California Atty. Gen. Kamala Harris has approved a deal for new management at the Daughters of Charity Health System after another transaction for the troubled Catholic hospital group collapsed earlier this year.

Harris gave her required approval late Thursday, allowing BlueMountain Capital Management to operate the six facilities and gain a right to purchase the chain. But to do so, the New York investment firm must agree to certain conditions such as maintaining the historic level of charity care at the hospitals that specialize in providing care to the poor.

The six hospitals include St. Vincent Medical Center in Los Angeles and St. Francis Medical Center in Lynwood.

Under the conditional approval, BlueMountain Capital would sign a 15-year management agreement and must keep Daughters a nonprofit for at least three years. After three years it could purchase the chain.


The deal provides $150 million of financing to support Daughters’ financial and capital needs. And $180 million is needed in capital improvements. BlueMountain would also pay $100 million for the right to purchase Daughters of Charity.

“This approval includes strong conditions that will maintain the charitable purpose of the Daughters of Charity Health System, ensuring that low-income Californians will continue to have access to critical healthcare services, including emergency, trauma, surgical, and reproductive health services,” Harris said in a statement.

Daughters of Charity’s future has been closely watched because its hospitals employ 7,600 workers and provide vital medical services to a number of lower-income communities.

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Many community hospitals and smaller nonprofit chains like Daughters of Charity have struggled because they lack the size and bargaining clout to win favorable reimbursement rates from insurers.

The chain, which has said it was losing $10 million a month, was previously an acquisition target of Prime Healthcare Services Inc. of Ontario.

But that company said it backed out of a $843-million deal because of “impossible” conditions imposed by Harris.

After the deal fell apart, Daughters of Charity’s chief executive, Robert Issai, said bankruptcy was an option to keep operating.


BlueMountain faces similar requirements to those turned down by Prime. For 10 years, five of the facilities must provide the same levels of emergency and non-emergency services to Medi-Cal beneficiaries and maintain Medi-Cal managed-care contracts, Harris’ office said.

And for 10 years, St. Francis in Lynwood must remain an acute care hospital with emergency service. BlueMountain has to maintain that status for five years at St. Vincent in Los Angeles, as well as keep Med-Cal service for the same time period, according to the attorney general’s office.

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FOR THE RECORD


12:25 p.m. Dec. 4: An earlier version of this story incorrectly said that the attorney general’s office said all six Daughters of Charity facilities would be required to maintain Medi-Cal service for 10 years.

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BlueMountain said it was reviewing the terms Harris imposed on the deal.

The announcement was cheered by SEIU-United Healthcare Workers West, a union with nearly 1,900 members working at Daughters of Charity.


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“We urge BlueMountain to accept the conditions and close the transaction so that everyone can put their full attention on providing the best patient care,” Marc Quarles, a radiology technician at Saint Louise Regional Hospital in Gilroy, said in a statement for the union.

In addition to the two L.A. County hospitals, Daughters owns four in Northern California: Saint Louise in Gilroy, O’Connor Hospital in San Jose, Seton Medical Center in Daly City and Seton Coastside in Moss Beach, near Half Moon Bay.

If BlueMountain accepts the deal, the hospital group would be renamed Verity Health System of California.


Follow me on Twitter: @khouriandrew

Staff writer James F. Peltz contributed to this report.

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