Daughters of Charity lays off staff; State blocks new patients to physician group

The health system is losing around $6 million each month, and so far has been unable to find a buyer after for-profit hospital chain Prime backed out of an $843 million takeover deal.

California’s Daughters of Charity Health System is laying off 4 percent of its workforce as the health system’s failed sale to Prime Healthcare Services has it teetering on the edge of bankruptcy.

Daughters, a network of six hospitals from Los Angeles to the Bay Area, is planning to eliminate 300 jobs from its 7,000 employee workforce. The health system is losing around $6 million monthly, and so far has been unable to find a buyer after for-profit hospital chain Prime backed out of an $843 million takeover deal.

[Also: Prime backs out of Daughters of Charity deal]

The San Francisco Business Times reported that the layoffs will cover 20 management and support positions at the Seton Medical Center in Daly City and Seton Coastside in Moss Beach, 50 jobs across the organization at O’Connor Hospital and Saint Louise Regional Hospital, 44 jobs at St. Vincent Medical Center (Los Angeles’ oldest hospital), and 48 jobs at St. Francis Medical Center in Lynwood.

The health system is also restructuring some of its clinical operations in high-cost, low-volume areas like cardiopulmonary rehabilitation and neonatal intensive care. "The plans include standardizing supplies, increasing physician collaboration, department and service line modifications, as well as a reduction in work force," a spokesperson told Healthcare Finance News.

Meanwhile, the California Department of Managed Care has filed a cease and desist order requiring 10 insurers to stop sending new patients to Daughter’s affiliated physician group. Regulators are concerned that the DCHS Medical Foundation is not meeting minimum solvency standards for partial-risk contracts with HMOs for about 20,000 patients.

Daughters of Charity officials said the workforce reductions could help the health system get to a break-even point, resolve the solvency issues and "better position our hospitals while we search for a new buyer." Whereas the health system  was previously losing $10 million a month last year, that loss has been narrowed down to about $6 million monthly, a spokesperson told Healthcare Finance News. 

There are apparently several possible suitors who could buy all or part of the Daughters system, although they may have to contend with the same requirements — maintaining current levels of service for years at most facilities — that were imposed as conditions for Prime’s takeover by the California Attorney General.

At least some of the layoffs may be the subject of dispute with the unions representing nurses and other staff, opening up a new debate about how the health system went broke in the first place. Daughters is expected to lose $140 million in the 2015 fiscal year.

Back in 2010, Standard & Poor's Ratings Services downgraded Daughter’s $463 million revenue bonds from stable to negative, and according to the union that opposed the Prime takeover, the SEIU United Healthcare Workers West, the problems stem from mismanagement by top leaders like CEO Robert Issai, who took over the company in 2006.

By 2008, the health system was losing millions, and between 2008 and 2015 lost $230 million, with $107 million lost in fiscal year 2013 and the first six months of fiscal year 2014. At the same time, the SEIU-UHW claimed Daughters executives were overpaid given the financial woes. In 2009, Issai earned $1.3 million and by 2013 he was bringing home $3.3 million. Gerald Kozai, the president and CEO of St. Francis Medical Center, saw his pay more than double in those years, from $707,000 to $1.5 million. Likewise, Conway Collis, senior adviser and chief government affairs officer, got a raise from $493,000 to $1.1 million.

"The level of failure shown by Mr. Issai and the leadership of Daughters of Charity, both leading up to the sale and during the sale process, is stunning," said Dave Regan, president of SEIU-UHW. "This is a crisis of Mr. Issai and by Mr. Issai."

Daughters of Charity leaders have said that compensation was fair and that executives have taken on a difficult task in trying to manage a healthcare system with a historic mission of serving low-income patients on government health plans, while at the same time adapting to the many challenges of a changing healthcare economy. The additional money was part of a payout of their retirement plan, which the executives participated in for as long as 12 years, a Daughters spokesperson said. "The plan was frozen in 2013 due to our financial situation."

In 2013, Medicaid comprised 24.5 percent of Daughters’ revenue, Medicare 48 percent and commercial and self-pay patients the rest. Daughters said that it lost $100 million in 2013 treating patients on MediCal, the state’s Medicaid program, which has some of the lowest Medicaid rates in the country, along with $36 million in conventional charity care. The payer mix of more than 70 percent coming from Medicare and Medicaid is well above the national average of 44 percent, and the commercial mix of 21 percent, "is significantly less than the California average hospital average of 32 percent," a spokesperson said.

Twitter: @AnthonyBrino