County offers $235M for local hospitals

County supes approve 'intent to purchase' resolution Oct. 9

Saint Louise Regional Hospital

Santa Clara County’s $235 million bid to buy Saint Louise Regional Hospital and O’Connor Hospital, revealed last week, could be the first of many bids for the hospitals owned by Verity Health System, Verity CEO Rich Adcock said in an interview Monday, Oct. 8.

Adcock said the county’s offer mailed to the El Segundo nonprofit in early August would serve as a “stalking horse bid” for the two Santa Clara County hospitals, setting the initial floor price for the two hospitals at a public auction of all the local assets that the county bid on.

Adcock said Verity asked the U.S. Bankruptcy Court this month to schedule the auction for the first two weeks of December.

He said he expected other purchase offers in the weeks ahead, but declined to identify the other suitors, or to say which hospitals are involved.
“There has been robust interest” in the Verity hospitals, he said.
He said Verity has had “formal conversations with over 125 different people for all or parts of the system.”

On Oct. 9, the Santa Clara County Board of Supervisors voted 5-0 on a series of actions to support the county’s effort to acquire the hospitals. Specifically, the board approved a resolution of intent to purchase the Gilroy and San Jose facilities; a resolution delegating the county executive to negotiate the transaction; and the addition of staff positions in the county’s hospital system relating to the purchase.

In late August, Verity Health System filed for bankruptcy protection under Chapter 11 to “reorganize and facilitate an orderly and efficient sale process.”

That means that the bankruptcy court must manage the sales process and approve any sale offer.

County Executive Jeff Smith said the county’s offer, sent nearly a month before Verity announced the Chapter 11 bankruptcy petition, had included with the purchase offer a list of terms and conditions offered for the two acute care hospitals. One condition would be that the county would make few changes in hospital and medical services. The dollar amount of the offer was not revealed until Verity’s Oct.2 announcement.

The acquisition would increase the number of county-run hospital beds by more than 80 percent, adding the 93 beds at Saint Louise and O’Connor’s 358 beds to the 563-bed Valley Medical Center, according to the county. The proposal also would include the De Paul Health Center in Morgan Hill.
The bankruptcy filing followed what Verity described as “a diligent process of evaluating all options of the table in partnership with the board of directors and legal and financial expert counsel who assessed the organization’s dire financial situation.”

The bankruptcy filing came 13 months after billionaire entrepreneur physician Patrick Soon-Shiong, bought a majority stake in its management company, Integrity Health Care, with a promise to revitalize the health system.

Verity Health System had announced in July that it was “exploring strategic options to alleviate financial and operational pressures on its six hospitals.”
This prompted Smith to move quickly with the county’s offer.

The previous management of the six hospitals and their related health service centers had in 18 years accrued debt totaling over $1 billion, according to Verity.

Verity Health secured debtor-in-possession financing of up to $185 million. This additional cash will enable continued operations without interruption to patient care, employees and vendors throughout the Chapter 11 process.
Adcock said in an interview that Verity’s goal is to “ensure the long-term success” and “high-quality patient care of the hospitals.”

Rich Adcock

Verity Health has requested court approval of an “orderly auction process” where other potential buyers can submit qualified competing bids against Santa Clara County’s bid.

The winning bid, as selected by the Verity Health Board of Directors, in consultation with its professional legal and financial advisors, is subject to the approval of the bankruptcy court, and, depending on the buyer, the California attorney general.

The county currently operates one acute care hospital, Valley Medical Center, plus 10 healthcare clinics around the county.
The sales process kicked off with the announcement of the “asset purchase agreement” with the County of Santa Clara.

“O’Connor and Saint Louise are two critically important institutions in the communities they serve, and the county has shown great leadership to ensure both can continue their mission of providing high-quality care to patients well into the future,” said Verity’s Adcock in a statement. “As we advance this sale process through the court, we are continuing to work with other potential buyers for Verity’s remaining assets, so they can be relieved from the financial burdens that impede their service to the community, and they can continue serving patients in their respective communities.”
The county is seeking to acquire substantially all assets at both hospitals for a purchase price of $235 million, although that price is potentially subject to certain adjustments at closing.

In the agreement, the county has committed to operating both hospitals “with a focus on quality, safety and patient satisfaction, including maintaining participation with public and private payors.”

In addition, the county commits to instituting its charity care policies, and continuing to provide care through community-based health programs.
Adcock told Reuters that Verity has been losing $175 million per year on cash-flow basis, and operated at a loss for at least the past three years. Politico quoted Verity as saying it had planned to break even in the 12 months ended June 2018, but the system reported its operating performance was $116 million below its budget expectations.

It was also reported that prior to filing for bankruptcy, Verity stopped all capital improvement projects, and needs to spend millions in updates to meet California’s seismic standards by 2019.

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