What's Behind the Curtain as Kamala Harris Decides Hospital Sale?

Why would a hedge fund, with little healthcare experience, commit $100 million in capital and provide a $150 million loan, with interest, to a dying hospital system?  That's the question Attorney General Kamala Harris needs to answer correctly or thousands of jobs will evaporate and critical healthcare access for many residents will vanish. Maybe that's why she delayed her decision on whether to approve or deny the sale of Daughters of Charity Health System to the hedge fund Blue Mountain Capital Management. Due on Thursday, the choice is now slated for Dec. 3. 

Daughters, which consists of six financially-struggling Catholic hospitals in Southern and Northern California, has been losing millions monthly and, according to the San Francisco Business Times, the deal has to go through before a Dec. 15 deadline for Daughters to repay or recapitalize a $125 million bridge loan.  

The problem, as we've documented previously, is what are Blue Mountain's reasons for wanting the system. Could it be a $1 billion real estate play? Could it be a good way to avoid taxes? Both? The San Jose Mercury News detailed the fact that the deal would allow the hedge fund to run the hospital chain as a nonprofit for up to 15 years before it would have to decide whether to buy Daughters.

"That, according to some industry experts, would permit BlueMountain to take advantage of laws exempting nonprofits from taxes, as well as continue to use tax-exempt bonds to finance its acquisition of a hospital system.
"And, experts say, that could also allow the $21 billion hedge fund to reap millions in tax benefits if the hospital chain sells medical office buildings or other hospital real estate worth hundreds of millions.
"This is amateur night at the opera," said Wanda Jones, a San Francisco-based hospital and health care consultant who has worked in the field for 50 years. "The people running it (Daughters) now are poor, innocent lambs ready to be fleeced."'
We know what a previous buyer, Prime Healthcare, was ready to pay for it. [Full Disclosure: I did public relations for them and left eight months ago.] The deal was estimated at $843 million, which included preserving essential services, saving substantially all jobs and fully funding the pensions of 17,000 current and past workers. But Harris, at the behest of  Service Employees International Union - United Healthcare Workers West, which is at war with Prime, placed unprecedented conditions to approve the deal. Prime's original offer was supported by the CNA, SEIU-UHW members at the facilities and hundreds of healthcare providers and community members. Because of the AG's conditions, Prime pulled out. 
The story gets even more bizarre, as Chris Rauber at the Business Times writes, because an anonymous group released detailed analysis of the proposal, which criticizes the deal. According to Rauber, one document shows that executives connected to Blue Mountain would be paid roughly $15 million each on an annual basis, or "at least 7 1/2 times the market rate." The list of possible culprits apparently trying to kill the deal is long. 
"Potential candidates include labor unions such as SEIU's United Healthcare Workers West local — which played a huge role in sinking an earlier proposed deal between the Los Altos Hills-based Daughters of Charity System and Prime Healthcare Services — Prime Healthcare itself, or a dissatisfied insider or insiders connected with either the Daughters system or Blue Mountain.
"Another intriguing possibility is Blue Wolf Partners, the union-friendly New York private equity firm that SEIU supported in its unsuccessful bid to purchase the Daughters' hospitals, when it was up against SEIU bete noire Prime Healthcare."
In the end, Harris has some tough choices: Pick a hedge fund that could just bleed the system dry or deny the sale, which will most likely force the hospitals into bankruptcy and bring back all the past possible saviors in a court room. And start the whole process all over again. 

Capitol Watchdog is owned and operated by nonprofit Consumer Watchdog. For more information about Consumer Watchdog visit http://www.consumerwatchdog.org