More on Mergers & Acquisitions

New Daughters of Charity deal could face same AG hurdle over terms

BlueMountain’s operation and potential ownership of Daughters of Charity guarantees that the hospitals will stay open for a minimum five years.

O'Connor Hospital, part of Daughter's of Charity Health System.O'Connor Hospital, part of Daughter's of Charity Health System.

Less than a year after Prime Healthcare Services declined to acquire Daughters of Charity Health System over concerns about mandates imposed by California's Attorney General, the six hospital Catholic system is hoping to get another, slightly different management and ownership deal approved.

The trouble is, one key provision -- keeping the hospitals open for a minimum of 5 years -- is the same as it was under Prime, and may again surface as an issue where regulators intervene.

In July, Daughters of Charity selected BlueMountain Capital Management, a $21 billion New York hedge fund, to recapitalize, manage and maybe one day buy the six-hospital network. Under the terms, BlueMountain will contribute more than $250 million of capital and its subsidiary Integrity Healthcare will manage and operate Daughter's six hospitals and medical foundation. The Daughters of Charity Health System and its hospitals will remain nonprofit entities, and at after three years BlueMountain would have the option to purchase the health system.

[Also: Daughters of Charity gets $250 million lifeline from BlueMountain Capital Management]

The deal is currently under review by Attorney General Kamala Harris, who added 300 conditions to the $843 million Prime acquisition, including included keeping all the hospitals open for 10 years -- one of several mandates that Prime leaders felt were unworkable. Agreeing to keep the hospitals running as acute care facilities for 10 years posed too much financial risk, given the growing emphasis on outpatient treatment, Prime concluded.

But it turns out the terms of BlueMountain's operation and potential ownership of Daughters of Charity guarantees that the hospitals will stay open for a minimum five years, as the San Jose Mercury News first reported.

That detail raises a series of questions: Will Harris, whose office approves all sales of nonprofit hospitals, also require BlueMountain to operate the Daughters of Charity facilities as general acute care hospitals? And will BlueMountain be open to that condition?

So far, neither Harris nor Daughters nor BlueMountain have commented on the issue.

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

The Daughters of Charity Health System traces its roots back to 1856, when the Daughters of Charity of St. Vincent de Paul opened the first hospital in Los Angeles. Today, the health system spans Southern and Northern California, with two L.A. hospitals, the O'Connor Hospital in San Jose, Saint Louise Regional in Gilroy, Seton Medical Center in Daly City and Seton Coastside in Moss Beach.

For the better part of this century, though, Daughters has been struggling to sustain its historic mission of serving all patients, regardless of income, especially those covered by Medicaid and Medicare. At one point, this year and last, Daughters was losing $10 million a month.

Part of the struggle, too, is that Daughters ideally needs be acquired as a whole system of six hospitals and physicians group--including $400 million in tax-exempt bond and related debt, plus some $300 million in estimated pension obligations.

With a $250 million investment,  sound management from BlueMountain's Integrity Healthcare and a rebranding as Verity Health System, Daughters could climb out of the red, the organization's leaders argue. The agreement includes full assumption of current collective bargaining agreements with hospital unions, as well as philanthropic foundations.

Twitter: @AnthonyBrino