Saint Michael’s Board Sticks with Original Bidder, to Critic’s Dismay

Andrew Kitchenman | November 10, 2015 | Health Care
Hospital representatives point to higher purchase price, capital investment, but public-interest advocate sees little new that will benefit public

St. Michael's Medical Center in Newark
Saint Michael’s Medical Center’s board has decided to stick with the same purchasing partner that has sought the hospital for three years, to the dismay of a public-interest advocate.

Prime Healthcare Services won the board’s approval yesterday over Prospect Medical Holdings, by offering $62 million, an increase of $13 million above the $49 million that Prime offered before the hospital filed for bankruptcy in August. Prime also increased the amount it promised to spend on capital investments, from $25 million to $50 million.

The board will recommend on Thursday that U.S. Bankruptcy Court Judge Vincent F. Papalia approve the sale to Prime. It’s not clear whether the state government will take a position on the sale by the Thursday hearing, but the state Department of Health and attorney general’s office ultimately must decide whether to sign off on the deal

Saint Michael’s representatives pointed to the increased purchase price, as well as Prime’s decision to double its commitment in capital investments in the hospital,, both increases over Prime’s pre-bankruptcy offer.

But Renee Steinhagen, executive director of New Jersey Appleseed Public Interest Law Center, questioned whether the changes would benefit the community, which she said is in need of greater outpatient care and coordination with the work of other Newark hospitals.

Prospect offered $63 million — $1 million more than Prime. However, Saint Michael’s and Prime had an agreement that the hospital would pay Prime a $1.5 million “breakup fee” if it chose another bidder. This meant that Prime’s bid was worth $500,000 more than Prospect’s.

‘Overwhelming’ support by hospital board

Saint Michael’s CEO David Ricci said the board “overwhelmingly” voted in favor of Prime, although the hospital appreciated “the interest and support” of both bidders. Saint Michael’s held an auction last Thursday that had 17 rounds of bidding between the two companies, which are both for-profit chains based in California.

Saint Michael’s bankruptcy attorney Michael Sirota noted that a committee representing the hospital’s creditors “fully endorsed” the board’s choice of Prime.

Sirota also expressed hope that state officials would quickly approve the sale to Prime, based on conversations that hospital representatives had with
representatives of the state attorney general’s office. The hospital is addressing all of the questions that the attorney general’s office had regarding the sale, he said.

Sirota also noted that Prime cleared the $60 million bar set by Bank of New York Mellon, the trustee for $228 million in outstanding hospital bonds on behalf of the New Jersey Health Care Facilities Financing.

Saint Michael’s revenue can be used to pay off the tax-free bonds as long as it remains a nonprofit hospital. But once a for-profit company owns the hospital, it would no longer be legally responsible for paying the bonds. Therefore, the state would be responsible for the remaining bonds.

It appears as though the state will remain on the hook for roughly $166 million in principal on the bonds, after using the $62 million from the sale to reduce the principal. If the state agrees to the Prime sale, the purchase price would pay for state bond payments into the second half of 2019. Under the current bond schedule, the state would have to pay roughly $16.75 million in combined principal and interest annually through 2039.

The Department of Health must approve any major changes in hospital ownership or operations, as part of the state’s certificate of need process. And the state attorney general must review whether the sale of a nonprofit hospital to a for-profit operate would serve the public interest as part of the Community Health Care Assets Protection Act.

Sirota said he’s hopeful that since Prime’s purchase price cleared the bar set by the state authority’s trustee, that other state agencies will support the sale.

Prospect: ‘We remain interested’

Prospect Medical Holdings executives released a statement saying that they believed they made a “highly competitive and attractive offer” for the hospital. They thanked the board for considering the offer, adding: “We remain interested in acquiring Saint Michael’s if the circumstances change and our bid is reconsidered.”

Steinhagen noted that Prime’s final purchase price was less than the $65 million that was initially offered for the hospital in 2012 – Prime’s offer was reduced during the sale process.

“I feel that this process was unnecessary and it got the hospital — and the public — no further than it was before,” she said.

Steinhagen expressed concern that the bankruptcy process could lead to a result that the state hadn’t agreed to before the bankruptcy filing.

“There’s something wrong with how they’re using the bankruptcy court,” Steinhagen said.

She expressed disappointment that Prime hasn’t made the same public commitments that Prospect has made in its agreement to purchase East Orange General Hospital.

Prospect officials have said that they largely agree with the recommendations contained in the state-commissioned report by Navigant Consulting. They include cooperating with other Newark-area hospitals, expanding outpatient services, and considering a reduction in the number of in-patient beds. State Acting Health Commissioner Cathleen Bennett noted Prospect’s willingness to work with the state in supporting the East Orange General Hospital sale.

But Navigant’s central recommendation was to close East Orange General Hospital, Newark Beth Israel Medical Center and Saint Michael’s Medical Center as acute-care facilities and converting them to outpatient centers. It also recommended expanding state-owned University Hospital to serve as the only full-service, acute-care hospital in the city.

Ricci noted yesterday that Prospect did not agree to close East Orange.

Ricci also said that other provisions of the sale include a commitment from Prime to hire all current hospital employees. He added that he anticipates the company would add employees since it’s been difficult to recruit workers during the prolonged sale process.

Promise to ‘rebuild’

Ricci added that Prime plans to use part of the $50 million in capital improvements to invest in some services that are “a bit dormant” and “rebuild Saint Michael’s into the premier institution that it was.” It will also maintain all current inpatient and outpatient services for at least five years.

As an example, he cited the challenge the hospital has in recruiting a new chair for the hospital department that conducts open-heart surgeries, which fell from more than 400 in 2010 to roughly 180 last year. He said the difficulty recruiting a doctor was “a direct result” of the prolonged sale.

Steinhagen expressed skepticism that Saint Michael’s would benefit from $50 million in capital improvements, since the hospital was recently renovated using some of the bond funds.

Steinhagen also criticized Ricci’s example of increasing the number of open-heart surgeries.

“That is exactly what we don’t need. What? So they can compete with University and Newark Beth Israel?” she asked.

Instead of more spending on inpatient services to compete with state-owned University Hospital – which could lead to the state losing much more money in the long run – Newark “needs a change in the delivery of healthcare,” including an investment in outpatient services and the coordination of patient care between different providers, Steinhagen said.

Navigant projected that five Newark-area hospitals would lose $190 million annually by 2019 if no changes were made in how they operate.

But the consulting firm projected that the hospitals would turn n a profit if all of its recommendations were followed.

Saint Michael’s executives have rejected the Navigant report, saying that the projections were flawed.

An alliance of local religious leaders and elected officials, the Save Saint Michael’s Medical Center Coalition – immediately hailed the board vote. The group has consistently backed the sale to Prime.

“Prime has demonstrated a deep commitment to Newark,” said Bishop Jethro James, president of the Newark/North Jersey Committee of Black Churchmen and a coalition co-chairman. “Despite all the roadblocks that were thrown up by the state, Prime stuck with us in Newark.”