The corporation poised to buy Verity Health's four remaining hospitals missed last week's court-appointed deadline to close the deal, which appears increasingly uncertain.
Court filings show the bankrupt El Segundo, Calif.-based health system's frustration with the would-be buyer, Strategic Global Management, owner of the KPC Group, escalated after SGM missed the Dec. 5 deadline. Verity tried unsuccessfully to get a judge to force SGM's leaders to appear in court on Wednesday and explain why they didn't close the $610 million deal, announced almost a year ago.
"SGM steadfastly has refused to provide such critical information to the debtors, even in face of its utter failure to comply with this court's prior orders," Verity wrote in a Dec. 6 filing.
Verity disclosed in court filings that it's operating at a loss of about $450,000 per day and is losing employees at a high rate amid the uncertainty.
Riverside County, Calif.-based SGM faces losing a $30 million deposit and breach of contract damages of up to $60 million if it fails to close the deal, U.S. Bankruptcy Judge Ernest Robles wrote in a Monday court filing. Despite denying Verity's request to force SGM leaders, including CEO Dr. Kali Chaudhuri, to appear in court, the judge promised that Verity will get a chance to litigate whether SGM breached its asset purchase agreement.
"In the meantime, debtors' efforts would be better spent ensuring the health and safety of the patients at the affected hospitals," Robles wrote.
SGM objected to Verity's proposed hearing, arguing it wasn't given enough notice.
Verity on Monday requested a Dec. 30 hearing on the issue. The provider wrote that while neither party has officially terminated the asset purchase agreement, both allege material defaults.
In a statement, Verity CEO Rich Adcock said the system is disappointed KPC did not close the sale as directed by the court.
"It is also important to note that neither Verity nor KPC has terminated the current sale process," he said. "The boards, leadership teams, and our professional advisors are working tirelessly to determine the next steps and best available outcomes."
California's Attorney General, Xavier Becerra, commissioned extensive reviews of how the proposed purchase would affect the hospitals and their communities. The hospitals include St. Francis Medical Center in the Los Angeles suburb Lynwood, St. Vincent Medical Center in Los Angeles, Seton Medical Center in Daly City and Seton Coastside in Moss Beach.
Interviews with community members, hospital management, medical staff and employees and Verity and SGM leaders determined "almost everyone" supported the transaction and wanted it to be finalized, JD Healthcare concluded in its reports.
Some, however, raised concerns about SGM's structure as a for-profit company. Interviewees said they worried SGM is interested in the hospitals for their real estate value and doesn't plan to operate them as hospitals in the long run.
"The motivations of SGM to make a profit may be in conflict with the interests of the community to operate the Hospital and all of its services," the reports said.
Becerra's conditional approval of the sale came with restrictions recommended by JD Healthcare. They would have required the company keep St. Francis operating as an acute-care hospital for at least 10 years after the sale, St. Vincent for at least five and Seton Medical Center for at least six. Seton Coastside, which operates 116 skilled nursing beds, five acute-care beds and a 24-hour "standby" emergency department, would have to maintain those services for about six years. Becerra also tried to enforce charity care spending requirements.
Verity successfully got the court to deem those terms unenforceable. Peter Chadwick, a managing director at Berkeley Research Group, said in an October statement that the conditions "lock the hospitals into an untenable operating model and ensure their economic demise." Verity has since named Chadwick its chief financial officer.
Robles delivered a victory to Verity in November when he granted the health system's request.
If the deal closes, SGM has agreed to conditions it reached this year with Verity and Becerra's office, and which Verity's bankruptcy judge signed off on. The new agreement keeps intact many of the terms of the 2015 sale of Verity's predecessor, Daughters of Charity Health System, to the private investment firm BlueMountain Capital Management.
The new agreement requires St. Vincent Medical Center be maintained as an acute-care hospital until 2020—five years from the closing date under the 2015 agreement—and St. Francis Medical Center and Seton Medical Center as acute-care hospitals until 2025—10 years from the original closing date. Seton Coastside will have to maintain its emergency services and skilled nursing services until 2025.
Santa Clara County assumed operation of two other former Verity hospitals as of March 1.