Story updated at 6:30 p.m. EDT
Prime Healthcare Services is abandoning its bid for Daughters of Charity Health System in Los Altos Hills, Calif., citing “onerous and unprecedented conditions” from the California attorney general.
California Attorney General Kamala Harris approved the controversial $843 million deal in late February but set more than 300 conditions that went beyond the original transaction terms.
Critics of the deal—including a number of elected officials and the Service Employees International Union-United Healthcare Workers West—had put pressure on Harris to reject the takeover.
In its decision, Ontario, Calif.-based Prime called Harris' terms “the most extensive and overreaching conditions in history.”
“In essence, the attorney general is telling Prime Healthcare to operate the hospitals exactly as DCHS has and expect different results,” Prime General Counsel Troy Schell said in a news release.
The conditions filled 78 pages. They included, for instance, the requirement to maintain the majority of services at Daughters' hospitals for 10 years, or twice as long as Prime had committed to in the takeover agreement. Prime also stressed that the requirement was twice as long as other hospital transactions approved in the state.
The conditions also required Prime to maintain current insurance contracts, which the chain argued were well below fair-market value and neighboring hospital rates.
The deal would have been the largest acquisition to date for Ontario, Calif.-based Prime, which has traditionally grown by adding one hospital at a time but has been expanding rapidly across the country. It also was the largest hospital acquisition ever reviewed by the California attorney general.
Prime has come under fire from opponents such as the SEIU-UHW, which has criticized its dealings with union employees, raised allegations of insurance overbilling and challenged its safety record. The chain, in turn, says it has been the victim of a smear campaign designed to force it to unionize its workforce, and is suing the SEIU chapter for its aggressive tactics.
Daughters of Charity Health System last month also sued the SEIU-UWH and its hand-picked suitor, private equity firm Blue Wolf Capital Partners, for conspiring to interfere with the sale process.
The Daughters of Charity system is running low on cash and has warned bondholders that it may not be able to continue operating without facing bankruptcy.
“We are disappointed that Prime Healthcare has decided not to go forward with the purchase of our hospitals,” the six-hospital system said in a statement. “We strongly disagree with Prime's position on the attorney general conditions. We are confident that Prime could successfully turn around the DCHS hospitals. We remain committed to finding the best solution for our patients, communities we serve, physicians, employees, retirees and creditors.”
The SEIU-UHW, which counts 2,600 Daughters employees among its members, called on the system to “immediately designate another buyer.” It pointed out in a statement that a number of other parties remain interested in purchasing the hospitals, though not necessarily as a single entity.
The deal's terms allow Daughters to receive a $5 million termination fee if Prime walks away from the transaction due to unacceptable conditions from the attorney general.
Daughters chose Prime in October from a field of four bidders. Its financial advisers understood the risks the deal could face but believed Prime was the only one with the financial strength to close the transaction.
The $843 million price tag included a $394 million cash consideration and $449 million for assumption of the system's debt. Prime also pledged to fund the system's pension plan, including $280 million in underfunded liabilities.
Follow Beth Kutscher on Twitter: @MHbkutscher
