Saint Michael’s Medical Center Board Will Meet to Review Bids Today

Andrew Kitchenman | November 9, 2015 | Health Care
Prime Healthcare and Prospect Medical Holdings, both for-profit chains, have submitted offers to acquire Newark hospital

Grades at Saint Michael's Medical Center in Newark improved significantly.
What’s next for St. Michael’s Medical Center?

The fate of the landmark Newark hospital will move one step closer to being determined today, when its board of directors will consider two bids to purchase the facility.

However, that decision won’t be the final word on the hospital’s future, which depends on a bankruptcy judge and whether the state approves the sale.

Two California-based for-profit hospital chains – Prime Healthcare Services and Prospect Medical Holdings – submitted bids in a bankruptcy-sale auction held last week. Details of each bid have not been released.

The hospital’s board isn’t required to choose the highest bidder – bankruptcy laws allow it to choose whichever bid it deems “best” for the hospital.

After choosing the bidder today, the board is scheduled on Thursday to ask U.S. Bankruptcy Court Judge Vincent F. Papalia to approve the bid. However, the state Department of Health and attorney general’s office also must sign off on any transfer of hospital ownership, and Papalia may consider the views of state officials on the sale.

Prime Healthcare goes into today’s board meeting with advantages, including the fact that Saint Michael’s officials announced an agreement to sell the hospital to Prime in December 2012.

In addition, Prime’s bid has received vocal support from some community members and Newark City Council members, who have cited Prime’s commitment to keeping 1,400 jobs at the hospital and its promise to maintain services for five years.

“We urge the board to do the right thing and pick Prime,” said the Rev. Ronald Slaughter, senior pastor of Saint James AME and co-chairman of the Save Saint Michael’s Medical Center Coalition, in a statement. “Prime has demonstrated its commitment to our community for the last three years and has stuck with this process even though the state has unnecessarily dragged its feet.”

The state’s position may be Prime Healthcare’s biggest disadvantage. Right through Saint Michael’s bankruptcy announcement in August, Department of Health officials continued to ask the hospital chain for more details about the transition and how Prime would operate the hospital in the future.
In addition, the state approved Prime’s acquisition of St. Mary’s Hospital in Passaic and the three-hospital Saint Clare’s system in much less time than it has taken to consider Prime’s bid for Saint Michael’s.

From the state’s perspective, the biggest potential advantage of selling the Saint Michael’s to the other bidder, Prospect Medical Holdings, is the possibility that it would work closely with other Newark area hospitals in operating Saint Michael’s.

Acting Health Commissioner Cathleen Bennett recently cited Prospect’s offer to coordinate its operation of East Orange General Hospital with the state in supporting Prospect’s purchase of that facility.

The coalition supporting Prime noted in a statement that Prospect’s owner, the Los Angeles-based private equity firm Leonard Green & Associates, also owns BJ’s Wholesale Club, Lucky Brand jeans, and Petco. In contrast, Prime is owned by “medical professionals who have a track record of turning financially ailing hospitals around” in communities where the hospitals serve minority residents.

However, Prime’s stewardship of its California hospitals has been criticized by the Service Employees International Union in California, citing disputes over employee benefits as well as federal investigations of billing and patient confidentiality.

In addition, consumer advocates in New Jersey have asked Prime to commit to keeping the hospital open for 10 years, to guarantee in-network status for a majority of insurance plans, to retain all services needed by the community, and to maintain safe staffing levels.

Saint Michael’s executives haven’t tipped their hand on which bid they prefer. In a memo sent to hospital workers on Friday, they described both Prime and Prospect as “very interested and committed.”

“Over the course of the auction both bidders remained very active,” according to the memo. “This serves as testament to the great interest both parties have in acquiring Saint Michael’s and validates that Saint Michael’s is essential to the Greater Newark community.”

[related]The memo said that the hospital, its advisors, and a committee representing the hospital’s creditors “worked tirelessly to encourage the bidders to put forward not only the best monetary offers but also to improve the terms of the asset purchase agreement towards assuring the long-term viability of Saint Michael’s.

“At the conclusion of the auction, Saint Michael’s was in possession of two very attractive and outstanding offers.”

Through the state’s certificate of need process, the Department of Health must approve any major changes in hospital ownership or operations.

In addition, the Community Health Care Assets Protection Act requires the state attorney general to review whether a sale of a nonprofit hospital like Saint Michael’s to a for-profit operator would serve the public interest.

Finally, the state has two major financial stakes in Saint Michael’s future. The hospital has $233 million in outstanding bonds that the state would be responsible for paying if the hospital is sold to a for-profit company, minus the amount of the purchase. For example, if Prime’s initial agreement to buy Saint Michael’s for $49 million had been approved by the state, the state would have had to pay off roughly $184 million in outstanding debt.

The Bank of New York Mellon is the trustee for the New Jersey Health Care Facilities Financing Authority-issued bonds. The bank submitted a court filing last week indicating that it would object to any sale for less than $60 million.

In addition, the state owns University Hospital, which faces a long-term operating deficit, according to a state-commissioned report by Navigant Consulting. Navigant said this loss could be turned into a profit if East Orange General Hospital, Newark Beth Israel Medical Center and Saint Michael’s were converted from full-service, acute-care hospitals into outpatient centers, and if University Hospital were to be expanded.