County will buy Saint Louise, O’Connor hospitals

Santa Clara County emerged this month as the sole bidder for O’Connor and Saint Louise hospitals, clearing the way for the county to buy the two private hospitals for $235 million, County Executive Jeff Smith disclosed Monday.

“We are really excited,” Smith told the Morgan Hill Times Monday. “And, we’re ready to go.”

“There is nothing that can derail it,” he said.

In an interview with the Morgan Hill Times Monday, Smith said the county, anticipating this month’s news, has been laying the groundwork for its expanded health care system for weeks, and now will be on a fast track, which Smith hopes will ensure a smooth transition to a three-hospital system in less than three months.

Once the deal closes, the 129-year-old O’Connor Hospital in San Jose and the 29-year-old Saint Louise Regional Hospital in Gilroy will join the 142-year-old Valley Medical Center in a significantly expanded publicly owned and managed health care system.

The new hospital system will nearly double the number of county hospital employees, medical staff physicians and hospital beds.

Smith said the county has already created the nearly 2,000 new positions, ready to be filled initially by existing O’Connor and Saint Louise employees, who will be hired as “provisional employees in permanent positions.”

He is gearing up the county’s human resources staff and expects a new media relations team and additional administrative services to be in place once the deal closes in late February.

Smith said patients at the two Verity-owned hospitals will see few immediate changes with the ownership change.

“Patients will see the same nurses, the same staff doctors—they won’t see much if any change at all,” he said. He said the hospitals will accept all of the same health insurance carriers.

Paul Lorenz, CEO of the Santa Clara Valley Medical Center since 2012, will lead the transition, after which two new sister hospitals will retain their names and identities under the expanded county umbrella. Smith also is well-positioned to manage hospital acquisitions: He has both medical and law degrees.

The county executive said he expects a federal bankruptcy judge to finalize the county purchase on Dec.19, and the escrow period to close by the end of February. The county offered to buy the hospitals in late July, after Verity Health announced it was seeking suitors and one month before Verity filed for Chapter 11 bankruptcy protection.

In October, Santa Clara County’s offer of $235 million was identified as a “stalking horse bid” in a highly anticipated bidding race that never got out of the starting gates.

A Dec. 5 deadline passed with no competing bids for the two Santa Clara County hospitals, eliminating the need for an auction this month in U.S. Bankruptcy Court in Los Angeles. Verity and its hospitals in August filed voluntary petitions for protection under Chapter 11 of the U.S. Bankruptcy Code, for the stated purpose of facilitating a court-supervised sale of some or all of the hospitals.

Saint Louise Regional Hospital is located on the north side of Gilroy, and O’Connor Hospital is in San Jose, located less than two miles from Valley Medical Center, less than four miles from the center of downtown San Jose.

Verity Health owns the two Santa Clara County hospitals, plus two in San Mateo County and two in Los Angeles. The company had posted no information or released any statement as of Dec. 10 about the sale of the two hospitals to Santa Clara County.

Smith said Verity contacted his office last week, and notified him of the county’s successful offer.

The O’Connor and Saint Louise employees will retain their jobs, but Smith said all union contracts with Verity Health will be voided, with the new employees represented by the current collective bargaining agreements already in place in Santa Clara County.

The bankruptcy court will be deciding what money, if any, Saint Louise and O’Connor will receive in a pay-out of their pensions. Smith said the employees will enter the California Public Employees’ Retirement System as new employees, regardless of currently held seniority.

He said the union contracts and pensions have to be different, because federal and state labor and pension laws differ between public and private employees.

Smith said the county is talking with employees and unions, adding that “We will be speaking with the doctors, and tenants of the buildings” at the hospital campuses.

The county is developing plans for the implementation of a new medical records system for all of its hospitals, called EPIC, and will updating equipment.

By July, he anticipates that all employees will be connected to the county payroll system.

“We will have a whole lot of work to do behind the scenes,” he said, including creating a new financial systems that integrate the two hospitals with the Valley Medical Center system.

Smith said the DePaul Urgent Care Center in Morgan Hill—site of the original Saint Louise hospital— is part of the purchase and will continue as an urgent care center and medical offices.

He expects the county to tear down the old hospital building, which has been vacant, and anticipates expanding skilled nursing care facilities in Morgan Hill.

The first-year costs in connection with the hospital purchase will be expensive—perhaps exceeding the purchase price of the two hospitals, Smith estimated.

However, he said these expenses will be defrayed by income from the two hospitals.

The county will sell “lease revenue bonds” to finance the purchase, a mechanism already authorized by the Board of Supervisors. Smith described this as a kind of mortgage, for which payments would be about $15 million per year.

Smith is optimistic about the financial health of the two hospitals, because Medicare reimbursement formulas provide more money for medical bills at publicly owned hospitals than for private hospitals.

“Now that the future is more stable, we know there is never going to be a cloud over these hospitals, and there is going to be a stable owner,” said Smith. “Then we can build the system back up and provide more services.”

Verity Health System, created in late 2015, is a nonprofit healthcare system employing more than 6,000 in California.

In 2015, the Catholic Daughters of Charity had sold the six hospitals to BlueMountain Capital Management, which owned Verity Health. Last year, a company owned by billionaire entrepreneur Dr. Patrick Soon-Shiong, who also owns the Los Angeles Times and San Diego Union-Tribune, bought the hedge fund’s healthcare division that owns Verity.

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