Unable to find a buyer after a five-year search, Via Christi Health System won state approval for a $22 million deal to sell its only California hospital, St. Rose Hospital, Hayward.
California's attorney general approved a deal July 15 that allowed St. Rose to go solo and buy out Wichita, Kan.-based Via Christi's interest in the hospital. But the deal, expected to close late this month, comes with stipulations -- and significant risks for its new owners, who inherit St. Rose's heavily low-income patient base, a competitive market and costly capital investments to ready the hospital for an earthquake.
Once independent, St. Rose must maintain existing emergency and obstetric services for at least five years and can't scale back or close its Silva Pediatric Medical and Dental Clinic during that time, under the attorney general's decision. If St. Rose finds a buyer or manager for the children's clinic, the buyer must agree to maintain existing services during the five-year window. Finally, St. Rose must spend $1.5 million on charity care during each of its first five years of independence.
Such stipulations on not-for-profit hospital sales are common, said John Washlick, a partner with Cozen O'Connor and chairman of the American Health Lawyers Association's hospital and health system practice group. Attorneys general, which oversee not-for-profits at the state level, typically require guarantees to protect access for low-income patients.
About 45% of St. Rose's patients are uninsured or covered by California's Medicaid program, Via Christi said in regulatory filings with California's Attorney General Bill Lockyer. St. Rose provided $18.4 million in uncompensated care in 2004.
St. Rose President and Chief Executive Officer Michael Mahoney said the hospital's large number of low-income and uninsured patients drove away buyers -- for-profit, secular not-for-profit and Catholic-leaving its trustees no option but to close or buy out the Bay Area hospital.
Via Christi even offered to write off $10 million in debt for potential faith-based buyers, with no luck, regulatory filings show. Mahoney said St. Rose officials hoped to remain in a Catholic health system. "I'm personally very disappointed that there's not a dialogue within Catholic healthcare about how Catholic hospitals can help each other," he said.
Via Christi and St. Rose officials acknowledge that the sale of the 172-bed hospital to another health system would have been preferable. But only one bidder, Provident Foundation in Baton Rouge, La., came forward, and Via Christi rejected its highly leveraged offer, the filing said. That left the Catholic health system with few options. "Determined to exit the California healthcare market and leave behind its unique problems of state-mandated seismic retrofitting and minimum staffing ratios, and intense managed-care competition, Via Christi had only one viable alternative -- to close the hospital and liquidate its physical assets," the filing said.
"The local board did not choose to acquire the hospital out of a desire to own a hospital," Mahoney said. St. Rose's trustees first offered to take the debt-laden hospital off Via Christi's hands for $1. The trustees argued the deal would free the Kansas health system of a safety-net hospital and save Via Christi from the "very high cost" of closing St. Rose or the significant capital needed to ready the hospital for an earthquake.
Via Christi rejected the $1 bid as "entirely unacceptable" and turned down a second $10 million offer. The California hospital owed the Kansas health system $32 million, Via Christi's officers said. But with no viable buyers after a five-year search, Via Christi first agreed to drop its price to $28 million, then to the final price of $22.22 million.
St. Rose "faced a difficult market for a long time and they will continue to face a difficult market," said Maribeth Shannon, director for hospital and nursing homes at the California HealthCare Foundation, a health policy not-for-profit.
Mahoney said St. Rose will first finance its sale, then focus on its long-term borrowing options to retrofit the hospital to meet California's earthquake standards, at a cost to St. Rose of $10 million.