With an investment of $260 million, hedge fund puts its hands on non-profit hospitals of the Daughters of Charity Health System. Being the largest non-profit transaction in California’s history and the only one involving a hedge fund, this marks the end of a two years financial struggle for the non-profit.
Daughters of Charity is a non-profit hospitals system dedicated to low-income patients, relying mostly on Medi-Cal – a type of insurance funded by the government, seldom accepted by healthcare providers given its low and late reimbursement rates.
Attorney General Kamala Harris, whose office must approve all the sales of non-profit hospitals in the state, has given her conditional approval for the transaction. According to the deal, The BlueMountain Capital Management has to loan the hospitals up to $160 million and after three years it will have to pay another $100 million if they want to buy the six hospitals. More than that, $180 million have to be invested in capital improvements.
Integrity Healthcare, the new company that manages the hospitals will end their Catholic affiliation but will keep operating the system as a non-profit for at least 15 years. The four managers will be paid each ear with one percent of the operating revenues of the system, which is currently around $58 million.
The huge management fee of 4 percent is questionable, since both federal and state law prohibit non-profits to use their net earnings in the benefit of insiders but also unreasonable compensations to the latter.
Steve Valentine, vice president of Premier – a health care improvement company, says that BlueMountain will have to struggle to increase revenues, which won’t be an easy task.
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.
Daughters of Charity Health System received another proposal in 2014, when Prime offered to buy the hospitals for $843 million. Eventually, the company withdraw their offer considering Harris’ conditions too difficult.
However, Harris had similar conditions for the current deal, including keeping at least five of the six hospitals open for 10 years, period in which they had to keep the contracts with Medi-Cal. Unlike Prime, BlueMountain agreed to the conditions.
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