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Prime Wins Conditional Approval for Daughters Takeover

Wednesday, February 25, 2015   (0 Comments)
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From Modern Healthcare
By Beth Kutscher

California Attorney General Kamala Harris gave the green light to Prime Healthcare Services' $843 million takeover of six-hospital Daughters of Charity Health System but added what she described as “strong conditions” to preserve access to community health services.

The conditions require Prime to continue operating four Daughters' facilities as acute-care hospitals with emergency services over the next 10 years. Prime also would have to continue to participate in the state's Medi-Cal program and maintain charity-care benefits at their historical levels. And the hospitals must provide "essential health services," including reproductive healthcare services. 

The conditions also hold Prime to some of the promises it included in the deal terms, such as making $150 million in capital improvements over the next three years and maintaining pension obligations.

Harris had been under pressure to block the deal from numerous elected officials in local and federal office. The influential Service Employees International Union-United Healthcare Workers West also turned up the heat with an advertising blitz.

The SEIU in a statement called Harris' conditions a “victory for protecting community health,” noting for instance that the condition requiring Prime to keep the hospitals open for 10 years is twice what Prime had originally committed to. “If Prime lives up to both the letter and spirit of the conditions placed on this sale, community healthcare and services for low-income families will be protected, but given our history with Prime, that's a big if,” Dave Regan, president of SEIU-UHW, said in the statement.

But in Santa Clara, County Executive Jeff Smith said the sale will be to the detriment of patients, even with the conditions imposed. He pointed to a San Bernardino court ruling this week that held one of Prime's hospitals, Chino Valley Medical Center, in contempt for needlessly admitting patients through the emergency room.

“The conditions don't address the right people getting the right care at the right time,” Smith said. “I don't think the attorney general could have put conditions to stop Prime from playing games.”

The county is now looking at a number of options, including buying land currently owned by Daughters and setting up a competing hospital in the southern part of the county adjacent to where St. Louise Regional Hospital is located.

The transaction is the largest ever reviewed by the California attorney general's office, a news release noted.

The deal, if completed, also will be the largest acquisition to date for Ontario, Calif.-based Prime, a system that has historically grown by adding one or two hospitals at a time.

“Its size is challenging—and I do these things for challenges,” Prime's CEO Dr. Prem Reddy said in an interview last November . “It best fits my mission of saving the hospital, saving lives and saving jobs.”

In addition to approval from the attorney general, the deal requires approval from the Federal Trade Commission, the California Department of Public Health and the Vatican. The parties had been targeting a first quarter closing date.

Daughters chose Prime in October from a field of four undisclosed suitors, one of which was a private equity firm. Daughters' financial advisers understood the public relations and regulatory risks the deal could face, but no other bidder had Prime's financial and operational wherewithal. 

The $843 million deal consists of a $394 million cash consideration and $449 million for the assumption of Daughters' debt. 

Daughters disclosed in an earnings report this month that it is running low on cash and has been warning bondholders since last year that it might not be able to continue operating without becoming insolvent.

It is down to just 12.4 days of cash on hand, according to the earnings report.

During the November interview at Prime's headquarters in Ontario, Calif., Reddy detailed the challenges Daughters is facing. The system is shouldering high salary and benefit costs of the Bay Area, many of its commercial contracts pay less than Medicare and its hospitals treat a high number of low-income patients with even lower paying Medi-Cal, he said.

These factors have affected hospitals throughout the state to various degrees, which may have contributed to a narrow array of options for the struggling Catholic system. 

“None of the major health systems want to come to California,” Reddy said. “They believe the California market is challenging.”

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