Santa Clara County this week is offering to buy Saint Louise Regional Hospital in Gilroy and O’Connor Hospital in San Jose for an undisclosed sum.
“We would be the perfect purchaser, from our perspective,” County Executive Jeff Smith said in an interview Tuesday, July 31. “So we are moving ahead” with the offer to buy the two private nonprofit hospitals in Santa Clara County, he said.
“We have been doing our due diligence with the appropriate consultants to come up with what we think will be a fair offer” to Verity Health System, the nonprofit that owns the two Santa Clara County hospitals and four others in the Bay Area and Southern California, said Smith. “We’ve been trying to keep in touch with Verity group to keep up with their timeline.”
Smith said he expected the county’s letter of intent to go to Verity Health Systems by Aug. 3. The letter will include a purchase offer, plus a list of terms and conditions relating to medical services offered by the two acute care hospitals.
One condition would be that “we should operate both O’Connor and Saint Louise pretty much as they are operating right now, in terms of the availability of medical services,” he said.
“We would keep the hospitals running as hospitals,” Smith added. “They fit into our strategic plan very well.”
The acquisition would increase the number of county-run hospital beds by more than 80 percent, adding the 93 beds at Saint Louise and O’Connor’s 358 beds to the 563-bed Valley Medical Center.
Smith is well-positioned to manage the negotiations for the hospital deal: He has both medical and law degrees.
The county executive said that since the Verity announcement, the county has been working with three consultants—a law firm and business firm that specialize in large mergers and acquisitions, and a consultant that specializes in operational mergers of health care systems—to develop the offer letter.
Currently, the county operates one acute care hospital, Valley Medical Center, plus 10 healthcare clinics around the county.
The Santa Clara County offer will be for just two of the six hospitals owned by Verity Health.
Verity Health System announced in July that it was “exploring strategic options to alleviate financial and operational pressures on its six hospitals.” Whether Verity will agree to sell off two of its six properties remains to be seen, and could depend on whether there are buyers for the other four hospitals: Seton Medical Center and Seton Seaside in San Mateo County, plus St. Francis and St. Vincent medical centers in Los Angeles.
“At this time, a range of options is being considered, including the potential sale of some or all of the locations, among other possible transactions,” Verity Health said in a July 9 statement.
“The top priority of Verity’s board and management team is to establish a long-term, sustainable path forward for our hospitals, which are of critical importance to the communities they serve,” said Rich Adcock, CEO of Verity Health.
“Pursuant to Verity’s strategic plan, we are exploring a number of options to deleverage our balance sheet and address challenges our hospitals face after a decade of deferred maintenance, poor payor contracts, and increasing costs. As the board and management team work together to evaluate these options, the interests of our patients, employees and communities remain paramount.”
Verity Health declined to elaborate this week.
Smith said a purchase by the county would be financed with revenue bonds in a lease-purchase arrangement with the county’s own financing agency. He declined to state the amount of the purchase offer, or to identify the consultants. The consultants will be identified in agenda materials for the Aug. 14 meeting of the county Board of Supervisors, he said.
The announcement that the six hospitals are up for sale or for new partnerships was a stunning reversal of the optimism that Verity Health had expressed early this year.
The Redwood City-based system named a new CEO in January, Rich Adcock, and in March promoted John Hennelly to that post at Saint Louise Regional Hospital, a 93-bed facility in northeast Gilroy.
Just eight months ago, at the time of Adcock’s appointment, Verity chair Jack Krouskup said Adcock “is the person to lead the health system through this time of tremendous growth and expansion to provide state-of-the-art healthcare to the communities Verity serves.”
Also at the time, Adcock said, “There is an amazing opportunity to transform health care delivery for our patients and communities throughout California. We are recruiting physicians and healthcare professionals from across the country to join our team to lead the nation in driving medical research and innovation.”
Before being named Saint Louise CEO in March, Hennelly had been chief administrative officer for Saint Louise for 18 months, when he was reported to have worked on a financial turnaround to put the hospital on more financially stable ground. In that period, the hospital opened two new breast care centers, increased emergency room volume, renewed the volunteer program and engaged the community, bringing more patients to the hospital.
Hennelly and the hospital are active in Gilroy and Morgan Hill. He is on the board of directors for the Gilroy Chamber of Commerce and is a member of the Morgan Hill Chamber of Commerce and Gilroy Rotary Club.
Verity Health System, created in late 2015, is a nonprofit healthcare system employing more than 6,000 staff statewide. The hospitals include 1,650 inpatient beds, six active emergency rooms, a trauma center and a host of medical specialties including tertiary and quaternary care.
In 2015, the Catholic Daughters of Charity sold the six hospitals to BlueMountain Capital Management, which had 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.
