Pressure from both the California Legislature and state Attorney General Bill Lockyer has killed for-profit Community Health Service's bid to buy not-for-profit Victor Valley Community Hospital in Victorville, Calif.
In a letter, CHS, based in Brentwood, Tenn., told the board of the 119-bed stand-alone hospital that pending legislation to mandate nurse staffing ratios and Lockyer's request for binding charity-care levels made it economically infeasible to proceed with the $40 million purchase.
CHS and Victor Valley signed a tentative sales agreement in February.
CHS owns or manages three hospitals in California, but Victor Valley's proximity to CHS-owned 46-bed Barstow (Calif.) Community Hospital would have given the company a fledgling network in the fast-growing high-desert region northeast of Los Angeles.
A CHS spokeswoman confirmed that the sales agreement was terminated but declined further comment. CHS did not pay Victor Valley a fee for breaking the deal, according to the hospital's attorney.
CHS' pullout leaves Victor Valley in a bind. According to financial records publicly released in connection with the transaction, the hospital lost $2.2 million on net patient revenues of $24.3 million for the seven months ended April 30, compared with a $1.6 million loss on net patient revenues of $27.6 million during the same period in 1998.
"Closure is always a possibility if we can't find a joint venture or merger partner," said hospital attorney Charles Slyngstad. He added that Victor Valley has commenced sales negotiations with other, unnamed parties.
The staffing legislation passed the state Assembly in June and is pending in a Senate committee. It would require one nurse for every six patients receiving general acute care and smaller ratios for intensive-care or specialty units. Current state law mandates nurse staffing ratios in intensive-care units and operating rooms, but not for pediatric, telemetry and general acute-care settings, which are dictated in the bill.
Victor Valley Chief Executive Officer Joan Phillips said the hospital was "comfortable with its staffing levels" but would not disclose specifically how it might have to change if the legislation passed.
Mary Wallace, spokeswoman for the California Healthcare Association, the state hospital lobby and a strong opponent of the bill, said she isn't surprised the legislation played a role in CHS' decision.
"I don't think alone it could kill a deal, but I do believe it could be a factor," she said.
The other concern of CHS' came from Lockyer's office, which wanted the system to commit to spending at least $1 million annually on charity care at Victor Valley. CHS preferred a floor of 1% of annual net revenues, or about half the figure requested.
Under a 1996 law governing sales of not-for-profit hospitals to for-profit operators, Lockyer's office had the right to block the deal if the parties don't agree to its terms.
CHS attorneys complained in correspondence to Lockyer's office that the charity-care commitment in effect would force CHS to pay twice: once by the hospital directly and again from the leftover charitable foundation. Furthermore, they argued local taxes from converting the hospital to a tax-paying for-profit, could also be used for indigent care.
Laurie Sobel, a staff attorney for the West Coast office of Consumers Union, noted that CHS was willing to adapt similar charity-care mandates from the attorney general as part of its $55.6 million purchase last year of 117-bed stand-alone Watsonville (Calif.) Community Hospital.
"They can't negotiate out the charity care," she said.
H. Chester Horn Jr., the California deputy attorney general who was reviewing the Victor Valley deal, said he believes CHS "balked at (the charity-care requirement) because they have seen the economic condition of the hospital" and thought it was unlikely to stem its losses.
Hospital Chairman Gene Binsbachar warned Horn in correspondence that its indigent-care burden would fall on other area hospitals anyway if it was forced to close or file for bankruptcy, but Horn apparently was unswayed.