For-profit operators will soon have to satisfy more than just the sellers when buying or leasing a not-for-profit hospital in California.
Gov. Pete Wilson last week signed legislation that gives the California attorney general power to scrutinize-and even reject-such deals. The scope of the law, which becomes effective Jan. 1, also extends to joint ventures and conversions by hospitals to for-profit status.
As part of the review process for such transactions, the attorney general must consider:
Whether the deal is fair to the not-for-profit and the sales price reflects a fair market value.
The effect on the healthcare resources and services in the community.
Whether the future use of charitable assets will be consistent with their original purpose.
Whether the deal is in the best interest of the public.
Prior to closing the transaction, at least one public hearing must be held in the county where the hospital is located. The not-for-profit organization would have to reimburse the state for any costs it incurred during the review.
The bill had bipartisan support, having been authored by Assemblyman Phillip Isenberg (D-Sacramento) and sponsored by state Attorney General Dan Lungren, a Republican.
While some healthcare business experts believed the new law would not affect the fast pace of dealmaking among California's 600 or so hospitals, others thought it could be slowed down.
"It gives one man the replacement power of a nonprofit's board of directors. It could have a chilling effect," said Wanda Jones, president of the New Century Healthcare Institute, a San Francisco-based consulting firm.
"I don't know whether a `chilling effect' is the word, but it will raise the bar in terms of the things that are going to be necessary to do these types of conversions," said Andy Demetriou, a healthcare attorney with the law firm of Jones, Day, Reavis & Pogue in Los Angeles. "My sense is these are the kinds of standards people are going to be adjusting to anyway....I think their attitude is, `Tell us what the rules are, and we will play the game,"' he said.
The purchase of not-for-profits by for-profit operators has been increasing in the state in recent years. Not-for-profits have found themselves pinched financially, while the battle for market share among for-profits has heated up. Late last year, Columbia/HCA Healthcare Corp., for instance, purchased the Good Samaritan Health System in San Jose, and a 50% interest in Sharp HealthCare's network of hospitals in the San Diego area. The Sharp deal is still pending regulatory approval.
OrNda HealthCorp recently bought out Centinela Hospital Medical Center in Inglewood, just south of Los Angeles.
However, backers of the legislation said it had been drafted more out of a concern over a spate of for-profit conversions among health plans, particularly Blue Cross of California's recent $3 billion effort to become principal shareholder in WellPoint Health Networks.
"That piqued everyone's interest and made it an issue for people to pay attention to," said Rick Battson, spokesman for Assemblyman Isenberg. "We wanted to get to the hospitals next."
Battson added that the legislation could have come in handy in the Good Samaritan transaction in San Jose. Lungren had initially opened an investigation into the $165 million purchase of the four-hospital system, primarily because Good Samaritan had reported enormous losses just prior to the deal, casting doubt on what a fair price would be. However, most financial analysts agreed the price was fair-perhaps even overgenerous-and may have reflected Columbia's eagerness to gain a toehold in Northern California.
According to published reports, Good Samaritan netted $56 million from the purchase-virtually all of which is going toward ongoing charitable commitments.
And whether or not the law is in existence, Jones, Day's Demetriou said Lungren's office already has been bird-dogging such deals.
"This is more of a codification of an ongoing process than a new thing for sellers to face," he said.
New Century's Jones speculated that Lungren's sponsorship of the legislation may be borne more out of political posturing than concern for the community. The bill included such disparate backers as the California Medical Association, the California Healthcare Association, the California Nurses Association and several lobbying groups for senior citizens. Lungren is expected by many to run for governor in 1998, and Jones said he might be looking to marshal support-a contention Battson and others denied.