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Wednesday, 16 December 2015 00:00

Why Is a Hedge Fund Acquiring a Nonprofit Hospital System? Not Out of Good Will

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aaaaaaaaaaaaahedgefund2Hedge funds and charity don't mix well. (Photo: Simon Cunningham)

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What is motivating a hedge fund to acquire a Catholic nonprofit hospital system in the San Francisco Bay Area? Is it a burst of Christmas spirit? After all, the Daughters of Charity hospitals serve a significant number of poor people in medical need.

We are skeptical that the acquiring hedge fund, BlueMountain Capital Management fund, is simply serving as a compassionate Santa Claus.

A December 14 article on the San Francisco Chronicle's SFGate site posed the financial paradox of the acquisition, given that the hospital is known for its care for the poor:

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.

SFGate also reported:

As of Monday’s [December 14] 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.

For-profit hospital systems have been around for a long time, so making a profit from them is not a new concept. Yet it's not currently clear how a hedge fund plans to collect on its $260 million purchase price for the Daughters of Charity. However, the Herald Current provides a hint when it reports that "the management of the non-profit hospital chain [which will remain technically non-profit as an IRS classification for the time being] would be under the senior management of the hedge fund."

It's possible that BlueMountain Capital Management fund will steer Daughters of Charity business purchases to firms in which it has a stake. It's also possible that the hedge fund will create for-profit professional firms that contract their services to the non-profit Daughters of Charity. There are multiple other possibilities for subverting the technical classification of Daughters of Charity as a nonprofit, potentially creating revenue streams for the parent hedge fund.

The San Jose Mercury News reported on one significant (albeit difficult-to-pull-off) strategy:

Steve Valentine, a West Coast vice president for Premier, a Charlotte, N.C.-based health care improvement company, said the biggest challenge facing BlueMountain is increasing revenues.

In public meetings around the state, Creem had said a central part of the firm's moneymaking strategy will be luring patients with private insurance -- which pays more than government funded Medi-Cal or Medicare rates -- from other hospitals in the area.

Whether or not - in a highly competitive healthcare market in the Bay Area - patients with health insurance can be "lured" from other providers remains to be seen. The effort would require a large infusion of marketing dollars by the hedge fund.

However, what is certain amid the still-emerging details of the curious acquisition is that a hedge fund would not acquire a hospital chain to increase medical services to the poor - or likely even to maintain the current level of indigent care. Hedge funds are not charitable organizations.

The acquisition is historic, as the Mercury News stated:

The news came 11 days after California Attorney General Kamala Harris gave her conditional approval for the largest nonprofit hospital transaction in state history, and the first to involve a hedge fund. 

The newspaper also speculated that the deal will keep "one of the Bay Area's oldest hospital chains afloat for at least three more years."

Of course, there's always the possibility that the hedge fund bought the Daughters of Charity Hospitals to make money eventually by selling off its assets. We might look at it as a hospital system; BlueMountain Capital Management might view it as a carcass.

Not to be reposted without permission of Truthout.