UPDATED: Prime backs out of Daughters of Charity deal

Daughters of Charity's O'Connor Hospital.

Prime Healthcare Services is backing out of its proposed $843 million acquisition of the Daughters of Charity Health System, the operator of six hospitals from Los Angeles to the Bay Area, over conditions placed on the deal by the state's attorney general. The move will likely lead cash-strapped Daughters to file for bankruptcy.

“Unfortunately, the conditions placed on the sale by the California Attorney General are so burdensome and restrictive that it would be impossible for Prime Healthcare - or any buyer - to make the changes needed to operate and save these hospitals,” said Prime's founder Prem Reddy in a statement issued after news of the deal's demise broke.

California Attorney General Kamala Harris recently approved the for-profit takeover, but with more than 300 conditions that included keeping all the hospitals open for 10 years, participating in Medicaid and providing reproductive services that Catholic Church-affiliated hospitals typically do not offer.

“Maintaining all services for 10 years regardless of whether the services are needed or ’essential‘ for the communities served is unprecedented and untenable," said Troy Schell, general counsel for Prime. "In essence, the Attorney General is telling Prime Healthcare to operate the hospitals exactly as DCHS has and expect different results.”

Daughters said it has been losing millions on its six hospitals: Seton Medical Center in Daly City; Seton Coastside in Moss Beach; O’Connor Hospital in San Jose; Saint Louise Regional Hospital in Gilroy; St. Francis Medical Center in Lynwood; and St. Vincent Medical Center in Los Angeles.

"I am disappointed to share the news that late yesterday afternoon, Prime Healthcare informed us that it has decided not to purchase the DCHS hospitals," Daughters of Charity CEO Robert Issai wrote to employees in an email obtained by the San Jose Mercury News, which broke the story.

"We have done everything possible to secure a different outcome,'' Issai wrote. "We've spent hours meeting with Prime and also meeting with the Attorney General's Office to come to an agreement on a path forward for DCHS. Unfortunately, Prime contends that the conditions placed on the sale by the attorney general justify their decision not to move forward and will have negative repercussions for its future transactions elsewhere in the United States."

[Earlier: Prime mulling conditions of the deal]

Throughout the year long saga, as the Service Employees International Union waged a public campaign against the sale to Prime, Daughters of Charity leaders maintained that the system was losing some $10 million a month and would have to file Chapter 11 bankruptcy and close facilities without an organizational savior.

But now that Prime is declining to move forward, it seems that Daughters of Charity may end up filing bankruptcy after all.

"We remain committed to finding the best solution for our patients, communities we serve, physicians, employees, retirees and creditors," Daughters said in a statement issued Tuesday night. "We recognize that time is of the essence as we navigate these challenging financial obstacles. Over the coming days, we have difficult decisions to make and we will communicate those decisions after we have a chance to consult with our advisors, boards of directors and the Daughters of Charity."

Prime, the nation’s fastest growing for-profit health systems, proposed acquiring Daughters of Charity System last fall for $843 million in cash, plus the assumption of uncertain debt and at least $300 million in pension liability for some 17,000 current and former employees. Daughters of Charity will still collect a termination fee of $5 million.

Twitter: @AnthonyBrino