Daughters of Charity Goes On The Block

After disclosing it will be financially challenged to continue operating its six hospitals, the Daughters of Charity Health System has decided to seek a buyer.

The Los Altos Hills-based Daughters of Charity announced earlier this week it planned to sell its hospitals and that it would“solicit proposals from Catholic, public, non-profit and for-profit organizations to purchase DCHS hospitals individually or the health system in its entirety.”

Robert Issai, Daughters of Charity's chief executive officer, said that “like other health systems across the country, we recognize that the way healthcare is provided today – where it is offered, how it is paid for, how it is measured – is changing dramatically, and we believe that new ownership is in the best interest of the communities we serve.”

In a message sent to employees, Issai said the Daughters of Charity voted last month to find a buyer. “After careful study and discernment, the DCHS Board of Directors, management team and advisors have determined that we cannot financially sustain our health system in today’s environment,” Issai wrote.

The system had been in merger talks with St. Louis-based Ascension Health, the nation's largest Catholic hospital operator, but the parties decided to pass on any deal, according to Issai. Instead, the Daughters of Charity facilities will remain in a loose affiliation with Ascension.

The Daughters of Charity reported a $75 million net loss for the fiscal year ended last June 30, including offsets from investment income.

Steven T. Valentine, president of The Camden Group, a consulting firm in El Segundo and a member of the Payers & Providers editorial board, said the system is facing a variety of issues, including the cost of seismic upgrades, and aging medical staff, the lack of an ACO strategy and what he described as a “rough” payer mix.

The system operates four hospitals in Northern California, including 358-bed O'Connor Hospital in San Jose, and two in Southern California. They include 366-bed St. Vincent Medical Center, the oldest hospital in Los Angeles, and 384-bed St. Francis Medical Center in Lynwood.

Valentine noted that the system would fetch the highest price intact. However, the St. Francis property might be the most important in terms of provided uncompensated care revenue. It is slated to receive $237 million in 2014 under the provider tax, the federal replacement for the Disproportionate Share Hospital payment. Systemwide, Daughters of Charity is expected to receive $318 million this year.

That Daughters of Charity is looking for any buyer, whether for-profit or religiously affiliated, suggests to Valentine that the market is not strong for the system. He noted that Ontario-based Prime Healthcare Services might be a potential candidate, as well as Avanti Hospitals, which operates four facilities in the Los Angeles area. Both are for-profits. Prime has had difficulty in recent years obtaining approval from state regulators in California to acquire not-for-profit properties.

A Daughters of Charity spokesperson would not indicate whether the system's Catholic ehtical and religious directives would remain in place after a sale.

“Catholic hospitals follow the Ethical and Religious Directives for Catholic Healthcare Services,” said spokesperson Beth Nikels. “A Catholic buyer would honor their Catholic heritage through adherence to the ERDs.”