PIH acquisition of Downey Regional raises eyebrows in health community

DOWNEY - After spending years beleaguered by debt and failed acquisition attempts, Downey Regional Medical Center finally received some good news on March 6, 2012. It had only been three years since Downey Regional filed for Chapter 11 bankruptcy protection citing poor HMO contracts and financial system breakdowns, but due to a successful reorganization plan, the hospital was now able to announce it would soon secure $52 million in loans.

"Downey Regional Medical Center's recovery is a success story almost without parallel," said hospital CEO and president Kenneth Strople at the time. "Hospitals don't usually survive bankruptcy intact, let alone unaffiliated...We are very proud of everything we have accomplished and are looking forward to making more exciting announcements in the near future."

Nine months later, executives at DRMC kept their promise announcing new "affiliation discussions" with non-for-profit health care network PIH Health of Whittier.

Sources privy to the impending deal, however, are raising questions concerning the transparency and integrity of the negotiations, which they believe will lead to a multi-million dollar acquisition of Downey Regional Medical Center.

According to documents obtained through the Downey city clerk's office, Downey Regional management evidently dismissed more than one eligible acquisition offer from credible health care entities without proper due diligence in order to advance negotiations with PIH Health.

Confidential documents obtained by The Downey Patriot indicate Rob Fuller, executive vice president at DRMC, met with Alan Weiner and James Hopwood, managing directors of Tampa-based Focus Management Group on Oct. 1, 2012 to discuss a notice of acquisition opportunity for potential acquirers.

The decision was made to send the notice to 16 non-profit and for-profit entities that have a strategic interest in Downey including PIH Health, Daughters of Charity Health System, Providence Healthcare System, St. Joseph's Health System, Cedars Sinai, University of California at Los Angeles, University of Southern California, Prime Healthcare, Prospect Healthcare and others.

In addition to highlighting the hospital's strengths, the two-page notice encouraged potential buyers to "propose any acquisition structure, either for-profit or non-profit, they believe will result in a successful transaction."

By Nov. 23, Downey Regional had an interested buyer.

In an e-mail sent from Kenneth Strople to the members of the Downey City Council, the DRMC president informed the council of a special board meeting on Nov. 29 where the hospital's board of directors would discuss a letter of intent between Downey Regional and PIH.

According to the eight-page letter of intent, PIH sought to acquire the Downey hospital after a period of exclusive negotiations. If the deal was approved by the Downey Regional board of directors, PIH would assume or satisfy all of the hospital's Chapter 11 bankruptcy plan obligations and provide working capital for the hospital over the next five years.

"Legally speaking, this is an affiliation," said Fuller. "There is an acquisition of assets however, so the attorney general requires we call it an acquisition, but it's two non-profits coming together."

Fuller, who joined the staff of DRMC in 2001, said the acquisition deal will add Downey Regional as the second hospital under the umbrella of PIH Health extending non-hospital services to the Downey stand alone medical center, which would probably change names.

"We're not wedded to the name," said Fuller. "I guess some smart people at PIH will suggest unified branding so the hospital will probably be called PIH - Downey Hospital."

Prior to that special board meeting, however, Downey Regional executives received correspondence from other health care groups interested in acquiring the hospital.

On Nov. 26, Joel Freedman, CEO of for-profit Avanti Hospitals, forwarded a memorandum of interest to Rob Fuller concerning Downey Regional Medical Center.

"As you may recall, we have had a long-standing interest in providing support to the hospital [DRMC] and its surrounding community," wrote Freedman. "A history which includes the execution of a term sheet between Downey and a subsidiary of Avanti in November 2011, pursuant to which, among other things, Avanti proposed to lend $32 million to Downey and enter into a management agreement to operate the hospital."

Freedman says he was surprised when his company's offer was hastily rejected without any due diligence by Downey Regional management. "Avanti operates four hospitals in south, southeast Los Angeles County. We're one of the most successful health care systems financially - we have the capital," Freedman said. "We sent them a five to seven-page proposal, but we were quickly dismissed. We're a clear alternative that should have been seriously considered."

Fuller maintains the hospital board voted in 2009 not to consider offers from for-profit entities, but Freedman insists Downey Regional management engaged in acquisition discussions with Avanti in November 2011.

While Freedman had nothing negative to say about PIH Health, he now questions Fuller and Strople's motives for not allowing the DRMC board of directors to thoroughly discuss Avanti's proposal. "One or two other buyers were not given the time of day, we should have been a clear option," he said. "We're a different solution that would provide excellent care and community education. The community would've been able to own and operate the hospital without it being a stand alone hospital."

Downey Regional also received interest from Daughters of Charity Health System, which owns St. Francis Medical Center. The group previously sought to acquire the 199-bed hospital in February 2010, but new offers from the health care entity were likewise rejected without proper due diligence.

During the special board meeting on Nov. 29, board members approved the letter of intent between PIH and DRMC in a 5-1 vote, noting two absents, and official negotiations began despite the proposals received by Downey Regional executives just days before.

In any case, correspondence between Fuller and the Downey city manager's office indicates DRMC management may have been preparing for the acquisition with PIH weeks before the announcement.

On Nov. 8, 2012, just 15 days before Strople announced the letter of intent between PIH and DRMC, Fuller e-mailed Downey City Manager Gilbert Livas requesting the City Council eliminate from its lease with the hospital a "strict" residency requirement for its board of directors. "We believe that the residency requirement in the lease is outdated with respect to DRMC board membership," wrote Fuller.

In his request, Fuller proposed the board requirements be broadened to incorporate anyone who has "significant interest in the city or region." He also suggested the board's size specifications be altered from its current requirement of "not less than 15 members" to five to 15 members, with a target of 11.

"The terms of our 1982 lease is not good governance," said Fuller. "The board is gigantic and may be unconstitutional. We're a $200 million business, without the proper understanding of business there's a lack of good governance. What we'd like to see is a professional government approach like a non-profit advisory board structure."

In an e-mail response on Dec. 3, Livas deferred the request stating the City Council found it premature to discuss an amendment to the lease while Downey Regional engaged in negotiations with PIH.

Fuller replied the following day noting that Downey Regional would indeed continue requesting the change even after a deal with PIH was complete. "We will have some clarity for you and the City Council soon concerning the potential affiliation with PIH," Fuller wrote. "Accordingly, we will likely be asking for the same amendment to Section 17.A as we requested on November 8 sometime in the near future."

Downey Regional entered negotiations with PIH Health on November 30 after signing a non-binding letter of intent. The exclusive negotiations are expected to end before March 1 followed by a waiting period of 60-105 days, according to Fuller. Any definitive agreement reached must be approved by DRMC's board of directors.

********** Published: January 31, 2013 - Volume 11 - Issue 42