Hospitals will remain open during restructuring

Published in the October 17 – 30, 2018 issue of Gilroy Life

After filing for bankruptcy this summer, Verity Health System has entered into an asset purchase agreement with Santa Clara County to acquire O’Connor Hospital in San Jose and Saint Louise Regional Hospital in Gilroy for $235 million.

“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. “As we advance this sale process through the court, we are continuing to work with other potential buyers for Verity’s remaining assets, so they can be relieved from the financial burdens that impede their service to the community, and they can continue serving patients in their respective communities.”

Verity has been losing about $175 million annually on a cash flow basis, Adcock said. It secured a $185 million loan to stay afloat and pay employees and suppliers as it seeks potential buyers.

Santa Clara County started taking steps to purchase St. Louise Regional Hospital after Verity Health System of California filed for bankruptcy protection Aug. 31. The Gilroy medical facility will remain open while the California hospital chain restructures. If the sales proceed, the county promises to operate both hospitals in terms of quality of the medical services offered to patients in a similar manner to how they are currently run.

“The county is interested in buying the hospitals so that we can ensure that residents have continued access to local health services,” said Supervisor Mike Wasserman, who represents the South Valley area. “We are well-positioned to run the hospital given our status as a public entity and record of providing quality services.”

The county would initially pay cash, he said. A few months after the sale, depending on the market and when it can get the best rates, lease revenue bonds would be issued to finance the purchase. The financing term would likely be 20 to 30 years.

If the county’s purchase offer goes through, it would add the 93 beds now at St. Louise and the 358 beds at O’Connor to the 563 beds now operated by Santa Clara County at its acute care hospital Valley Medical Center in San Jose.

St. Louise was originally owned and operated by the Daughters of Charity of St. Vincent de Paul. Verity Health was formed in July 2015 when the DOC selected BlueMountain Capital Management LLC, a private investment firm, to recapitalize the health systems operations and transition leadership of the health system to the new Verity Health System.

In July 2017, NantWorks, the Culver City company controlled by physician and billionaire entrepreneur Patrick Soon-Shiong, purchased Integrity Healthcare, the company that manages Verity. His goal was to revitalize the hospitals, many of which are in lower-income neighborhoods. Soon-Shiong bought the Los Angeles Times this summer.

The process to purchase O’Connor and St. Louise will include the De Paul Health Center in Morgan Hill. Verity Health has requested court approval of an orderly auction process where other potential buyers can submit qualified competing bids. The winning bid, as selected by the Verity Health Board of Directors is subject to the approval of the Bankruptcy Court, and, depending on the buyer, the California Attorney General. The time line requested by Verity Health would result in an auction in December 2018.

In the agreement, the county has committed to operating both hospitals with a focus on quality, safety and patient satisfaction, including maintaining participation with public and private payers. In addition, the county commits to instituting its charity care policies, which are broad in scope, along with continuing to provide care through community-based health programs.

In mid-September, as a result of the Chapter 11 filing, S&P Global Ratings downgraded Verity Health System to “CC” from “CCC,” affecting about $325 million of debt. The rating reflects S&P’s view that the issuer may see no repayment in the next year. S&P also acknowledged the health system operates in a highly competitive market and the outlook is negative.