State rejects bid for O.C. hospital

State officials Wednesday rejected a rapidly growing Inland Empire hospital chain’s bid to buy one of the largest medical centers in Orange County, saying the sale was not in the best interest of the community.

The sale had been debated in Orange County for months as community activists, doctors, patients and medical experts argued over whether Prime Healthcare Services Inc., a for-profit chain based in Victorville, should be allowed to buy nonprofit Anaheim Memorial Medical Center.

The attorney general’s office declared Wednesday that it was unable to conclude that “the sale is fair to Anaheim, reflects fair market value ... and is consistent with the public interest.” Regulators also questioned the propriety of the bidding process. Last month, a public hearing on the proposed deal drew a crowd of about 200, where dozens of people spoke out against the pending sale.

The decision was a blow to Prime Healthcare and its chairman, Dr. Prem Reddy, a cardiologist who has built the chain of eight hospitals in Southern California with a controversial business model that has involved canceling most insurance contracts and eliminating unprofitable services.

In a statement, Prime Healthcare signaled that it would continue its quest for approval for the proposed purchase of the 217-bed hospital. In February, Anaheim Memorial’s parent company, Huntington Beach-based Memorial Health Services, accepted Prime Healthcare’s bid of about $55 million.

The company said it “respects the decision of the attorney general’s office in denying the sale of Anaheim Memorial Medical Center to PHS based on their inability to conclude that the bidding process was fair to all bidders.

“We are prepared to participate in any new process that the board of directors of Anaheim Memorial Medical Center establishes for the sale of the hospital.”

Gareth Lacy, a spokesman for Atty. Gen. Jerry Brown, said that Wednesday’s decision was rare and that officials could not recall a similar rejection. The office must approve all purchases of nonprofit hospitals by for-profit companies.

In November, Reddy said, he donated $100,000 through his foundation to the Oakland Military Institute, a public charter school Brown founded.

In February, Brown approved the sale of another hospital being purchased by Prime Healthcare. He said later that he saw no conflict and that his deputies had made the decision. Wednesday’s decision was also made by Brown’s deputies, his office said.

Opponents of the purchase were ecstatic.

“We applaud Jerry Brown for taking action to safeguard the interests of patients in Orange County,” said Sal Rosselli, president of SEIU United Healthcare Workers, West.

“Our state’s hospitals shouldn’t be operated to line executives’ profits at the expense of our patients and communities,” he said.

“This can only lead to higher prices for consumers, and with healthcare costs rising rapidly, this isn’t good for Orange County or California.”

Stan Otake, an Orange County healthcare consultant and former chief executive of Bellflower Medical Center, called the decision extraordinary.

“The attorney general’s decision means that Reddy’s business model is now under the microscope,” he said.

Memorial Healthcare Services placed the hospital, which it has owned since 1995, up for sale last year. At the time, the company said it decided to sell the facility because the Anaheim hospital faced severe financial challenges and expensive necessary upgrades.

Several companies expressed interest, although details of those bids are confidential.

On Wednesday, Brown’s office said it had concerns about the bidding process.

Some “bidders failed to fully develop or withdrew a bid, or their bid was rejected by Anaheim, for reasons that are uncertain or disputed,” Chief Deputy Atty. Gen. James M. Humes said. “In addition, the evidence suggests that potential bidders may have been treated differently and did not have equal access to relevant information.”

Memorial officials have said Prime Healthcare Services’ bid was superior to others because the company agreed to spend millions to upgrade the facility and said it would maintain most services at the hospital.

Barry Arbuckle, president and chief executive of Memorial Health Services, said in a statement: “We are surprised and shocked by the attorney general’s decision since this was an open and transparent seven-month process.”

“Prime was chosen because it was the only bidder that was both financially sound and had experience running hospitals,” he said.

Prime Healthcare Services was the subject of a front-page story in The Times on Sunday that explored the debate over its business practices and Reddy.

The company has been sued by several former employees who said they were fired for raising concerns about patient care, and state and federal health officials have found that the company’s hospitals repeatedly have failed to meet minimum safety standards.

The company said its safety record was better than its peers and denied firing employees for raising concerns about its business practices. Its hospitals include Huntington Beach Hospital, Sherman Oaks Hospital and Paradise Valley Hospital near San Diego.

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daniel.costello@latimes.com