Santa Clara County has formally offered to buy O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy, including the De Paul Health Center in Morgan Hill, for $235 million as part of a bankruptcy reorganization by the hospitals’ parent company.
Verity Health System of California has asked the bankruptcy court to approve an auction in December in which the county’s bid would be considered along with others that might come forward.
“O’Connor and Saint Louise are two critically important institutions in the communities they serve, and the county has shown great leadership to ensure both can continue their mission of providing high-quality care to patients well into the future,” said Rich Adcock, CEO of Verity Health.
Santa Clara County officials have long expressed interest in acquiring O’Connor and St. Louise as public hospitals to extend its reach and help relieve overcrowding at the county-run Santa Clara Valley Medical Center in San Jose.
“We’re pretty happy,” County Executive Jeff Smith said Tuesday morning after Verity announced the offer, though he cautioned it’s early in the process and doesn’t guarantee the county will end up the buyer. “We think we have a competitive offer.”
Verity’s hospitals in San Jose, Gilroy, Daly City, Half Moon Bay and Los Angeles provide 1,650 inpatient beds, emergency rooms, a trauma center and a host of medical specialties, and employ 7,000.
The Catholic Daughters of Charity, which provided medical care for California’s poor since the Gold Rush, sold the financially struggling hospital group — including two Los Angeles hospitals — as a package to the East Coast hedge fund BlueMountain Capital Management in 2015. That sale came after a bid by a private for-profit healthcare firm fell through.
A year ago, a Culver City company owned by billionaire doctor and entrepreneur Patrick Soon-Shiong, who also owns the Los Angeles Times and San Diego Union-Tribune, bought BlueMountain’s Integrity Healthcare division that manages Verity.
But the financial woes have continued as Verity saw operating losses of $55.8 million in the nine months that ended March 31. In filing for bankruptcy protection, Adcock cited “a legacy burden” of more than a billion dollars of bond debt and unfunded pension liabilities plus a need for significant expensive seismic upgrades and an aging infrastructure as a drag on the hospitals’ finances.
Adcock said Verity’s board of directors has made clear it would prefer to sell some or all of the hospitals to buyers who would continue to provide health care, rather than convert the property to housing, offices or shops.
Adcock said Verity has been in discussion with more than 100 different organizations looking at various parts of the hospital system, but Santa Clara County is the first to offer a bid.
A bankruptcy judge is expected to approve the requested auction for the Santa Clara County hospitals on Wednesday, Adcock said.
The county’s offer is considered a “stalking horse bid,” meaning it is made before the auction takes place and serves to set the floor for any competing offers. If no competing offers emerge, Santa Clara County’s offer would stand.
Should the county be the approved buyer, it has committed to operating both hospitals, and maintaining the county’s broad charity care programs, Verity Health said. All of Verity’s hospitals remain open during the Chapter 11 bankruptcy protection process.
“We intend to operate both of the hospitals pretty much as they operate now,” Smith said. The nurses and support staff would become county employees, while the doctors work under contract, he said.
Smith said in July that one potential advantage the county would have as a buyer is that the transaction would not require fresh approval from the attorney general’s office, as it would with a private buyer. He said that as a public hospital, the county would be reimbursed for indigent care by the federal government at higher rates than a private operator, easing the financial pinch on the hospitals.
Adcock said he could not discuss any conversations Verity has had about other hospitals such as those in San Mateo County.
Following the bankruptcy filing, San Mateo County Supervisor David Canepa noted that Seton is Daly City’s largest employer, providing about 1,500 jobs, and sees about 28,000 patients in its emergency room every year, with about 85 percent of them being on Medicaid or Medi-Cal. He said it also provides skilled-nursing beds “which are lacking in San Mateo County.”