Antitrust fears steer bankrupt hospital to Westchester savior
With state and federal regulators ready to block a sale to a competing Hudson Valley hospital system, officials at bankrupt St. Francis Hospital in Poughkeepsie this month accepted a purchase offer from Westchester Medical Center that would keep the 100-year-old hospital campus operating with what St. Francis officials called “minimal disruption” to existing services.
A late shift in the 2-month-old Bankruptcy Court proceeding left the first-year CEO of Health Quest Systems Inc., an apparent loser in the deal, critical of regulators who effectively thwarted the sale of St. Francis Hospital to Health Quest. Health Quest operates Vassar Brothers Medical Center in Poughkeepsie as well as Northern Dutchess Hospital in Rhinebeck and Putnam Hospital Center in Carmel.
Critics of the proposed sale to Health Quest, led by physicians affiliated with St. Francis, claimed the takeover would give Health Quest a monopoly on hospital services in Dutchess and Putnam counties and overburden emergency and other medical care staff in consolidated facilities at Vassar Brothers. Although Health Quest officials said they were committed to maintaining jobs at St. Francis and hiring all qualified employees, Physician Friends of St. Francis Hospital in a letter to the Bankruptcy Court claimed more than 1,000 jobs would be lost in a Health Quest takeover. St. Francis employs about 2,000 full-time and part-time employees.
Unsaddled as stalking horse bidder in the bankruptcy sale by antitrust rumblings, Health Quest recently withdrew the $24.15 million purchase offer it made as sole prospective bidder in mid-December, when St. Francis filed for Chapter 11 bankruptcy protection. St. Francis officials on Feb. 10 canceled a scheduled auction of hospital assets and struck an alternative deal with Westchester County Health Care Corp., the public-benefit corporation that operates Westchester Medical Center in Valhalla.
U.S. Bankruptcy Judge Cecelia G. Morris is expected to set a May 9 closing date for the sale. Health Quest”™s stated disappointment over the pending sale to a rival bidder might be somewhat salved by the $1 million break-up fee that Health Quest will be paid by debtor St. Francis when the sale closes.
Health Quest and Westchester Medical Center were the only bidders for the 333-bed hospital, known for its mental health and addiction services and Level II trauma center for emergency care. Arthur A. Nizza, who has served as president and CEO of St. Francis Hospital since last August, in court documents said the hospital and affiliate entities had an operating loss of $7.7 million in 2012 and gross revenues of nearly $150 million.
An attorney for St. Francis reportedly said the offer by Westchester Medical Center was $18 million to $19 million better than Health Quest”™s stalking horse bid.
The asset purchase agreement entered in Bankruptcy Court on Feb. 10 calls for a $3.5 million cash payment at closing by Westchester Medical Center, which also will assume an unstated amount of debtor liabilities. St. Francis in its first-day bankruptcy filings listed approximately $137.7 million in liabilities as of last July 31 and net assets totaling approximately $17.2 million.
As part of the purchase deal, Westchester Medical Center also would issue exchange bonds to buyers of the approximately $37.47 million in bonds obtained by St. Francis Hospital since 2004. The hospital defaulted on those bonds in late 2012 and early 2013, which led to the decision to explore a possible sale or merger to another health care provider and other potential uses for the St. Francis campus, Nizza said in a court document.
Westchester Medical Center is expected to operate the Poughkeepsie hospital under a management services agreement prior to the sale closing.
In response to the Business Journal, a spokesman for Westchester Medical Center issued this statement regarding the St. Francis Hospital takeover:
“Following the entry of a final order by the court, we will be communicating more broadly about the plans and process over the coming weeks and months. We appreciate the hard work that has gone into developing a plan to continue and expand the quality and breadth of health care services offered in the mid-Hudson Valley region. We are excited about the future and thankful for the outpouring of support and enthusiasm we have received from the Saint Francis and Westchester Medical Center families and the community at large.”
The Valhalla corporation in court documents this month said it planned to “enhance and strengthen” all current services at St. Francis “while introducing additional advanced-care offerings locally to more patients in areas such as orthopedics, cancer, neurosciences, trauma and critical care, and cardiovascular.”
At Health Quest, CEO Luke McGuinness in a statement released after the WMC purchase offer said “intervention” by state and federal regulatory authorities forced Health Quest trustees to drop out of the bidding process, although its stalking horse bid “would have provided the best outcome for those seeking local access to affordable, high-quality care.”
Letters from state and federal attorneys to lawyers representing St. Francis in the bankruptcy proceeding indicate regulators were prepared to let the Health Quest purchase go through as long as no other bidders surfaced for the severely financially distressed hospital, where officials were seeking a quick transfer of assets in order to continue operations.
Attorney Susan Raitt, an attorney in the Northeast regional office of the Federal Trade Commission, in a letter written one month before the hospital filed for bankruptcy, requested information from a St. Francis attorney for a joint, “non-public” preliminary investigation by the FTC and the New York Office of the Attorney General to determine whether the proposed deal with Health Quest might violate antitrust laws by substantially reducing competition.
On Dec. 17, the day St. Francis filed its Chapter 11 petition, Raitt wrote in an email to the same attorney for St. Francis: “Based upon the current information we have on St. Francis”™ financial situation, and assuming there is no alternative purchaser, FTC staff would not recommend a challenge to the acquisition by Health Quest of St. Francis.”
On Feb. 10, when Westchester Medical Center submitted its purchase offer, Raitt notified the St. Francis attorney that FTC staff “has significant concerns” that Health Quest”™s acquisition of St. Francis “could result in a substantial loss of competition in acute care inpatient services” in the Poughkeepsie area and could result in “higher prices and reduced quality and access.”
Raitt said the FTC would ask St. Francis and Health Quest to delay closing on the deal until the investigation was completed. She said it was “highly likely” the FTC would go to court to block the purchase or overturn the sale or Health Quest”™s ownership if it went through.
On Feb. 11, the state attorney general”™s office weighed in with the same opinion heard from federal regulators by the St. Francis attorney.
Eric J. Stock, chief of the state”™s antitrust bureau, said his office”™s preliminary investigation raised “significant concern” that the proposed deal with Health Quest “would combine two significant and direct competitors” and leave Health Quest as sole provider of inpatient hospital services in Dutchess and Putnam counties.
Both Raitt at the FTC and Stock said the alternative bid by Westchester Medical Center did not raise antitrust concerns. Raitt assured the St. Francis attorney that a WMC purchase would not run the risk of extended delays or legal challenges by the federal agency.
McGuinness, though, in the wake of Health Quest”™s withdrawal said officials there were convinced that making St. Francis part of Vassar Brothers and the Health Quest system “would have helped drive down medical costs for our entire region and would lead to better access to enhanced medical services for the entire service area.”
The Health Quest CEO added that the position of FTC and state antitrust regulators “runs counter to the goals of the Affordable Care Act, the New York State Berger Commission recommendations, the public policy declared by the state legislature in recent statutory enactments, and the overall goal of state and federal policy makers to reduce duplication, promote preventative care and improve patient outcomes.”
McGuinness declined to comment further on those views to the Business Journal.