Prime acquisition continues for-profit hospital takeover wave

As healthcare’s trade winds blow towards more consolidation, some nonprofit health systems are taking a new business turn, while trying to continue traditional charitable missions.

In California, for-profit Prime Healthcare has emerged as the suitor for the Daughters of Charity Health System, agreeing to acquire the financially struggling Catholic system for an undisclosed sum.

The board of the network, with hospitals from Los Angeles to the Bay Area, received 133 inquiries from potential buyers after first soliciting bids in February, although only three offered to purchase the whole system, including St. Vincent Medical Center (LA’s first hospital) and O'Connor Hospital in San Jose.

[See also: Catholic hospitals grow via mergers and alliances, but so do concerns.]

Prime’s was the best deal in the end, and gives the system’s stakeholders “hope for the future of healthcare in the communities we serve,” said Sister Marjory Ann Baez, Daughters of Charity board chair. “The Daughters of Charity consider it an honor to have served the healthcare needs of the sick and those who are poor in California for 162 years.”

Now the acquisition has to be approved by the Vatican and the state attorney general — and go through public scrutiny.

While the California Nurses Association supports Prime’s takeover of the struggling hospitals, the Service Employees International Union is pledging to launch a media campaign with the aim of convincing California Attorney General Kamala Harris to reject the deal.

The DCHS Seton Medical Center in Daly City, south of San Francisco (Photo via Patricksmercy)

Prime, based in Ontario, Calif., is promising to infuse $150 million in capital improvements at Daughters of Charity facilities, maintain 7,600 jobs at an annual payroll of $750 million, and assume several hundred million in pension guarantees for 17,000 union and non-union active and retired workers.

The SEIU and other critics, however, are still opposed to a for-profit takeover of a not-for-profit hospital system. “Prime’s business model has been bad for patients, bad for taxpayers, and bad for workers,” the SEIU’s website reads. “Prime has a shameful history of buying struggling hospitals, then laying off large numbers of staff and reducing patient services in order to increase profits.”

Attorney General Harris has proven willing to intervene in M&A deals that she concluded were not in the public interest. In 2011, she blocked Prime’s planned acquisition of the Victor Valley Community Hospital, in Victorville — the longtime home of Prime founder and CEO Prem Reddy, MD, and the location of another Prime facility, the Desert Valley Hospital.

Approval from the Vatican, too, may not be a guarantee, given Pope Francis’ speeches railing against “the idolatry of money” and “trickle-down theories” of economic growth.

[See also: Catholic Health East and Trinity Health plan merger.]

Prime already owns four Catholic hospitals, along with 25 others, in California, Kansas, Nevada, New Jersey, Pennsylvania, Rhode Island and Texas, and will carry on their historic missions of serving low-income communities, said Reddy, a cardiologist who immigrated to the U.S. from India in the 1976, built the Desert Valley Hospital in Victorville in 1994 and launched Prime in 2001.

"We are committed to preserving these hospitals and continuing to deliver the highest quality patient care to the communities they serve,” Reddy said.

Since 2005, Prime Healthcare has purchased more than 20 struggling hospitals and invested more than $800 million since 2005 in capital improvements and new equipment — one reason why the Daughters of Charity agreed to the acquisition, said health system president and CEO Robert Issai.

“In selecting candidates to take over the hospitals, our priority was to seek the best buyer who could guide our hospitals into a successful future while honoring the obligations to our associates, retirees and other constituents,” said Issai, who helped create the DCHS system with Catholic Health West back in 2001.

Despite an alliance with Ascension Health through last year and the emergence of Medicaid eligibility expansion and newly-subsidized patients, DCHS was unable to sustain itself and has been losing about $10 million a month for some time, Issai said. In 2013, the system’s hospitals provided almost $160 million in uncompensated care and $22 in traditional charity care.