Daughters of Charity Deal Carries Warnings for the Future of Health Care

MedizinWhat would happen to our health care system if we took the advice of some politicians and turned it into “Medicare for all,” a single-payer plan?

Right now in California, there is a story of hospitals, nuns, hedge funds, corruption, the state Attorney General and union bosses that may hold the answer to that question.

The story begins in Paris, where the Daughters of Charity religious order was founded in 1633, dedicated to serving the poor. The Daughters came to America in the 1800s, and by 1991, their highly respected nationwide chain of nonprofit Catholic hospitals had $3.1 billion in annual net revenues and a top credit rating.

Six hospitals in California, including St. Vincent Medical Center in Los Angeles, became the Daughters of Charity Health System in 2002. By 2013 they were losing $10 million every month. Why? DCHS said three-quarters of its patients were covered by government health programs, which pay less than private insurers. The recession made it worse as more people lost their jobs and health benefits, and then the government cut back further, slashing Medi-Cal rates that reimbursed providers for low-income patient care.

DCHS also cited the “volume and mix of services” and the “employee salary/benefits structure” as causes of the financial bleeding.

The nonprofit chain put itself up for sale in 2014, hoping to find a buyer that would preserve the pensions of current and retired employees, repay debts, honor existing union contracts, and maintain services.

And they did. Prime Healthcare Services, based in Ontario, California, made an offer of $843 million to buy DCHS. But under state law, nonprofit hospitals can’t change hands without the approval of the California Attorney General.

And that gave Prime Healthcare’s longtime enemy, the Service Employees International Union and its affiliate, United Healthcare Workers West, the power to blow up the deal. In July, 2014, UHW president Dave Regan met with Prime CEO Dr. Prem Reddy and told him, according to court documents, “that he would prevent the sale unless Prime allowed UHW to unionize hospital workers at all of Prime’s hospitals.” Prime refused Regan’s demand.

The union allegedly told Attorney General Kamala Harris that if she blocked Prime’s acquisition of DCHS, they’d spend $25 million to get her elected to the U.S. Senate in 2016, and threatened that if she didn’t, they would spend the money to elect somebody else.

Harris gave conditional approval to the deal but added poison-pill requirements, including an order to run the hospitals without any changes for 10 years, which would have continued the financial meltdown. Prime walked away.

The Daughters of Charity filed a lawsuit against the SEIU-UHW in Santa Clara County Superior Court, accusing the unions of extortion and of chilling bids from other suitors by threatening to block the attorney general’s approval.

Then Prime Healthcare Services filed a lawsuit in federal court accusing Kamala Harris of corruptly abusing her power in an illegal scheme to gain financial support of her political career.

The story is told in disturbing detail in the combined 85 pages of the complaints.

Now a New York-based hedge fund, which has never run a hospital, has offered to take over the management of DCHS. BlueMountain Capital Management would pump $250 million into the nonprofit chain, take 4 percent of annual revenue as a management fee, and have an option to buy the hospitals after three years.

Harris has granted conditional approval, and BlueMountain is presently reviewing the conditions, which include providing services and charity care for ten years.

If the deal falls through again, DCHS could enter bankruptcy. Pensions could be lost and the hospitals could close, costing 7,600 jobs and depriving the communities of local health care services.

Twelve million people are now enrolled in Medi-Cal — one in three state residents — and the number could go higher. How many hospitals will go bankrupt providing legally required services for below-cost reimbursements?

Imagine what would happen if all of American health care was run that way.

It’s easy for politicians to decree that services shall be provided and fees shall be reduced. It’s even easier for them to help their friends get lucrative contracts, and to collect campaign cash as a tip for good service.

What’s not easy is persuading anyone to go to medical school or build hospitals when politicians control health care. Too bad no one has ever been cured by a hedge fund seeking a tax loss.