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Private investment firm to recapitalize Daughters of Charity Health System hospitals

August 1, 2015

By JULIE MINDA

The board of the Daughters of Charity Health System and those of the system's six hospitals have unanimously approved a proposal by the private investment firm BlueMountain Capital Management to recapitalize the health system's operations. Under the firm's plan, it will contribute more than $250 million in capital to the system's hospitals to cover outstanding financial obligations, to provide liquidity and to invest in the facilities and their operations. The firm's immediate focus would be to stabilize and strengthen the health system, according to Elizabeth Nikels, vice president of marketing and communications for Daughters of Charity Health System.

New York-based BlueMountain will have the option to purchase the health system after three years, if its proposal is implemented. The transaction requires the approval of the California Attorney General, the California Department of Public Health and the Federal Trade Commission. The deal could be completed by November.

Plans call for the Los Altos Hills, Calif.-based Daughters of Charity Health System board to transfer control of the hospitals and foundation to an independent, five-member fiduciary board, upon the deal's regulatory approval. The current health system board will select the new board, which will include one representative of BlueMountain. BlueMountain has formed an organization called Integrity Healthcare to manage, operate and provide day-to-day operational support to the six hospitals and to the DCHS Medical Foundation, a collaboration of physicians and other clinicians.

Robert Issai, president and chief executive of Daughters of Charity Health System, said in a news release announcing the deal that the system's selection of BlueMountain ensures the continuation of health care access in the communities served by the system's hospitals. The health system's facilities, all of which are located in California, would retain their nonprofit status. Pension benefits would remain intact for current and former employees of the system's facilities, according to Issai. BlueMountain has committed to retain substantially all employees, according to Nikels.

Under BlueMountain's proposal, the Daughters of Charity would relinquish their sponsorship of the Daughters of Charity Health System facilities, and because of this sponsorship transition the facilities "will no longer be considered Catholic," according to information from Nikels. However, "BlueMountain intends to maintain the charity care policies and spiritual care that define the Daughters of Charity mission in its communities," according to information from Nikels.

BlueMountain's planned $250 million capital infusion would include access to a new $150 million credit facility to promote liquidity and support operations, and $100 million of new capital for additional operating liquidity, the health system said. The system's net outstanding debt is about $300 million, according to Nikels.

BlueMountain would assume and honor all current collective bargaining agreements with hospital unions, and it would maintain the hospitals' philanthropic foundations, according to the news release on the deal.

Mitch Creem and Mark Meyers head the leadership team of Integrity Healthcare, the organization that would oversee the six hospitals' and medical foundation's operations. Creem, the chief executive of Integrity, was formerly the chief executive of Los Angeles' Keck Hospital of the University of Southern California. Meyers, the chief operating officer of Integrity, was senior vice president of operations for San Francisco's Dignity Health. An operations committee with representatives of BlueMountain, Integrity and Daughters of Charity Health System will be formed to coordinate the transition.

BlueMountain manages $21 billion in assets globally. It makes equity and debt investments, including in the health care sector, according to the news release. It invests in both publicly traded equities and private businesses in that sector. It has made significant investments in an acute care hospital system, Plano, Texas' LifeCare Holdings; a medical products company; health care real estate company and post-acute care facilities.

Daughters of Charity Health System has been seeking a buyer since early 2014, particularly as it has been booking steep operating losses at its hospitals, which are safety net facilities. The system said in March that its financials had improved with better-than-expected reimbursements from federal payers, but that financial concerns remain. The system estimates it lost about $65 million in the fiscal year that ended June 30.

The health system heard from more than 100 potential buyers in its search last year, narrowed the field to four finalists and then selected Prime Healthcare Services of Ontario, Calif.'s proposal in fall 2014.

In February, California Attorney General Kamala Harris approved the sale with conditions, including that Prime agree to run four of the Daughters of Charity Health System hospitals as acute care hospitals with emergency services for at least 10 years, and to run a fifth as an acute hospital with emergency services for at least five years. The sixth was to remain a skilled nursing facility with a standby emergency department for at least a decade. (Under the facility's current standby arrangement, its emergency department is staffed 24 hours a day, with a physician qualified in emergency medicine and a registered nurse. The facility has the capability to transfer critically ill patients to a tertiary facility if necessary.)

Calling the attorney general's conditions "extensive," Prime withdrew its offer.

Since that withdrawal, 86 potential buyers have expressed interest in the health system; the system narrowed that list to four finalists before selecting BlueMountain. This is according to Nikels, who said no Catholic providers were interested in purchasing the entire system.

Issai said in the release announcing BlueMountain's selection, that the investment firm's offer "represents an extremely attractive opportunity for DCHS, allowing it to continue its operations and mission as a nonprofit system with the support and backing of strong and well-qualified partner organizations."

 

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