AG Approves Venture Capital Deal for Six California Nonprofit Hospitals

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December 4, 2015; San Jose Mercury News

Six nonprofit hospitals owned by the Daughters of Charity may become the property of a New York-based venture capital group under a deal recently given conditional approval by California Attorney General Kamala Harris. BlueMountain Capital Management will be allowed to invest in the hospitals with an option to purchase in three years. BlueMountain commits to, among other things, maintaining charity care, access to comprehensive medical services, loaning $150 million to the hospitals, and making $180 million in facilities and capital improvements.

The largest nonprofit hospital transaction in California history is significant for several reasons. Last year, Prime Healthcare Services offered to buy the six hospitals for $843 million, but rescinded their offer when Harris invoked conditions similar to those agreed to by BlueMountain. It’s difficult to do an exact comparison between the 2014 and 2015 deals because Prime Healthcare’s was a straight purchase and the BlueMountain agreement is a purchase option.

Many people don’t realize that state attorneys general are the ultimate trustees of charities operating in their states. It’s not unusual for large nonprofit transactions to require state approval, especially when the acquiring entity is located out-of-state. It’s almost certain that approval is required when a nonprofit sells itself to an out-of-state for-profit entity. Attorneys general seek to assure that any such transactions don’t harm the state’s citizens by reducing services or transferring charitable assets outside the state’s borders.

As NPQ recently reported, there may be a countertrend to mergers and acquisitions of community hospitals into large health systems. The conditions placed on the Daughters of Charity sale are expensive at a time when hospitals and healthcare is becoming less and less profitable. Will BlueMountain complete the purchase after spending three years operate the facilities and to evaluate the trajectory of healthcare and healthcare finance, or will they write off hundreds of millions of investors’ dollars as a losing proposition? If BlueMountain isn’t successful, would the hospitals close, would Daughters of Charity find another way to keep them open, or would they seek yet another buyer with the attorney general as a negotiating party? Healthcare is a big business, but it’s incredibly fragile. There are few certainties besides continued—and escalating—demand for services.—Michael Wyland