Fate of Bay Area hospitals in doubt as hedge fund deal to save them sours

Santa Clara County interested in buying O’Connor and St. Louise

Santa Clara County is hoping to buy a pair of struggling hospitals that have long served as a safety net for the poor, less than three years after they were sold to a New York hedge fund in a state-approved deal to ensure they remained open.

County Executive Jeff Smith said the county sees a renewed opportunity to acquire O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy as public hospitals to extend its reach and help relieve overcrowding at the county-run Santa Clara Valley Medical Center in San Jose.

“We’re watching carefully,” Smith said. “We’ve told them that we’re interested and asked them to let us know what their process is going to be.”

The county’s interest comes after Verity Health System, the Redwood City-based secular nonprofit that now runs the hospitals, announced the “potential sale of some or all” of the hospitals among options “to alleviate financial and operational pressures.”

It was less than three years ago that the Catholic Daughters of Charity, which provided medical care for California’s poor since the Gold Rush, announced the largest nonprofit hospital transaction in state history with the $260 million sale of six hospitals to a hedge fund.

The deal, blessed by a state attorney general under conditions that included facility improvements and no cuts to charity care, jobs or pay, was welcomed with guarded optimism: As hospitals struggle nationwide, a half dozen in the Bay Area and Los Angeles would stay open.

But already, the deal has soured. Verity saw operating losses of $55.8 million in the nine months that ended March 31.

The hospitals in San Jose, Gilroy, Daly City, Half Moon Bay and Los Angeles provide 1,650 inpatient beds, emergency rooms, a trauma center and a host of medical specialties, and employ 7,000.

But insurers are pushing to cut hospital stays to keep a lid on costs and premiums, shrinking hospital business. At the same time, demand for housing and commercial space has soared with California’s surging economy, raising the possibility that some of the hospitals could be turned into homes or offices.

Who would buy the hospitals, and what other alternatives are under consideration, is unclear. No hospital chains have announced interest.

“I don’t know of a system in California that would pick them up,” said Wanda J. Jones, a veteran health system planner and writer in San Francisco who has followed the deal.

San Mateo County officials could not say what might happen to Seton Medical Center in Daly City and Seton Coastside in Moss Beach, near Half Moon Bay.

“The potential closure of the hospitals and the impact on the residents they serve is very important to the county,” said Michelle Durand, spokeswoman for the San Mateo County county manager’s office. “However, we currently have made no decisions and also cannot speculate as to the potential interest of private hospital operators.”

But Santa Clara County officials have been vocal about their interest.

Daughters of Charity Health System had declined to sell the two hospitals to Santa Clara County because it wanted to sell all the hospitals as a package. After for-profit Prime Healthcare Services walked away from a potential $843 million deal to buy the six hospitals in 2015, calling then-Attorney General Kamala Harris’ conditions too burdensome, Daughters sold them to hedge fund BlueMountain Capital Management under similar terms.

A year ago, a Culver City company owned by billionaire doctor and entrepreneur Patrick Soon-Shiong, who also owns the Los Angeles Times and San Diego Union-Tribune, bought the hedge fund’s Integrity Healthcare division that owns Verity.

Smith said that in the current landscape for hospitals, O’Connor and St. Louise would always be money-losers for a private owner, but could pencil out as public hospitals. That’s because public hospitals get reimbursed by Medi-Cal, the state’s coverage for the poor, at higher rates than private hospitals, which rely on a mix of insured patients to cover charity care costs. O’Connor and St. Louise, he said, are in areas where they won’t attract enough insured patients.

For the county, acquiring O’Connor and St. Louise would make sense, Smith said. The county’s Santa Clara Valley Medical Center in San Jose is “filled to the brim with patients, and we have great need for services,” said René G. Santiago, deputy county executive and director of the Santa Clara Valley Health and Hospital System.

Some of the money to buy the hospitals could come from funds set aside for VMC renovation, Smith said.

But the six hospitals share debt and employee retirement obligations, which is what made Daughters of Charity unwilling to sell them piecemeal, Smith said.

There’s also the possibility that potential buyers may see greater use for some of the hospital properties for housing or offices. Smith said that while that wouldn’t satisfy the attorney general’s approval conditions, a seller could argue those terms were unworkable and seek a new deal.

Jones said the attorney general’s conditions made it impossible for the hospitals to survive in today’s environment, calling terms like no job cuts “insane.”

“Kamala Harris was so overboard in her requirement for what she wanted to happen,” Jones said. “You don’t put a condition like that on a buyer.”

The office of the attorney general, now under Democrat Xavier Becerra, had no comment.

Sean Wherley, a spokesman for SEIU-United Healthcare Workers West, which represents the hospitals workers, said when the possible sale was announced earlier this month that they were “disappointed.”

He said the union expects “Verity and any new buyer to be held accountable to keep hospitals open, maintain vital services, fund pension obligations, protect jobs and honor our collective bargaining agreements.”