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Deal could save Seton, O’Connor hospitals

A New York-based private investment firm has agreed to take over a Los Altos Hills-based hospital chain with four locations in the Bay Area, hospital officials announced Friday.

BlueMountain Capital Management plans to provide $250 million to Daughters of Charity Health System’s six hospitals and medical foundation, which will continue to operate as nonprofits.

The health system, which formed in 2002, provides free or low-cost healthcare services to the needy at the 125-year-old O’Connor Hospital in San Jose, Saint Louise Regional Hospital in Gilroy, Seton Medical Center in Daly City and Seton Coastside in Moss Beach.

It also has hospitals in Southern California at St. Francis Medical Center in Lynwood and St. Vincent Medical Center in Los Angeles.

The transaction still needs to be reviewed and approved by the state Attorney General Kamala Harris before it is finalized.

Daughters of Charity started looking for a buyer last year because it was losing $10 million a month.

The investment firm is also sponsoring Integrity Healthcare, an entity that it owns, to take over management and daily operations of the health system and its hospitals.

As part of the deal, the health system’s board of directors would have to turn over its power to an independent board of directors.

BlueMountain will have the option of buying the health system after three years.

The board of directors for the health system and at each hospital unanimously approved the transaction to BlueMountain, health system officials said.

Robert Issai, president and CEO of the health system, said in a statement, “In evaluating candidates to manage the hospitals, our priority was to seek the strongest bidder who could provide the greatest long-term financial stability while honoring the obligations to our associates, physicians, retirees and other constituents:

“The transaction represents an extremely attractive opportunity for DCHS, allowing it to continue its operations and mission as a non-profit system with the support and backing of strong and well-qualified partner organizations. We are extremely excited by today’s announcement.”

The health system will seek to keep the same pension benefits former and current hospital workers, Issai said.

Pension and retirement plans classified as “church plans” would be subject to the Employee Retirement Income Security Act of 1974, health system officials said.

In a statement, BlueMountain said:

“We are excited to provide substantial expertise and financial capital to DCHS, positioning the hospitals to meet the evolving health care needs of the region. We look forward to working with the DCHS family of physicians, employees and all stakeholders to strengthen the hospitals for the betterment of these communities.”

Prime Healthcare Services, a hospital chain based in Ontario, a city in San Bernardino County, had agreed to purchase the health system for $843 million last October. However, the company withdrew its offer in March citing “burdensome and restrictive” conditions imposed by state Attorney General Kamala Harris, which included maintaining most of the hospitals’ current services for 10 years.

Under state law, Harris had to approve the sale because the transaction was from a non-profit corporation to a for-profit company.

SEIU-United Health Care Workers West, a union representing 2,600 medical workers in the charity’s six hospitals, opposed the former sale to Prime Healthcare because they feared the chain would impose layoffs, reduce services and make other reductions.

The union was supportive of a bid from Blue Wolf Capital, a private equity firm based in New York, which offered to provide $300 million in capital improvements, health system officials said.

But health system officials said Blue Wolf’s offer was not a real bid but an annual management contract, in which its executives would run the hospitals for $24 million a year. The equity firm did not guarantee to take over employee pension liabilities, while Prime did, officials said.

In a statement Friday union president Dave Regan said, “We had a much stronger grasp of the Blue Wolf bid and were confident it protected critical health services for local communities, the essence of Daughters of Charity’s mission for more than 100 years. … We are anxious to see the details of the Blue Mountain proposal so we can understand what commitments they make to ensure the community receives the best possible healthcare.”

The California Nurses Association, which is based in Oakland and represents about 1,800 nurses across the six hospitals, said it is calling on the health system and BlueMountain:

 … “to keep open all the hospitals, retain current patient services, and honor the collective bargaining rights and current standards for DCHS employees.”

Association co-president Malinda Markowitz said in a statement:

“We encourage the Attorney General to conduct a rigorous review to assure preservation of hospital and patient care services for the largely underserved communities that have long depended on Daughters of Charity hospitals for the critical care they need.”

Santa Clara County offered to purchase the San Jose and Gilroy hospitals last year but health system officials said the bid did not assume pension liabilities that would have forced the nonprofit to file for bankruptcy before the sale.

Seton Medical Center in Daly City, which has been running for more than 100 years, employs about 1,200 city residents, Daly City City Councilman David Canepa said:

“If this deal did not happen there was a high probability that Seton Medical Center would’ve closed.”

Canepa urged Harris to approve the transaction as soon as possible.

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