Shockwaves from California Attorney General Dan Lungren's decision last month to hold up a venture between San Diego-based Sharp HealthCare and Columbia/HCA Healthcare Corp. have rocked a similar deal between Columbia and Riverside (Calif.) Community Hospital.
Attorneys for 369-bed Riverside Community said last week they would seek to modify the 50-50 venture with Columbia. Mollifying Lungren's legal concerns, however, could mean selling for-profit Columbia a 75% stake in not-for-profit Riverside, according to hospital attorney George Reyes.
"It's a little sad, because the original intent of such a deal is to maintain community control," Reyes said. Still, it appears Riverside-and perhaps many other hospitals in California seeking joint ventures-have little choice but to go along.
"There may be less of a commitment to the community than what they would like to have, but in the long-term they can't go it alone," said Ronald Spoltore, senior vice president of Healthcare Financial Advisors, a Rancho Mirage-based consulting firm.
Riverside and Columbia signed a letter of intent to enter a joint venture last May and have not yet submitted the deal to Lungren for approval. However, Riverside officials decided to modify the deal after receiving a copy of a letter from Lungren's office outlining its objections to the Columbia/Sharp joint venture. Sharp agreed late last month to halt the deal pending modifications.
"We were a little fearful when we got this letter, and wanted to know how it applied to us," said Reyes, who added that he and other Riverside officials met with the attorney general's representatives on Nov. 20. "We were told it applied in terms of how our deal is structured."
Unlike the Sharp deal, which Lungren's office thought would undermine public interest primarily through the undervaluation of Sharp's assets, state officials are concerned with how Riverside's charitable trust would be structured. According to Reyes, the trust would receive some cash as part of the proceeds from the venture, but it would also receive a large interest in the hospital itself.
"With the projected ratio of cash in the investment, (Lungren's office) thought it may be imprudent to have that large an investment in a venture without a controlling interest and not much in the way of a guaranteed return," Reyes said. "They were concerned about the lack of diversification."
Reyes also observed that the hospital is not in the best financial shape, having operated in the red in some recent months. "It's not really making any money and is getting squeezed by third-party payers," he said.
"We have an interest in making sure that proceeds for charitable purposes are properly administered," observed Deputy Attorney General Jim Schwartz, who authored the Sharp letter. He declined further comment until his office had reviewed the Riverside/Columbia deal.
By selling a larger interest to Columbia, Reyes believes the joint venture would generate more cash for the trust, creating other investment opportunities.
"Less of the portfolio (would be) in an illiquid, nonmarketable investment, and that's more prudent," he said.
Another meeting is scheduled with attorney general's representatives this week. Columbia officials will be present. "Columbia is all ears. They want to hear what the attorney general has to say," Reyes said.
Richard Bracken, president of Columbia's Pacific division, said: "We are continuing to go forward with the deal, and we are interested in what the attorney general has to say. Hopefully, we can reach a deal that's acceptable to all the parties." He declined further comment.
Still, there are many potential sticking points. Reyes noted that Riverside went through great pains to negotiate certain reserve powers under the 50-50 scenario. It would want to keep those powers even if it sold a majority stake. Among them would be joint governance through a single board of directors, half chosen by Columbia and half community representatives chosen by a limited liability company formed by Riverside. While Columbia would retain control over day-to-day operations, the community members would retain veto power in selecting a chief executive and chairman and approve the annual operating budget and any changes in the hospital's services or mission.
Another problem might be the rights surrounding the "put," or price window in which Riverside would have the right to sell Columbia the remainder of its interest. In such deals the number is typically set at five to six times operating income. Reyes said Lungren's office has already voiced objections to any put calculated at the time the parties enter a joint venture, rather than at the time the remaining interest is sold.
Consultant Spoltore predicted Columbia would remain flexible. "It's obvious that if they want to continue to be a player in California, they will have to agree to more creative deals," he said.