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Michael Hiltzik

Kamala Harris calls Prime's bluff in hospital deal's collapse

Prime's business model is to cut medical services except for those that turn a profit or are required by law

Is Prime Healthcare bluffing? That's always been the big question about the company's promises to maintain medical services at the six California Catholic medical institutions it proposed to take over in an $843-million deal.

Last month, state Atty. Gen. Kamala Harris forced Prime to show its cards. In approving the sale to Prime of five hospitals and a skilled nursing facility owned by the financially strapped Daughters of Charity chain, she etched some of those promises into stone — for at least 10 years. Now that Prime has exited from the deal with a snarl, we have a definitive answer. Yes, Prime was bluffing.

Long-term observers of the aggressively expansionist and very profitable Ontario-based hospital chain aren't surprised. Prime's business model has been based on cutting medical services except for those that turn a profit or are required by law. There's nothing wrong with that strategy, except when these practices leave residents in medically underserved communities with nowhere else to go for services they need.

That's why public officials must make sure those communities aren't shortchanged. Harris did her job. "The fact that Prime is backing down because the attorney general said, 'Let's make these commitments stick' suggests they had no intention of keeping them," says Anthony Wright, executive director of the Sacramento-based consumer group Health Access.

Although the company was plainly unhappy with some of Harris' proposed terms, her office says that Prime never identified her conditions as "deal-breakers" until after she issued her conditional approval on Feb. 20.

On Tuesday, Prime launched a broadside at Harris, stating that it was pulling out of the merger because her "onerous and unprecedented conditions" would make it impossible for "any buyer … [to] save these hospitals."

The collapse of the deal, which was to include St. Vincent and St. Francis medical centers in Los Angeles County and four facilities in Northern California, comes as the hospital merger wave is building nationwide, in part because the federal Affordable Care Act encourages hospitals to become more efficient.

In most cases, regulators must determine whether merging two or more competing hospitals will result in less community healthcare. This case was unusual: Prime wasn't aiming to acquire competing hospitals, but to turn money-losers into viable institutions.

The deal did, however, raise questions about community access to adequate services. Both Prime and the Daughters of Charity management implied that the deal was the only option for keeping the hospitals out of bankruptcy. Here's what Harris demanded and what Prime had promised:

The law allows Harris to impose conditions, including for maintenance of service, for at least five years after the conversion of a nonprofit to a for-profit institution; she chose to make it 10 years for five of the six Daughters of Charity units. The facilities were all to maintain their Medicaid and Medi-Cal certifications, provide charity care and community benefits at historical levels and invest at least $150 million in capital upgrades. Prime also was required to comply with state and federal laws on debt collection.

There are sound public-interest reasons for these mandates. Most of the facilities provide crucial but not especially profitable services that Prime might otherwise be inclined to cut.

When the firm took over Inglewood's Centinela Hospital in 2007, for instance, it closed seven of its 13 operating rooms, and laid off 13% of its staff. Obstetrics deliveries in 2013 were down nearly 80% from their level in 2006, before Prime took over. Service to traditional Medi-Cal enrollees, for whom government reimbursements are notably low, shrank precipitously to 8,140 patient days from more than 18,000. But from 2006 to 2013, Centinela swung from a nearly $10-million loss to a $38-million profit.

As for the debt-collection mandate, that could be an echo of a 2008 episode. Prime was accused of sending bills to thousands of patients of Kaiser and other health plans — some for as much as $50,000 — who had been treated at Prime emergency rooms or admitted. Their insurers refused to pay what they said were Prime's inflated charges. Prime eventually settled a lawsuit from the state by agreeing to cease the practice and make a $1.2-million donation to community clinics.

This history loomed over the Daughters of Charity deal, not least because Harris had cited Prime's "disturbing business model" in rejecting Prime's proposed takeover of Victor Valley Community Hospital in 2011. Prime tried to forestall questions about its plans for the Daughters of Charity hospitals by placing explicit commitments in the purchase agreement. These included promises to keep the emergency rooms open, run the hospitals as general acute care institutions and ensure "adequate access to Medicare and Medi-Cal patients" for five years at least.

But there were loopholes. As Wright of Health Access pointed out to Harris, Prime conditioned those commitments on "the availability of physicians … community needs, market demand and the financial viability of such services" — all subject to Prime's judgment. Prime made no commitment to serve California's uninsured population or to provide services beyond the bare minimum required by law.

That could mean the elimination of labor and delivery services, cancer treatment, cardiac care and orthopedic surgery, among others. Harris' mandates that such services be continued or expanded for 10 years were among the "onerous and unprecedented conditions" that prompted Prime's withdrawal.

Prime may have thought that it had Harris over a barrel, given the hospital chain's dreadful financial condition. And time may prove it right. "It's a difficult trade-off," says healthcare economist Leemore Dafny of Northwestern University. "Is it better to keep the hospitals open under the conditions that companies like Prime require, or will they go under?"

The issue is even more pressing when a struggling nonprofit serves as a community's medical lifeline. It's not a given that the for-profit model can't serve a low-income community — "in some cases, they might even be more efficient," Dafny says. But it's also relatively rare to see for-profit hospitals offering expensive, unprofitable services.

The difficulty of finding that balance appears to be precisely what's behind the collapse of the Prime-Daughters of Charity deal, and the problem is nowhere near a solution.

Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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