Daughters of Charity gets $250 million lifeline from BlueMountain Capital Management

The O'Connor Hospital in San Jose. Photo via Daughters of Charity.

The Daughters of Charity Health System is finally getting a new lifeline with an investment firm that will recapitalize, manage and maybe one day buy the six-hospital network.

California's Daughters of Charity Health System has chosen BlueMountain Capital Management, a $21 billion, 12-year-old hedge fund, to recapitalize its operations. The health system has been struggling financially for several years and recently lost a would-be $850 million takeover by Prime Healthcare Services, after the state attorney general's conditions were deemed impractical.

Now, New York-based BlueMountain will contribute more than $250 million of capital and will sponsor Integrity Healthcare, an organization to manage and operate Daughter's six California hospitals and medical foundation.

Under the deal, the Daughters of Charity Health System board will transfer control of the hospitals to an independent board of directors to direct hospital operations, with Integrity preforming "key management services" and operational support.

Unlike the Prime deal, the transaction will maintain the Daughters of Charity Health System and its hospitals as nonprofit entities, while including an option for BlueMountain to purchase the health system after three years.

"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," said DCHS President and CEO Robert Issai. "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 $250 million in new capital will allow DCHS to repay some of its outstanding obligations, increase operational liquidity and invest in new physical improvements. Issai said. The deal includes full assumption of current collective bargaining agreements with hospital unions, as well as philanthropic foundations.

All pension and retirement plans that are currently "church plans" will become subject to the Employee Retirement Income Security Act of 1974, the federal pension law, a transition required by law, Issai said.

The transaction also must be reviewed and approved by the California Attorney General.

The team of Integrity Healthcare includes Mitch Creem, a hospital finance veteran who's worked at UCLA Health and Beth Israel Deaconess Medical Center in Boston, and Mark Meyers, who worked in hospital operations at Dignity Health during the 2000s.

"The Daughters of Charity consider it an honor to have served the health care needs of the sick and those who are poor in California for 162 years," said Sister Marjory Ann Baez, DCHS board chair. "We owe a great deal of gratitude to all who helped us in this process, including other interested bidders and our advisory team. We are grateful for those who have lived our values and have remained faithful to us through this transition."