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California attorney general wants oversight in hospital sale to Santa Clara County

California attorney general wants oversight in hospital sale to Santa Clara County
California Atty. Gen. Xavier Becerra, seen in 2018, is asking a judge to put a hold on the sale of two struggling hospitals in Santa Clara County — a move the county's chief executive says could result in the struggling hospitals having to close. (Rich Pedroncelli / Associated Press)

California Atty. Gen. Xavier Becerra is asking a federal district judge in Los Angeles to place a hold on the sale of two struggling hospitals to Santa Clara County, a request the county says could scuttle the purchase.

Becerra’s action is the latest skirmish in a years-long effort by the state to maintain oversight of six financially beleaguered not-for-profit hospitals. The hospitals, located in both Northern and Southern California, are now in bankruptcy.

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They were originally owned and operated by the Daughters of Charity of St. Vincent de Paul but were plagued by spiraling operating losses.

The state’s involvement began when the Catholic organization decided to sell the nonprofits.

State law gives the attorney general responsibility for reviewing sales of not-for-profit assets, and former Atty. Gen. Kamala Harris imposed conditions on the sale.

Harris, now a U.S. senator and Democratic presidential candidate, required the hospitals to maintain specific services and bed counts and to treat the poor.

The conditions also called for capital improvements and a commitment that the 7,000 jobs at the health facilities would continue, with comparable salaries, wages and job duties.

The hospitals were to make annual reports on compliance to the attorney general.

Verity Health System purchased the hospitals but could not restore them to financial health. The company filed for Chapter 11 bankruptcy in August.

Santa Clara County now wants to buy two of the hospitals — O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy — and a medical center for $235 million. The sale is on schedule to be completed by the end of the month.

Becerra, though, wants the county to assume the conditions negotiated by Harris, albeit with some reworking to make them applicable to a government owner.

Jeff Smith, chief executive of Santa Clara County, said the attorney general has no authority over a sale of a nonprofit hospital to a county.

The bankruptcy judge overseeing the case agreed, and Becerra asked a district judge for an emergency stay.

U.S. District Judge R. Gary Klausner, appointed by President George W. Bush, has asked for written arguments. He is expected to rule this month.

Becerra’s office, which does not object to the sale, points to language in the agreement negotiated by Harris that says the conditions would be binding on future owners.

“We’re going to do everything we must to make sure that the people whose lives depend on those health facilities will be protected,” Becerra said in a statement released by his office.

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Smith said that many of the conditions make no sense for a government buyer and that the county has agreed to all of the clinical conditions, including keeping emergency services.

“The plan is to increase the services,” Smith said.

If Becerra succeeds in putting a hold on the sale, the hospitals could end up closed, and the future of the other four also would be more at risk, Smith said.

The county’s purchase agreement expires March 1, “so if they can’t sell it to us free and clear by March 1, we would have to step out,” Smith said.

When asked whether that would scuttle the deal permanently, Smith said he could not rule anything out.

“We think it is important to keep these hospitals open,” he said.

Becerra put the blame on Santa Clara, saying the county should agree to the conditions.

“Santa Clara County has no reason to put in jeopardy the purchase of these hospitals, just as it has no reason to put in jeopardy the medical services and protections patients rely on and currently receive,” he said.

Anthony Wright, executive director of Health Access California, said attorneys general have been important in the past in overseeing sales of nonprofit hospitals to ensure continued access and services.

“Santa Clara would be a good steward for those two hospitals,” said Wright, whose group advocates for healthcare consumers. “At the same time we do support the attorney general’s authority in imposing conditions.”

Santa Clara County already operates a $1.5-billion healthcare system with a hospital and 10 clinics. But the hospital operates at high capacity, and bed shortages are common.

Two million people live in Santa Clara County, and about a fourth of them have inconsistent health insurance or are underinsured, Smith said.

Strategic Global Management Inc., a California-based for-profit hospital operator, has bid $610 million to take over the other four hospitals: St. Francis Medical Center in Lynwood, St. Vincent Medical Center in Los Angeles, Seton Medical Center in Daly City and Seton Coastside in Moss Beach.

St. Vincent Medical Center in Los Angeles is one of the six former Daughters of Charity hospitals being sold out of bankruptcy by Verity Health System.
St. Vincent Medical Center in Los Angeles is one of the six former Daughters of Charity hospitals being sold out of bankruptcy by Verity Health System. (Brian van der Brug / Los Angeles Times)

Those hospitals are subject to the attorney general’s oversight, although lawyers could try to get the conditions struck down in bankruptcy proceedings.

In a court declaration, Verity CEO Richard G. Adcock said the attorney general’s conditions locked the hospitals “into a failing business model, dictating both minute details of business operations” and prohibiting change.

For example, the conditions required Verity to enter into contracts with certain entities, he said.

“Because those entities were well aware of the AG’s requirement that Verity contract with them or be in default, Verity had no bargaining power with those entities or payors,” Adcock said.

Integrity Healthcare took over management of Verity’s six struggling hospitals in 2015.

NantWorks, a Culver City company controlled by Dr. Patrick Soon-Shiong, purchased Integrity in 2017, and the company loaned Verity $148 million, according to court records.

Many healthcare advocates were initially thrilled that the Southern California medical entrepreneur was taking charge, but the cash influx and new management did not stop the losses. The delight turned to anger when the hospitals declared bankruptcy.

Integrity no longer has a contract with the hospitals. Soon-Shiong, a physician and inventor who owns the Los Angeles Times, is a creditor in the bankruptcy.

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