Jewish Hospital’s downtown campus

Whispers about BlueMountain Capital Management’s proposed acquisition of Jewish Hospital and other local facilities have flown around town with increasing frequency this summer — but also with increasing divergence.

“The deal is dead,” one source told Insider last week. A second source said initially that the deal was rumored dead a few weeks ago and later confirmed the initial source’s report — only to revise the tip a couple of days later, saying that the deal is still in play, and now, its conclusion is imminent. 

Negotiations are taking place outside of the view of even many of the roughly 4,000 employees who may be affected. One of those employees, who asked not to be identified, told Insider that staff has been given only vague updates.

“We have no idea what’s going on,” he said.

On the record, spokesmen for the parties would say only that negotiations are continuing and that they remain hopeful about being able to reach an agreement.

However, behind the scenes, hospital and university officials have become entangled in a complex web of interests that reaches from coast to coast and involves the would-be buyer, a New York-based hedge fund; enormous San Francisco- and Denver-based health systems; and an eccentric billionaire who owns The Los Angeles Times.

Exclusive negotiations between KentuckyOne Health, which owns the local medical facilities, and BlueMountain are approaching the end of their ninth month, with only about three weeks remaining before the original expected completion date, Sept. 22.

Chuck Neumann

KentuckyOne CEO Chuck Neumann recently acknowledged that the process “is taking a bit longer than we originally planned.”

In a “strategic update” toward the end of July, Neumann told employees that they “may have noticed additional activity, discussions and visits with many leaders at multiple facilities” and he expected that process to continue “until at least mid-August.”

However, in the middle of this month, Neumann wrote that BlueMountain had informed KentuckyOne that it needs “a few more weeks to analyze all of the information that has been gathered, and that they will also continue their dialogue with UofL.” The CEO said that he remained optimistic about reaching an agreement “around the end of summer,” indicating that the parties may now overshoot their initial deadline.

The University of Louisville is involved for several reasons, including that University of Louisville Physicians staff many of the facilities that may be involved in the deal and that the institution uses various facilities for medical research and training purposes. Dr. Greg Postel, the university’s vice president for health affairs, declined to be interviewed.

The local deal’s delay is coinciding with prolonged merger discussions involving KentuckyOne’s parent, Denver-based Catholic Health Initiatives, and San-Francisco-based Dignity Health. The health systems’ governing boards “have encountered multiple setbacks … and there are few indications that they will consummate the deal soon,” according to an Aug. 11 report from Modern Healthcare.

The negotiations about the Louisville medical facilities also are occurring as media are reporting that a California hospital system, which includes facilities that were part of a BlueMountain acquisition in 2015, but in which the hedge fund now holds just a minority stake, may be nearing bankruptcy. According to Politico, the system, Verity Health, invested millions in technology that advanced L.A. billionaire and LA Times owner Patrick Soon-Shiong’s for-profit interests “while cutting charity care and neglecting earthquake preparedness.”

Dr. Peter Hasselbacher

Dr. Peter Hasselbacher, a local health care industry observer, said the local negotiations’ sluggishness may point simply to the deal’s scope and complexity, ranging from lease agreements to pension debt and intellectual property. But, he said, it could also indicate that BlueMountain’s analyses of the local assets have uncovered something unexpected that is making the firm’s leaders hesitate.

“Delays must tell us that … something’s going on,” Hasselbacher told Insider this week. “It’s not as easy as they thought.”

Jewish Hospital, a 462-bed facility in downtown Louisville, for years has been losing money and until recently had been propped up financially by the profitable University Hospital, which KentuckyOne managed. However, the University Hospital’s management — and profit — has reverted to the university, leaving Jewish in a more precarious financial situation and its owner in a more desperate state to sell it, lest it keep hemorrhaging cash.

According to CHI’s most recent quarterly operating statement, Jewish Hospital and St. Mary’s Healthcare (JHSMH) through the first nine months of fiscal 2018 were incurring operating losses of more than $1 million — per week. And that’s before structuring, impairment and other losses.

The longer the negotiations continue, the longer CHI is responsible for the losses at JHSMH, though BlueMountain also continues to incur due diligence costs, which, one source told Insider, now exceed eight figures. BlueMountain declined to comment on that figure.

Hasselbacher said that while he has no inside knowledge of the negotiations, he believes it is most likely that CHI remains a willing seller and that BlueMountain is balking — perhaps at the significant deferred maintenance expenses for the local medical facilities, or, as another source suggested, the arrangements with University of Louisville Physicians.

“I’m sure CHI wants to sell it as a package,” Hasselbacher said. “They may not have that luxury.”

Hedge fund remain interested in health care

While BlueMountain may be having second thoughts about JHSMH, the disruption in the health care sector is continuing to draw the firm’s interest.

Last month, the company bolstered the team of Jim Pieri, who heads the firm’s private health care investments, by creating two new positions for senior analysts.

BlueMountain said in a news release at the time that it has invested more than $500 million in health care in recent years, including in post-acute and long-term care, behavioral health, acute care and physician practice management companies. In total, the firm has more than $21 billion in assets under management.

Chief Investment Officer and co-founder Andrew Feldstein said in the release that disruptions in the health care sector are creating investment opportunities.

“Just as the financial services industry went through a major transition in recent years, many health care sectors are beginning to go through substantial transformation that will dynamically evolve over the next decade, thus increasing the need for nontraditional capital providers,” he said.

James Pieri

Meanwhile, Pieri said that the health care sector remains attractive because demand for services continues to “exhibit predictably strong growth rates.

“However, a combination of rising costs, ineffective delivery and misaligned incentives are accelerating necessary market structure reform and business model change,” he said. “These factors impact market participants unequally and create attractive investment opportunities. As a result, the need for flexible capital solutions has increased substantially, creating a unique, persistent and high barrier-to-access opportunity for our investors.”

Hasselbacher remains concerned especially about how the interests of a hedge fund may alter the culture and mission of a downtown hospital that traditionally has taken care of a greater-than-average share of patients without a safety net or on government insurance, which pays lower reimbursement rates for medical care than private insurers.

A lot of the dynamics that produced challenges in the California hospital system that BlueMountain acquired — not enough private patients, too much deferred maintenance, high salaries — are affecting medical facilities in Louisville, Hasselbacher said.

Since BlueMountain acquired the six former Daughters of Charity Hospitals in California, Leapfrog safety grades for three of them have deteriorated, with two, including the flagship St. Vincent Medical Center in Los Angeles, falling to a “D.” However, grades for Jewish, St. Mary’s and University Hospital also all have fallen to a “D” during that span.

If Jewish Hospital ceased operating as a full-service hospital, “where would all those patients go?” Hasselbacher asked.

At the same time, he said, if the current negotiations failed, it could lead to an outcome that could benefit the community. The ideal case, he said, would be if Jewish Hospital were controlled by and would cooperate with University Hospital. Such a union would allow Jewish Hospital to continue its traditional mission and also would produce benefits for the university, including access to research money, a greater variety of patients to expand student experiences, and teaching areas for cardiac and organ transplant services.

The importance of the outcome of the CHI and BlueMountain negotiations on the city, its residents and the university cannot be overstated, Hasselbacher said.

“The impact … could be colossal, or even catastrophic,” he said.