Opinion: Will a hedge fund make a better savior for Daughters’ hospitals?

St. Vincent Medical Center is one of six hospitals in the Daughters of Charity Health System chain that a New York hedge fund proposed to recapitalize and manage.

St. Vincent Medical Center is one of six hospitals in the Daughters of Charity Health System chain that a New York hedge fund proposed to recapitalize and manage.

(Los Angeles Times)

When Prime Healthcare Services dropped its bid to rescue the six floundering Daughters of Charity Health System hospitals, pundits raised two questions: Did Atty. Gen. Kamala Harris put the kibosh on the deal by demanding too much from Prime? Or is it just not possible to preserve a struggling hospital chain that caters to the poor in this state?

We’ll get the answers to both questions soon enough.

On Friday, Daughters -- which owns St. Francis and St. Vincent medical centers in Los Angeles and four hospitals in the Bay Area -- announced a deal to turn over management of the chain to a New York City hedge fund, BlueMountain Capital Management, and a Los Angeles-based hospital-management company it sponsors, Integrity Healthcare. According to Daughters, BlueMountain will invest $250 million in the chain to return it to sustainability. If all goes well, the fund will have the option to buy the hospitals in three years.

This should sound familiar, given that the outlines of BlueMountain’s plans are a lot like those of a previous bidder, Blue Wolf Capital Partners -- also a New York City hedge fund. (Evidently, the color of money in that city is no longer green.) Daughters rejected the Blue Wolf bid because, among other reasons, the firm wasn’t proposing to invest much of its own money into the system. Instead, it planned to cover the chain’s sizable debt by cutting costs and selling some of its assets.


Put another way, Blue Wolf seemed to be taking a page out of the private-equity playbook and was trying to acquire the chain with proceeds from its own operations.

BlueMountain has pledged to put up significantly more of its investors’ money than Blue Wolf offered, albeit less than Prime had planned to invest. BlueMountain has also promised to put the chain’s pension plan on more reliable financial footing, although unlike Prime, the firm isn’t offering to assume liability for those benefits. Instead, they will remain the responsibility of the hospital chain.

The main issue for the public, though, isn’t who owns or operates the hospitals or where their funding is coming from. It’s whether the hospitals can continue to serve the people who rely on them. That’s particularly important in South Los Angeles, where St. Francis’ trauma center carries much of the life-saving load.

And that, in a nutshell, is the question the attorney general will have to answer. Because the Daughters hospitals are nonprofits, state law gives Harris the power to block or set conditions for any sale or transfer.

The terms Harris set for Prime’s proposed purchase will not carry over to the new deal, said Kristin Ford, a spokeswoman for Harris, adding that the office will start reviewing BlueMountain’s proposed transaction from scratch as soon as it applies for approval. “We can’t comment on what the outcome is going to be at this point,” she said, “but we’re obviously going to be looking at the same issues in terms of the community’s access to healthcare.”

She added, “That’s why the AG is required to approve these, in order to ensure that communities aren’t harmed in the process of the transaction.”

The main problem for Prime was Harris’ insistence that it maintain an extensive list of services at St. Francis and the chain’s three other acute-care hospitals for 10 years. This demand, Prime argued, all but guaranteed that it wouldn’t be able to turn the chain around.

BlueMountain doesn’t plan to close any of the hospitals, but the announcement Friday didn’t commit the fund to supporting the hospitals or their individual services for any particular length of time. Executives at the fund and the chain declined to elaborate Friday.


It’s conceivable that Harris imposed the detailed 10-year requirement on Prime because she didn’t think a for-profit company (or Prime in particular) could be trusted to keep the hospitals and their costliest services going. But given how much money the chain has been losing in recent years -- $130 million in 2014 alone -- any new owner or management team will have to make significant changes if it hopes to keep the chain afloat.

Those fiscal pressures could lead Harris to demand a similar commitment from BlueMountain and its hospital management team not to shutter any major services for a considerable period of time. And that demand, in turn, could determine whether BlueMountain moves ahead with the deal or follows Prime out the door.

Follow Healey’s intermittent Twitter feed: @jcahealey