News & Press Releases

Southern California-based KPC Group acquires Seton’s Medical Centers in San Mateo County

On April 17th, the United States Bankruptcy Court in Los Angeles approved the sale of four hospitals within the Verity Health System - including Seton Medical Center in Daly City and Seton Coastside in Moss Beach - to the southern California-based KPC Group. The court approved bid has been submitted to the California Attorney General for approval, and that process is expected to take 4-6 months.

KPC Group is managed by its Chairman and Founder, Dr. Kali P. Chaudhuri. Dr. Chaudhuri is an orthopedic surgeon who is an American immigrant physician from Bangladesh that became a healthcare entrepreneur and investor. The KPC Group is engaged in numerous global industries – including KPC Health - which has several for-profit hospitals in Southern California’s Orange, Riverside, and San Bernardino counties. 

KPC Health owns and operates a group of integrated healthcare delivery systems consisting of acute care hospitals, Independent Physician Associations, medical groups, and various fully integrated multi-specialty medical facilities. KPC Health’s current system includes seven full-service acute care hospitals located throughout southern California. Additionally, KPC Health is acquiring seven additional acute care hospitals and two skilled nursing facilities located in Kansas, Utah, Mississippi, Arizona, Louisiana, and Texas, which will bring its integrated healthcare system to 20 facilities nationally combined with the Verity Health acquisition.

According to Peter Baronoff, Chief Executive Officer, KPC Health has previously acquired and led seven separate hospitals out of bankruptcy – which differentiates their group from others because they have the resources and practical experience to lead such a turnaround. The KPC Group was a runner-up bidder during the 2015 sale of Seton Hospital from the Daughters of Charity, and they have followed Seton affairs closely and are well aware of the challenges faced by Seton’s low-cost environment and case/mix index.

The transaction was a part of a $610 million dollar “Stalking Horse Asset Purchase Agreement (APA)” in the sale of four hospitals within the Verity Health System, including the two Seton facilities in San Mateo County along with two hospitals in Los Angeles County: St. Francis Medical Center in Lynwood and St. Vincent Medical Center in downtown Los Angeles. Of the proposed $610 million purchase price, $70 million is allocated to Seton Medical Center and Seton Coastside, while $120 million is allocated to St. Vincent Medical Center, and $420 million is allocated to St. Francis Medical Center.

The bid received was a result of the Chapter 11 bankruptcy filed by Verity Health System on August 31, 2018, which announced their plan to liquidate assets as part of the bankruptcy process. In bankruptcy proceedings, a stalking-horse bid is the initial offer accepted on the assets of a bankrupt entity, which becomes the low-end threshold for future offers so that other potential buyers cannot underbid the purchase price. This strategy is designed to maximize the value of the distressed entity’s assets and the APA becomes the opening offer for future bid submissions or auctions that may take place. 

No other proposed bids exceeded the initial stalking horse bid, so no auction was required to take place as part of the bankruptcy proceedings and subsequent sale approval. However, the deal remains subject to review by the California Attorney General, and a late-August / early-September timeframe for AG approval is considered realistic. In the meantime, the KPC Group will actively begin plans for full integration into the Seton infrastructure, which involves an extensive review of all contracts, union relationships, seismic issues, and an evaluation of existing programs and costs. Part of this operational review will also include a detailed review of labor, coding procedures, collections, supply-chain management, and the QuadraMed EMR.

SMCMA representatives met with Mr. Baronoff on April 26th to welcome KPC Health to the county and to discuss forthcoming plans for Seton Hospital. Mr. Baronoff stressed that although KPC Health is a for-profit system, the desire is to create a viable institution while seeking fair – not excessive – margins. He also outlined KPC Health’s preliminary vision for a new medical campus - with Seton Hospital as the epicenter – which include an Alzheimer’s’ & memory care center, low-cost senior housing and assisted living, an adult psychiatry facility, and a medical school and nursing institution. Although these plans are in their early stages of development, it is apparent that KPC Health is looking to not only make Seton Hospital a sustainable venture but is also looking to expand the Seton campus into a functional institution and community resource.

The sale of the remaining two hospitals in the Verity Health System – O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy – was finalized on March 1^st to Santa Clara County through the bankruptcy proceedings. This transaction gained a great deal of exposure as the California Attorney General, Javier Becerra, attempted to block the sale, but his petition was denied by a U.S. District Court and the $235 million sale to Santa Clara County was finalized.

In North San Mateo County, a great deal of concern has been expressed regarding access to care and quality of care at Seton Hospital during not only this period of bankruptcy for the Verity Health System, but also for the future of the facility. Trepidation remains in the community due to these uncertain conditions, but also from the well-documented financial struggles of Seton including Attorney General imposed restrictions, payer mix, pension liabilities, and earthquake retrofit costs. Many believe these financial encumbrances prohibit the facility from being fiscally viable and fear the community impact should the hospital be closed. According to Mark Fratzke, CEO of Seton Hospital, the Emergency Room serves nearly 30,000 patients each year, many of which are very sick, elderly, or have chronic conditions – leading to high admission rates. In addition, Mr. Fratzke estimated that 87% of patients served are on government programs utilizing Medicare or Medi-Cal administered by the Health Plan of San Mateo. The impact if Seton Hospital closed would be devastating in the community, especially due to the nature of its destitute patient population.

Dr. David Goldschmid, who served as the Director of Emergency Services at Seton Medical Center from 1988-2014, has repeatedly expressed that Seton Hospital is an essential provider of care in the community. According to Dr. Goldschmid, “the ED, cath lab, and outpatient services are very busy. It would be difficult to find alternative providers due to the high patient volume, their severity of illness, and the high prevalence of underinsured people in the area.”

The nearest alternate facility, Kaiser South San Francisco – located about one mile from Seton Hospital - is already noticing an increased volume in their Emergency Room as Seton is currently under stress and offering limited services due to some machines being down from unperformed routine maintenance. During a recent meeting with SMCMA Leadership, Dr. Jason Anderson, Assistant Physician-in-Chief at Kaiser SSF, noted that their ER already sees over 41,000 patients annually, and it would be unrealistic for their facility to handle the additional volume in the event of a Seton closure. Dr. Anderson also noted that the patients being redirected from Seton are typically very sick, with an Emergency Severity Index (ESI) score of 1 or 2 on the 5-point scale, causing a further strain on ER resources. Kaiser SSF is already planning an ER expansion based on their current patient volume requiring additional beds, and the uncertainty of the Seton facility along with the potential impact on the Kaiser SSF volume makes it difficult to create a long-term plan.

Although the importance of Seton Hospital in the North San Mateo County is obvious, the general sentiment is that this is a potentially unsafe situation that has reached its tipping point. Concerns about the long-term stability of Seton Hospital will remain in question until a greater sense of permanency is instilled within the community. Early indications are encouraging that KPC Health wants to bring stability and continuity to Seton Hospital, but only time will tell if their expertise can adequately navigate the challenging conditions presented. Stakeholders will now wait to see if the stalking horse will become the white knight that brings stability to the healthcare delivery system in North San Mateo County.

 

Keith Darby, CAE is the Executive Director of the SMCMA