County buys two hospitals it sought to expand services
Santa Clara County has succeeded in buying two financially struggling hospitals for $235 million, the cornerstone of its plan to relieve overcrowding at the county-run Valley Medical Center and expand services to central San Jose and south county.
The purchase came after the county entered the only bid in Friday’s auction of O’Connor Hospital in San Jose and Saint Louise Regional Hospital in Gilroy, including the De Paul Health Center in Morgan Hill.
The county had offered to buy the group as part of a bankruptcy reorganization by the hospitals’ parent company, Verity Health System of California. After a judge approved the auction, county officials were the first to bid. Verity had been in discussion with more than 100 organizations looking at various parts of the hospital system, but none put in a bid, allowing the county to win by default.
“It’s pretty exciting,” said County Executive Jeff Smith, who also is a physician. “The whole county population is increasing, and we need additional beds and space.”
VMC is currently at 91 percent capacity, Smith said. The acquisition of the two hospitals will add 456 beds to the system, on top of Valley Medical’s 380 beds, more than doubling the total number available countywide.
The county is sure to face scrutiny if its financial projections for saving a pair of financially beleaguered hospitals don’t pan out. But Smith insists that even under the worst-case scenario, the county expects to operate the hospitals at less of a loss than the private sector or nonprofits. That’s because public hospitals such as VMC receive more funding per patient under the state’s version of the Affordable Care Act.
Verity could not immediately be reached for comment Monday. But the company’s board of directors had made clear that the firm preferred 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.
The purchase comes amid a significant turnaround for Santa Clara County’s public health care system, which had been a significant drain on county coffers before California expanded Medi-Cal payments to public hospitals under the Affordable Care Act. The county also has taken steps to improve billing and increase efficiency at VMC and its clinics, including increasing the number of patients its physicians treat.
The health care system previously depended on the county’s general fund for an annual subsidy of about $250 million. The subsidy has now shrunk 68 percent, to $80 million annually. The new acquisitions will be funded through a lease revenue bond, which is a loan backed by the projected revenue generated by the hospitals.
The system always will be at least slightly in the red, Smith said, because it treats people who are not insured or on Medi-Cal or Medicare. Under the worst-case scenario, the new hospitals acquired from Verity would put the system another $5 million to $7 million in the red; under the best case, they bring in roughly the same amount, Smith said.
The bankruptcy court is expected to approve the county’s offer later this month, with the county expected to take over operations by Feb. 25. Verity’s more than 1,700 employees will be offered jobs with the county.
The transition will come less than four years after the hospital’s original owners, Los Altos Hills-based Catholic Daughters of Charity, sold its nonprofit hospital group, including two Los Angeles hospitals, to an East Coast hedge fund.
The hedge fund, BlueMountain Capital Management, then sold its Integrity Healthcare division, which manages Verity, to 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. But the financial woes continued.
In October, Verity officials praised the county for its interest in acquiring the hospitals.
“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.