Selling Your Hospital, Part 1

This post was originally published on the California Society of Anesthesiologist’s (CSA) webpage on 2/29/2016. With their website rebuild, the archives were not posted.

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Selling Your Hospital, Part 1

Feb 29, 2016 by Christine Doyle, M.D.

tags: hospitals

My anesthesiology group practices at one of the Daughters of Charity Health Systems (DCHS) hospitals, and our members have been working there for over 30 years.  In January 2014, the DCHS board announced a search for a buyer for the five hospitals and associated facilities.  

Needless to say, everyone was flabbergasted, although it wasn’t news that our health care system was in trouble. Each facility has a significant proportion of patients who are covered by Medi-Cal, although not all of them reached a sufficient percentage to qualify as a “Disproportionate Share Hospital (DSH)” and receive DSH payment adjustment from CMS. The Daughters’ overarching goal of providing care to the poor and needy has tended to keep them running an operating loss budget, while investment revenue has declined to the point that it no longer offsets the losses.

Thus began a two-year rollercoaster process. While we often compare the process to selling a house, there are some significant differences to keep in mind about the process of selling a health system.

After making the decision to sell, and choosing a broker, you have to create a prospectus for your facility or system. This prospectus is made available to potential buyers. Your broker will then collect information from potential buyers, who may be interested in acquiring the entire system or only certain parts. You will have a series of site visits from bidders, and many meetings with hospital administrators and medical staff.

Once you select a bidder, you must get a series of approvals for the sale. As a Roman Catholic health system, DCHS requires approval of the sale by the head of the Daughters of Charity in Paris, and by Pope Francis in Rome. As a California health system, we also must have the approval of Kamala Harris, California’s Attorney General.

DCHS contracted with Houlihan Lokey, a global investment bank with extensive experience in brokering hospital sales. Representatives of the firm came to talk to the medical staff and explain the process.  One of the first points they explained was that the names of all potential bidders would be kept private except to the individuals on the selection team, in part to avoid outside attempts to influence the process. The names of the other bidders would become public when DCHS announced the selected bidder. Houlihan Lokey expected this phase, including on-site visits and due-diligence research by both sides, to last about six months. 

Simultaneously, we began working with the Attorney General’s office and with officials in Paris and Rome. We knew that there were likely to be political ramifications of the sale, but we had no idea what they might be.

One of the overarching goals was to sell the system intact, because breaking up the system would have significant financial implications for the three different retirement funds. A break-up of the system would force a conversion of the existing church pension plan, which wasn’t covered by federal laws, to an ERISA-compliant plan, at a projected cost of about $200 million. The Daughters were adamant about protecting these funds both for current and retired staff.

As the summer progressed and the timeline slipped a bit, we started to hear rumors that one of the bidders was Prime Healthcare Services. The Service Employees International Union (SEIU) immediately contacted the ancillary hospital staff, urging them to oppose the deal. SEIU favored Blue Wolf Capital, a venture capital firm that had been co-founded by SEIU in 2005. The local newspaper printed a series of articles, reporting that the Santa Clara County Health & Hospital System (SCVHHS) wanted to buy O’Connor Hospital in San Jose and Saint Louise Regional Hospital in Gilroy, and that Prime was one of the competing bidders.  

We kept hearing that the announcement would be made “soon.” It was finally made on October 10, 2015, as we were all traveling to New Orleans for the ASA Annual Meeting.  Prime Healthcare’s bid was accepted at $843 million, in a mix of cash and specified capital investments.

Now the real work would begin.

As part of the requirement to submit the selected bid, as well as the other finalists’ bids, and supporting documents to the Attorney General’s office, the documents were made available online for public review. The documents for O’Connor Hospital alone filled 10 four-inch binders, which were available for a mandatory period of 105 days to anyone who wished to review them. There are also mandatory public hearings, and a site visit by a consultant appointed by the Attorney General’s office to make recommendations for conditions of the sale.

Make no bones about it, this was a POLITICAL decision, and like most political decisions, there were opinions and “spin” put forward by all sides.

The SEIU strongly opposed this deal unless Prime was willing to sign a “neutrality” agreement, which in union language means that the union may enter any facility and organize without any opposing action by management. Employees were divided, with most ultimately siding in favor of the sale.

The California Nurses Association (CNA) initially withheld judgment, but ultimately supported the deal as well.  They felt that the sale provided the best option for their members, as it would preserve jobs and protect retirement funds.

Three of the five Santa Clara County Supervisors were vocally opposed to the deal.  They serve as the Board of Directors for the county hospital system, which is constantly working at capacity, and acknowledged a clear bias in favor of a sale of the San Jose and Gilroy hospitals to the county.  

The local paper, the San Jose Mercury News, initially opposed the sale to Prime.  Early on, SEIU published an invited commentary criticizing the deal, as did the Santa Clara county supervisors. Many people submitted letters to the editor, although only a few from the physicians and nurses were printed.  Hospital staff encountered roadblocks in trying to contact the editorial board to tell the other side of the story. The hospital system’s advertisements implied the hospitals would all close immediately if the sale wasn’t approved.

Public hearings were held the first week of January, nearly a year after the process started.  Each facility was scheduled for a four-hour hearing, although all of them went on much longer. O’Connor’s lasted 11 hours! The Deputy Attorney General who was in charge had us sit on the “support” (right) side or “oppose” (left) side in the auditorium. SEIU sponsored a cadre of people who didn’t work at DCHS but who traveled and spoke against the sale at each hearing. One DCHS nurse wryly remarked, “I recognize most of the people sitting to my right, and I don’t recognize anyone sitting to my left.”

Given the sheer volume of documents as well as testimony to review, the Attorney General requested, and was later granted, a two-week extension. Her decision was announced at 5 pm on Friday, February 20. The decision was “Approve with Conditions” — 300 conditions in all. Some of the key provisions included a requirement to keep each of the facilities open as acute care hospitals for 10 years, keeping all current contracts, including some very unfavorable ones with two Medi-Cal HMOs. Another condition required increasing the amount of charity care provided each year, despite fewer people needing it, at least in theory, because of the Affordable Care Act.

Prime spent two weeks reviewing the conditions, and then announced on March 10 that they were withdrawing from the agreement because the conditions were onerous and would set a bad precedent.

Now what?

To be continued…