Daughters of Charity will consider potential buyers who want to break up the chain purchase individual hospitals or to purchase the entire six-hospital system, said Robert Issai, chief executive of Daughters of Charity Health System.

LOS ANGELES — Prime Healthcare Services has backed out of a $843 million deal to purchase the troubled Daughters of Charity Health System in California, putting in doubt the future of the nonprofit system and its more than $400 million of bond debt.

For-profit Prime called the conditions set by California Attorney General Kamala Harris "onerous" and" unprecedented" in explaining the reasoning behind the decision not to buy the chain of six hospitals clustered in the San Francisco Bay area and in Los Angeles.

The attorney general's office is required to sign off on the sale of any non-profit hospital to a for-profit organization.

"The sheer number of conditions - more than 300 - is unheard of in California, or anywhere else in the United States," said Troy Schell, general counsel for Prime Healthcare.

The condition that Prime preserve all of Daughters' services for 10 years was deemed particularly unpalatable to the healthcare provider.

"Maintaining all services for 10 years regardless of whether the services are needed or 'essential' for the communities served is unprecedented and untenable," Schell said. "In essence, the Attorney General is telling Prime Healthcare to operate the hospitals exactly as DCHS has and expect different results."

The proposed sale and conversion of the non-profit system into for-profit hospitals has been controversial. Prime has faced investigations for Medicare billing practices, and different unions took different sides on the Prime buyout proposal.

Harris, a Democrat, is running for the U.S. Senate seat Barbara Boxer will vacate after next year.

The conditions were formally released by Harris on Feb. 20, but they weren't substantially different from the recommendations made in December, said David Miller, director of research for SEIU-United Healthcare Workers West, a vocal opponent of the sale.

"We didn't think they could live up to the conditions, which were designed to protect the community," Miller said. "I don't know why they didn't back out in December."

Prime notified Daughters of Charity at 5 p.m. Monday that it was withdrawing from negotiations, Daughters of Charity Chief Executive Robert Issai said.

SEIU-UHW urged Daughters to immediately designate another buyer for its six financially ailing hospitals.

"This announcement sets the path for other buyers more compatible with Daughters' commitment to public health to jump in immediately to purchase either the entire health system or individual hospitals," said Dave Regan, president of SEIU-UHW.

A number of buyers have offered to purchase the hospitals individually.

Santa Clara County has offered to purchase the two Daughters' hospitals located there, O'Connor Hospital in San Jose and Saint Louise in Gilroy.

Dignity Healthcare and Sisters of Providence have expressed interest in buying two Los Angeles-area hospitals, St. Francis Medical Center in Lynwood and St. Vincent Medical Center, Miller said.

Issai said they will look at offers to buy the entire hospital system as well as those that could break up the chain in determining the best future for the hospitals.

In previous interviews, Isaai has said that without the $843 million sale to Prime the hospital would likely be forced into bankruptcy.

Isaai said that Prime officials told him the reason they backed out of the deal that agreeing to Harris's conditions could result in similar demands in other states in which they are acquiring hospitals.

Issai now says the hospital chain has gained some "breathing room" from budgetary cutbacks resulting partly from attrition of administrative positions and billing improvements. It still needs to move quickly. His hope is that since the hospital chain has already been courting buyers, finding a replacement won't take as long as the 12-month process just to enter exclusive negotiations with Prime that started late last year.

Nuveen Investments, the majority holder of the hospital's bond debt, had supported the sale to Prime. The sale would have exited bondholders at par from Daughters of Charity's junk-rated $409.5 million in debt and its bankruptcy risk.

Standard & Poor's downgraded Daughters of Charity's 2005 debt, issued through the California Statewide Communities Development Authority, to CCC from B-minus in December. The outlook is negative.

Issai said the hospital chain will be able to continue payments on its bond debt while it seeks another buyer.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.