Daughters of Charity hospitals management takeover complete

A statue of St. Elizabeth Ann Seton outside the main entrance into Seton Medical Center, which is run by the Daughters of Charity, in Daly City Calif., as seen on Fri. March 13, 2015 A statue of St. Elizabeth Ann Seton outside the main entrance into Seton Medical Center, which is run by the Daughters of Charity, in Daly City Calif., as seen on Fri. March 13, 2015 Photo: Michael Macor, The Chronicle Buy photo Photo: Michael Macor, The Chronicle Image 1 of / 1 Caption Close Daughters of Charity hospitals management takeover complete 1 / 1 Back to Gallery

Less than two weeks after gaining approval from the state, the financially troubled Daughters of Charity Health system has completed an unusual and controversial transaction with a New York hedge fund.

As of Monday’s announcement, the six-hospital nonprofit Catholic chain, which includes Daly City’s Seton Medical Center, became known as Verity Health System. The system will be managed by Integrity Healthcare, a subsidiary of the $21 billion BlueMountain Capital Management fund.

The other hospitals in the Daughters chain are Seton Coastside, a skilled nursing facility in Moss Beach; O’Connor Hospital in San Jose; Gilroy’s St. Louise Regional Hospital; and two Los Angeles County hospitals.

The deal is considered the largest and most complex nonprofit hospital transaction in the state’s history. It’s not technically a sale, but a financial arrangement in which the hedge fund has agreed to invest up to $260 million in the chain and operate most of the facilities for at least a decade.

“Our goal is to build up the hospitals and make these hospitals vibrant health providers in the communities they serve,” said Mitchell Creem, chief executive officer of Verity, the new nonprofit formed to run the six hospitals.

Verity is a nonreligious entity, and Catholic artifacts in the hospitals came down immediately. Aside from that, hospital officials said patients should not notice any major changes. “Patients should see the same level of care and attention and concern for their health,” said Rick Rice, spokesman for Daughters of Charity. “We expect that service to continue.”

Daughters of Charity, which is based in Los Altos Hills, had been losing about $150 million a year and was searching for a buyer for years. A New York hedge fund seemed an unlikely entity to take over a nonprofit health system that treats a fair number of poor and uninsured patients.

In finalizing the deal, BlueMountain has agreed to meet the terms set out by state Attorney General Kamala Harris on Dec. 3. She approved the transaction, but imposed a number of conditions including a requirement that Seton, O’Connor, St. Louise and St. Francis Hospital in Los Angeles continue operating as acute-care hospitals with emergency services for at least 10 years.

Earlier this year, similar conditions placed on a tentative agreement between Daughters of Charity and Prime Healthcare, a for-profit Southern California hospital chain, caused the deal to fall through.

Verity’s Creem, who has 33 years experience in hospital management, said the fund and the management team were comfortable with the attorney general’s terms, which require Integrity to manage the hospitals for at least 15 years. The deal eventually gives the fund the option to buy the hospitals.

Daughters of Charity’s president and CEO, Robert Issai, will be leaving the organization. New Verity executives have taken over. Creem said, for the most part, the chain’s 7,000 employees will retain their jobs, along with their labor and pension agreements.

Issai, in a statement, praised the transaction. “Our hospitals are in good hands,” he said.

Victoria Colliver is a San Francisco Chronicle staff writer. E-mail: vcolliver@sfchronicle.com Twitter: @vcolliver