Daughters of Charity closes $260 million deal with BlueMountain Capital

Largely, the reaction was positive, as it saves the financially struggling hospital chain from going under, but people are also concerned about what it means down the road when a hedge fund, which is focused on the bottom line, buys up a Catholic organization that was focused on helping poor people.

Daughters of Charity Health System announced Monday that it has finalized a $260 million investment deal that will see a NY hedge fund take over management of its six nonprofit hospitals in the San Francisco Bay and Los Angeles areas, reports the San Jose Mercury News.

BlueMountain will be able to outright purchase the hospital chain just after a few years.

In addition to O’Connor Hospital, the chain includes Saint Louise Regional Medical Center in Gilroy, Seton Medical Center in Daly City and Seton Medical Center Coastside in Moss Beach, and two hospitals in Los Angeles. That was the situation in a court case in New Jersey this summer where the supposedly nonprofit Morristown Medical Center (owned by the Atlantic Health System) lost its tax-exempt status as it was operating like a for-profit hospital on nearly every level.

In prepared statement, Daughters of Charity CEO Robert Issai thanked Harris for approving the deal and said the large infusion of capital “will provide a great jump-start on the many strategic, operational and capital initiatives” the chain needs. In terms of the deal, Blue Mountain will lend $160 million to the hospital, apart from keeping a reserve of another $100 million for it exercise the option of buying out the hospital at the end of three years from now.

According to the new management, one of the central strategies to increase the revenues will be to attract patients with private insurance, which pays more than insurances funded by the government such as Medi-Cal and Medicare.

Creem said BlueMountain agreed to all of Harris’ demands.

The deal is considered to be one of the most complex as well as the largest transaction involving a nonprofit hospital in the state.

Critics say the massive management fee could be questioned under federal and state law that say a nonprofit is prohibited from using its net earnings to benefit insiders, including unreasonable compensation to insiders. The deal stipulates that they will need to keep at least five of the six hospitals open, maintaining Medi-Cal contracts and services for at least ten years. As we reported earlier, the 0 million deal will save six hospitals and allow patients to continue to seek treatment at DOC facilities.

Still, Valentine said reviving the hospitals won’t be easy for the hedge fund. The transaction involved a competitive bidding process administered exclusively by the Daughters of Charity Health System.