Why California Put the Brakes on a Hospital Merger — and What it Means

There’s a story being written in metro areas around the country, over and over again.

In Atlanta: Hospitals’ merger goes through.

In Detroit: Hospitals’ merger goes through.

But in California this spring, something different happened: A merger fell through.

And that case — the failed sale of Daughters of Charity to Prime Healthcare, and all the acrimony that’s come after it — is an interesting case study in regulatory power.

Mergers on the Rise

Hospital mergers have boomed since the passage of the Affordable Care Act. According to Irving Levin Associates, there were 50 hospital acquisitions in 2009, the year before the ACA was signed into law.

Last year there were 100.

The reasons for the upswing vary, but they’re mostly driven by financial and competitive changes. Hospitals’ traditional business models have faced new pressures, as more patients opt for outpatient care and federal reimbursement continues to tighten. The health law also has encouraged more cooperation among organizations, by encouraging hospitals to focus less on inpatient volumes and more on “population health.” And health systems are seeking ways to lower their spending, sometimes by teaming up to negotiate lower prices from suppliers and higher payments from insurers.

“Every hospital in America today has some level of cost restructuring going on,” Kit Kamholz, managing director of Kaufman Hall, told the Chicago Tribune earlier this year.

(Kamholz said he expects that hospitals will continue to consolidate at an accelerated rate “for the foreseeable future.”)

And as many hospitals and health systems get bigger — and financially stronger — that creates more of an incentive for struggling organizations to find partners of their own.

That’s the situation that faced Daughters of Charity, a health system with four safety-net hospitals in Northern California and two in Southern California. Earlier this year, Daughters of Charity officials said they were losing about $10 million per month because of high labor costs and low Medi-Cal and Medicare reimbursement rates.  

And that’s why they were especially receptive to Prime Healthcare’s offer to buy their organization — for $843 million.

Why California Put Conditions on the Deal

The planned acquisition, which was announced last summer, quickly attracted scrutiny. One reason was that Prime, as a for-profit health care provider, seemed to be an unusual partner for a safety-net hospital system.

“In most cases, regulators must determine whether merging two or more competing hospitals will result in less community healthcare,” Michael Hiltzik wrote at the Los Angeles Times.

“This case was unusual: Prime wasn’t aiming to acquire competing hospitals, but to turn money-losers into viable institutions.”

And some consumer advocates and lawmakers said they had specific concerns about Prime Healthcare. The system has had a strained relationship with labor unions, and has faced multiple federal investigations over its questionable billing practices.

Democratic lawmakers lobbied state Attorney General Kamala Harris to block the deal, and the case attracted widespread attention across California.

“Attorney General Harris needs to act if Prime Healthcare somehow pulls the wool over the eyes of the Daughters of Charity with empty promises and wins the right to acquire these important health facilities,” political consultant Steven Maviglio argued last summer.

“In the communities that these hospitals serve, the basic value of medical care for everyone — regardless of income or economic status — is at stake.”

Meanwhile, Prime sued unions, alleging that they were interfering in the system’s bid to purchase Daughters of Charity. (A judge threw out the suit earlier this year.)

Harris ultimately approved the sale in February, with a major hitch: She imposed more than 300 added conditions on the merger. Prime had to commit to keeping the hospitals open for 10 years and providing low-profit services, like serving Medi-Cal patients, for instance.

The terms proved too much: Prime withdrew from the deal.

Supporters hailed Harris’ move, saying that it forced Prime to be accountable — and that future hospital mergers should face similar scrutiny.

Harris established a new bar for how all hospitals should operate, and it ought to become the industry yardstick,” RoseAnn DeMoro, executive director of the California Nurses Association/National Nurses United, wrote in the Sacramento Bee.

What’s Next

Since the merger fell through, Prime and Harris have been in a war of words — and legal briefs.

“By walking away, Prime is confirming many of the concerns heard at multiple community meetings that the continuity of vital health care services in these communities is not its priority,” Harris said at the time.

Prime officials protested that the system had to walk away because Harris’s conditions were unworkable.

“Maintaining all services for 10 years regardless of whether the services are needed or essential for the communities served is unprecedented and untenable,” said Troy Schell, the general counsel of Prime.

“In essence, the Attorney General is telling Prime Healthcare to operate the hospitals exactly as [Daughters of Charity] has and expect different results.”

And last week, the health system filed a lawsuit that aims to limit Harris’s ability to place conditions on the sale of not-for-profit hospitals in the state, Modern Healthcare reports. In one striking accusation, Prime alleges that Harris participated in an “illegal scheme” with the SEIU to win the union’s political support by challenging the deal.

Meanwhile, Daughters of Charity found a new buyer: BlueMountain Capital Management, a New York investment firm. Harris is currently reviewing the proposed acquisition, and her decision is expected in November.

Around the nation

Here’s a look at other stories making news on the road to reform.

Addressing drug prices. Hillary Clinton’s new proposal to reform drug company behavior might not lead to a windfall of new, low-cost drugs, given the way that patent law works, Austin Frakt writes at the New York Times‘ “Upshot.”

Trump’s plan to repeal the ACA. In his interview with CBS’ “60 Minutes” this week, Republican presidential candidate Donald Trump “accidentally proposed” radical reforms to the U.S. health care system, Matthew Herper writes at Forbes

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Health Industry Road to Reform