With Prime deal's collapse, Daughters of Charity Health System seeks new buyer

April 1, 2015

By JULIE MINDA

Prime Healthcare Services of Ontario, Calif., has decided not to purchase the six-hospital Daughters of Charity Health System. Its decision came 17 days after California Attorney General Kamala Harris approved the proposed sale, with conditions that Prime called "extensive."

Since March 9 when Prime notified the Daughters of Charity Health System of its intent to withdraw its offer, the Catholic system has been "moving forward to make sure that we will find another outstanding buyer that will be able to ensure the future of these hospitals," said Robert Issai, Daughters of Charity Health System president and chief executive. Shortly after Prime's decision, Issai told Catholic Health World in a March 11 interview, "we're seeing tremendous interest from potential buyers," some of which had been suitors during the system's buyer search that began in early 2014, and some of which had not.

Before choosing the offer from Prime in October, the Los Altos Hills, Calif.-based Daughters of Charity Health System evaluated more than 100 potential buyers, and narrowed that field to four contenders. The for-profit Prime operates 34 hospitals in 10 states, including six nonprofit facilities in California. (It owns the California facilities through the Prime Healthcare Foundation.)

The proposed purchase and conversion to for-profit status was subject to regulatory review and on Feb. 20, Harris announced a list of conditions to secure state approval of the transaction. Prime had to agree to operate four of the system's hospitals as acute care hospitals with emergency services for at least 10 years and to operate a fifth hospital as an acute facility with emergency services for at least five years. The sixth system facility was to continue to operate as a skilled nursing facility with a standby emergency department for at least 10 years. The attorney general also specified the services, investments, charity care benefits and pension obligations that Prime was to provide.

Issai said, "While there is no question that the attorney general's conditions that she put forward were unprecedented, that does not mean that they were not workable. … When we looked at the conditions and did our analysis of the impact financially, we saw that they were not significant. They would not have handcuffed Prime's ability to turn around (the hospitals)."

Issai said a key reason Prime decided against the purchase was due to concerns about maintaining the hospitals and certain services for 10 years. However, Issai said attorneys general regularly have processes in place, such as waivers, to allow for evolving circumstances that may change the dynamics of a deal.

With a sale to Prime no longer possible, Issai said the system is moving quickly to "start the process again." He said the Daughters of Charity Health System is "a prettier bride now. Our financial position is much better than it was six months ago. Our cash position has gotten better …. And the net worth of our company compared to when Prime put their offer in back in September, until now, has improved by $90 million." He said the cash position boost is due to better-than-expected reimbursements from federal payers over the past several months. The improved payments have come because of system hospitals' positions as safety net providers.

While Daughters of Charity Health System leaders are excited about the financial improvements, "we are not out of the woods," said Issai. The system continues to accrue $10 million monthly in operating losses. While the system still is focused on the possibility of a sale, "bankruptcy is always on the table for us, but it's not necessarily that we have to file for bankruptcy now," said Issai. If the system were to declare bankruptcy, it would be a reorganization bankruptcy, not a dissolution, according to a Daughters of Charity Health System's Elizabeth Nikels, vice president, marketing and communications.

Issai noted that the Daughters of Charity Health System prefers to sell all of its hospitals to a single buyer. However, he said, "we're not putting any limitations" on potential bidders. "We will entertain all offers."

Issai said of the Daughters of Charity Province of the West, which sponsors the health system: "They are disappointed" the sale did not go through. Their belief is that "promises made are promises kept; and we made promises — to pensioners, vendors, bondholders and others — that we want to keep. And Prime's proposal was helping the sisters to keep all the promises made.

"Our marching orders have not changed, and we will make sure that all the buyers we are going to evaluate are going to help us, as much as possible, to keep the promises made," he said. "For instance, we're going to insist, as we did with Prime, that the next buyer keep our existing charity policies."

Issai said that while no Catholic organizations are among those that have approached the system since the collapse of the Prime deal, "I pray to God that in this round we'll have some Catholic systems who are in a better financial position and will step up and say, 'I want you, and I'm going to keep you Catholic.' That would be probably the happiest day of my life.

"My heart and soul have always been in Catholic health care," he said. "Catholic health care is the best health care, not only in the states, but throughout the world."

Daughters of Charity Health System sues SEIU-UHW for sale interference

The Daughters of Charity Health System of Los Altos Hills, Calif., has filed suit against the Service Employees International Union–United Healthcare Workers West and other defendants for actions it alleges were "unlawful efforts" to interfere with the health system's sale process.

In the suit filed in February in the Superior Court of Santa Clara, the Daughters of Charity Health System asserts that the labor union and New York City-based private equity firm Blue Wolf Capital Partners used "extortionist threats and bid chilling tactics" to disrupt the health system's sale. Blue Wolf Capital Partners made an unsuccessful bid to acquire the Daughters of Charity Health System. The defendants named in the suit are SEIU, SEIU-UHW, Blue Wolf Capital Fund III and Blue Wolf Capital Partners.

The Daughters of Charity Health System says in the suit that SEIU-UHW announced publicly and to potential bidders that it would oppose any deal with any organization except Blue Wolf, and it made known to potential bidders and others that the union could influence California Attorney General Kamala Harris in her review of potential deals. Further, the suit says the union's president threatened to interfere in a deal between Daughters of Charity Health System and then-suitor Prime Healthcare Services unless Prime conceded on some union demands regarding some Prime hospitals in California. The SEIU-UHW represented employees in three Prime hospitals in California, but that contract has expired. Prime did not agree to the demands. The suit further alleges Blue Wolf violated the nondisclosure agreement it signed as a potential bidder.

The suit says the activities of the union and private equity firm had a chilling effect on the bidding process and cost the health system and Prime "millions of dollars in professional fees and legal fees" and delayed the sale process, subjecting the health system to ongoing operational losses.

Robert Issai, president and chief executive of Daughters of Charity Health System, told Catholic Health World that the system engaged in a campaign to counter the union's activities. The Daughters of Charity Health System gained support for the sale to Prime from other unions, civic officials, prominent newspapers, community governing boards, its own employees and community members and publicized this support on a news page on its website. It held rallies to demonstrate community buy-in.

In the end, Issai said, "we received over 60,000 expressions of support — signatures, letters, phone calls, you name it."

He said he believes that support will continue as the system renews its search for a buyer.

In a press release on the SEIU-UHW website, union President Dave Regan called the lawsuit "frivolous" and said it was part of a bullying tactic. The union acted in line with its right to speak out against the sale, according to the release.

 

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