreement (OT, 1/25/12) to merge the cancer center into the Temple system, the price of the sale has now been reported: An article in the Philadelphia Inquirer by Harold Brubaker said that Temple “revealed in a conference call” that it has agreed to pay $83.8 million for Fox Chase and would immediately invest $30.9 million to expand the institution into Temple's neighboring Jeanes Hospital.
Two days later the Inquirer's Joseph N. DiStefano wrote in his PhillyDeals blog that Moody's Investor Service said that it is worried that “deep operating losses at ‘troubled’ Temple University Health System, ‘along with substantial reductions in state funding’ and plans for increased borrowing, will likely put ‘pressure on the university's operations and liquidity,’ especially as Temple prepares to take over Fox Chase Cancer Center.”
The post then added that although the credit rating agency affirmed its Aa3 investment-grade long-term debt term rating of Temple, its future rating outlook is “negative.”
I contacted both Temple and Fox Chase for additional information and learned that the conference call source was a recording of an investors' phone call that included Larry R. Kaiser, MD, Senior Executive Vice President for Health Sciences and Temple University, Dean of Temple University School of Medicine, and President and CEO of Temple University Health System.
Fox Chase President and CEO Michael V. Seiden, MD, PhD, said that he learned of the call and its details only when he read it in the newspaper.
Affiliation, Merger, Takeover?
When asked if the Temple-Fox Chase relationship was an affiliation, merger, takeover, or something else, Seiden explained that from a legal point of view the new entity would be considered an affiliation, with Fox Chase as a distinct separate corporation within the Temple family of corporations operating semi-autonomously as a cancer-focused center.
He said the $83.8 million paid to Fox Chase by Temple would remain within the Temple system with part of the money going toward restructuring Fox Chase's balance sheet, upgrading information systems, and converting the cancer center's two-bed rooms to single-bed rooms.
“Fox Chase is licensed for 100 beds, and that number will be retained by adding beds within Jeanes Hospital [also part of Temple University Health System], which is on the same campus and connected to the center by a bridge.”
Seiden added that the proximity of Jeanes would also allow Fox Chase to take advantage of certain facilities there and have access for non-cancer medical services for its patients.
Kaiser said that the term “affiliation” could be used in many different ways, but that Temple was acquiring Fox Chase for the Temple University Health System, and that Fox Chase will remain a distinct entity as a component of the Temple University Health System.
“It will still be Fox Chase Cancer Center and be headed by a President-CEO but [Fox Chase] will become part of Temple University Health System and their finances will roll up into a consolidated income statement for the Temple University Health System.”
He said the center's NCI core grant (Cancer Center Support Grants—CCSG—for NCI-Designated Cancer Centers known as the P30, which is due for renewal in fall 2013) will still be at Fox Chase with Seiden remaining as its principal investigator, and that key investigators from both Temple and Fox Chase had just held a day-long scientific retreat to explore synergies in research.
Kaiser noted that some Temple faculty will be added to the core grant resubmission, and that at Fox Chase's recent external advisory board meeting there was a lot of positive reaction to a close integration between the two entities for the renewal application.
He said the $83.8 million will be paid to the banks holding Fox Chase's debt, and Temple will commit some additional funding to enhance research as well as build additional beds in Jeanes Hospital, which will be leasing space to Fox Chase. Temple plans to begin selling bonds in June.
This arrangement will also allow the cancer center to maintain its Prospective Payment System exemption, said Kaiser, who said he has been in close contact with the Centers for Medicare and Medicaid Services about preserving the exemption.
Seiden said that new faculty titles are still being discussed but that many Fox Chase clinicians already have adjunct appointments at Temple and that he doesn't expect changes to the affiliations some faculty members have at other institutions as well.
“We expect to take a more robust role in Temple's graduate programs including engineering and allied health, but the deal hasn't closed yet and we're looking at ways that being part of a university system might add value to a freestanding cancer center.”
