Opinion: Prime Healthcare: villain or victim in Daughters of Charity story?

Let the finger-pointing begin!

Prime Healthcare Services dropped its bid to rescue the six Daughters of Charity Health System hospitals in California this week, citing the lengthy mandates Atty. Gen. Kamala Harris placed on Prime in approving the deal. “The conditions placed on the sale by the California attorney general are so burdensome and restrictive that it would be impossible for Prime Healthcare -- or any buyer -- to make the changes needed to operate and save these hospitals,” Prime’s founder and chairman, Dr. Prem Reddy, stated Tuesday.

Harris responded by accusing Prime of acquiescing to the conditions during negotiations with her office, then turning around and rejecting them. “By walking away, Prime is confirming many of the concerns heard at multiple community meetings that the continuity of vital healthcare services in these communities is not its priority,” she intoned.

Ouch.

Whoever is to blame, the result is potentially disastrous for the low-income communities that have come to depend on the nonprofit Daughters of Charity hospitals, including St. Francis and St. Vincent in Los Angeles County. The chain is losing about $10 million a month and seems headed for bankruptcy unless another buyer emerges.

Bankruptcy wouldn’t necessarily shutter the hospitals, but it’s hard to imagine how they could emerge from the process with their most costly services intact. The loss of the trauma unit at St. Francis would be particularly bad for Los Angeles County, Health Services Director Mitchell Katz wrote in a report to the supervisors last year, because the hospital had become “a cornerstone” of the county’s trauma network, handling more than 2,100 cases annually, including the highest rate of gunshot and stab wounds in the county.

“The withdrawal of [St. Francis] as a trauma center within the Los County system would be a significant loss to the community and would pose a substantial stress to surrounding trauma centers,” he warned.

In fact, the hospitals may have to start cutting services in short order just to stay afloat.

The Daughters of Charity put the six hospitals up for bid after another potential rescuer, Ascension Health, backed out of a planned merger. The chain concluded that its pension obligations required it to sell all the hospitals to a single buyer, but at the end of the bidding process Prime was the only company still bidding to buy the entire system. One other bidder, a private equity company called Blue Wolf Capital, proposed that the Daughters of Charity spin off the six hospitals, but Blue Wolf would commit only to running the hospitals for three years, with an option to buy them if they generated enough cash.

The leadership at Daughters dismissed Blue Wolf’s bid and embraced Prime, a for-profit company based in Ontario that has specialized in pulling troubled hospitals into the black. But the deal came under immediate attack from Prime’s critics, who argued that it wasn’t committed to preserving the hospitals’ safety-net functions. They also blasted the company’s practice of canceling contracts with health plans and billing aggressively for its services.

These ranks included numerous Democratic elected officials and the Service Employees International Union, which backed Blue Wolf’s bid. They urged Harris either to reject Prime’s bid or to impose a laundry list of conditions to ensure that Prime, a for-profit company, keeps all the hospitals’ services intact.

Harris went the latter route, approving the deal with scores of requirements. Which brings us back to the finger-pointing.

“Prime Healthcare would be required to operate the hospitals as they are now, despite the fact that they are losing more than $10 million a month,” the company complained. “[The Daughters chain] would lose nearly $3 billion over the 10 years the conditions are in effect. Conditions dictate operations far beyond the scope of what is typical, including service offerings, financial reporting, governance, staffing levels, on-call coverage, seismic compliance and insurance contracts.”

“Maintaining all services for 10 years regardless of whether the services are needed or ‘essential’ for the communities served is unprecedented and untenable,” Troy Schell, Prime’s general counsel, said in a statement. “In essence, the attorney general is telling Prime Healthcare to operate the hospitals exactly as [Daughters of Charity] has and expect different results.”

Retorted Harris, “In December of last year, the independent healthcare consultants [who reviewed the deal for Harris] recommended the 10-year conditions, and Prime was notified at that time. Now, after 2 1/2 months, Prime is saying these conditions are a deal-breaker.”

In truth, Prime and Harris’ office negotiated for weeks before she issued her conditional approval in February. According to a letter supplied by Harris’ office, Prime identified a handful of proposed conditions that it could not abide, and Harris removed them all. But Prime never told Harris definitively that it couldn’t commit to operating the four acute-care hospitals in the Daughters’ chain as acute-care hospitals for 10 years, the letter says.

Prime countered that it has “repeatedly stated” its concerns about the 10-year requirement and the more than 300 proposed conditions “in extensive discussions with the attorney general’s staff and in letters to the attorney general prior to her decision.” The hospital cited a letter of its own to Harris’ office in early February that said, “While Prime Healthcare has committed to a significant capital investment and to the very hard work of saving the six safety-net hospitals, it would be impossible to do so with crippling conditions and mandates that require the continuation of the failing and unsustainable DCHS operating model.”

Harris’ 10-year requirement also would have set a precedent that could have made it harder for Prime to continue acquiring troubled hospitals around the country, which has been a key part of its growth. It also feared that the mandate to keep its contracts with Medi-Cal managed care plans robbed it of the negotiating leverage it needed to win better terms from those insurers, perpetuating one of the Daughters’ biggest problems.

There’s no question that Harris placed much more extensive mandates on Prime than it had agreed to when it signed the deal with the Daughters of Charity. But Harris didn’t spin those requirements out of whole cloth; they reflected the independent consultants’ recommendations, which in turn were based on the needs of the communities the hospitals serve.

Though some Prime critics were eager to kill the deal, that clearly wasn’t Harris’ goal in drafting the conditions, said Conway Collis, president of Grace, a nonprofit anti-poverty group sponsored by the Daughters of Charity. “What it was was an effort to address the issue that these are safety-net hospitals and they need to be operated as safety-net hospitals,” Collis said.

Regardless, whether they can continue to be safety-net hospitals with a full array of services depends on what happens now. Robert Issai, chief executive of the Daughters’ health system, said he’s looking into all the options, with or without bankruptcy, but it’s too early to tell where the chain goes next.

One thing that isn’t going to happen, Collis said, is Harris applying less stringent terms to any other buyer of the Daughters’ chain. The best a buyer could hope for, he said, is that the attorney general might provide some relief down the road.

Follow Healey’s intermittent Twitter feed: @jcahealey