Daughters of Charity Health System is still in a precarious financial position as it awaits a decision from the California attorney general that would allow its sale to a for-profit group.
A decision on the sale to private equity firm Blue Mountain Capital has been extended till Dec. 3, the attorney general's office said Wednesday.
The Los Altos Hills, Calif.-based system reported another net loss in the first quarter of fiscal 2016. The six-hospital group believes a sale to Blue Mountain would be its best option, but the deal needs approval from state Attorney General Kamala Harris.
The decision comes about eight months after Harris foiled a deal with another for-profit buyer, Prime Healthcare Services, by imposing strict conditions on the transaction. Prime, an Ontario, Calif.-based chain, balked at the terms and ultimately walked away.
In its earnings report for the period ended Sept. 30, Daughters blamed its continued financial challenges on an adverse payer mix, reimbursement rate increases that were below historical levels and patient volume declines.
Patient discharges decreased 1.3% year over year, or 4% when adjusted for outpatient activity. Emergency room volume was down 1.8%, while outpatient surgeries decreased 12.2% and deliveries dropped 19.8%.
However, the system did see some relief from the return of California's provider fee program, which helps supplement Medicaid payments but had been on hold last year while waiting for the CMS to approve its extension.
Daughters also disclosed that it entered into a settlement agreement this month with the CMS that required it to pay $815,000 for inappropriate financial arrangements between physicians and Seton Medical Center in Daly City, Calif. The system made the voluntary self-disclosure to the government in 2013.
In total, Daughters reported an operating loss of $39 million on $274.9 million in net patient service revenue compared with an operating loss of $42.3 million on $265.4 million in patient revenue.
Daughters continues to run low on cash, with just $58.6 million in unrestricted cash and securities, representing 22.6 days of cash on hand. In comparison, it had $73.1 million in unrestricted cash and securities as of Sept. 30, 2014, representing 20.7 days of cash on hand.
The system's salary and benefit costs declined 7.6% year over year as it closed programs, reduced its workforce and staffed to lower volume. Supply costs similarly fell 6.9% year over year due to treating fewer patients.
Blue Mountain has offered $100 million in exchange for the lease of Daughters' information technology assets and the option to buy the system within three to 15 years after the transaction is approved. In addition, Daughters will receive a line of credit between $150 million and $160 million, which will be used in part to pay down existing debt.
After the agreement, Blue Mountain subsidiary Integrity Healthcare will manage the system, which will have an entirely new board and be renamed Verity Health System. It will be converted from a religious organization, sponsored by Daughter of Charity, Province of the West, to a public benefit corporation.
“In the event that the transaction does not close, the board of DCHS will consider all alternatives, which may include seeking alternative transactions, closure of facilities, and use of bankruptcy proceedings to accomplish alternatives,” the system said in its earnings report.