Kaiser, who is a thoracic surgeon and surgical oncologist, said he has a limited thoracic surgery practice at Temple and didn't anticipate becoming part of the cancer center faculty.
Projected Date of Merger: July 1
July 1 is the projected date for the merger, but there are still a number of legal and regulatory issues that need to be addressed, mostly within the state of Pennsylvania's Department of Health, Attorney General's Office, and Orphans Court.
“As a nonprofit we have legal responsibilities to maintain our mission as a not-for-profit institution and have restricted investments given by grateful donors for specific purposes with covenants that have to be respected post-affiliation, and there are some antitrust issues that have to be approved,” said Seiden.
Other organizational aspects of the new entity will have to wait until Temple University names its next president to succeed Ann Weaver Hart after she steps down on June 30 after six years, he said.
“Health care is obviously changing, and Fox Chase has established itself as an institution that has contributed to the cancer mission in cancer care and discovery. To move to the next level in a world that is shrinking where technologies come out of engineering schools and chemistry and computer science departments, we have to have access to the best and brightest kids coming out of universities.
“Fox Chase has to position itself to reach the next level as an NCI-designated comprehensive cancer center,” Seiden continued. “We needed access to more space and a wider breadth of science, and with health care changes through affordable care organizations and megatrends in health care, it really made sense for Fox Chase to be part of a larger health care system. This is part of the evolution of bringing better science to patients in the future as well as being responsive to the evolution of how medical care is going to be delivered in the U.S. in the years ahead.”
Temple serves an underserved population, Kaiser said, “and we think this will be an opportunity for this population to be able to participate in clinical trials and that it will enhance the quality of the clinical trials to have a more diverse patient population—plus we can offer outstanding cancer treatment to this population.
“We think that by investing in Fox Chase we will be able to expand the reach of Fox Chase and allow it to expand [physically], since it's been in a difficult position because it couldn't expand.”
He said Temple will invest in both Fox Chase's clinical and research missions, and that the new arrangement “will be something great for this community, and will be a literal transformation for us at Temple to have one of the NCI-designated cancer canters as part of us.”
As for Moody's changing Temple's outlook from stable to negative, Kaiser said the health system is a separate 501(c)3 entity from the university, which is not responsible for the liabilities of the health system: “The ratings agencies basically make assumptions that the university is going to stand behind the health system, but we are separate corporate entities.
“What rating systems do is up to them, but we think that after looking at the numbers, that the addition of Fox Chase will be very positive for Temple. We don't agree with the rating agency, but they do their thing.”
What Happens to NCI-Designation Following a Takeover?
Linda K. Weiss, PhD, Director of NCI's Office of Cancer Centers (OCC), said in an interview for this article that during her 10 years in that position she knew of no other instance when NCI-designation had been transferred from one institution to another.
She said NCI had not as yet received any formal notification about the change, but had learned of the pending merger several months ago from Fox Chase.
Although she could not comment specifically about the Temple-Fox Chase situation, she was willing to discuss the general process involved: “NCI's Office of Grants Management would handle a number of issues, mostly relating to financial and legal matters since it enforces NIH policies and puts out the awards, and would be involved in discussions related to the merger or organizational change of this kind and complexity,” she said.
“From the programmatic side, we [OCC] would be very interested and want to know that the requirements of the CCSGs [Cancer Center Support Grants for NCI-designated Cancer Centers known as the P30] are being met and that the integrity of the cancer center as funded is intact.”
She said the principal investigator of a P30 grant is the cancer center director, who had to be a scientist with experience in both scientific and administrative leadership.
“As far as the directorship is concerned, those are all issues that we would want to work through, and I feel fairly certain that in a case of this nature we would have some leeway with the Office of Grants Administration to seek clarification and make an independent determination about how we would want to proceed. Obviously, the NCI designation is a highly desired designation and we want to ensure it is not be diluted in any fashion.”
She added the merger would be scrutinized at various points to ensure that the transfer of the designation meets the requirements of the law related to changing the organizational status of a grantee.