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California Attorney General And Santa Clara County Face Off Over Sale Of Two Hospitals

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UPDATE at 4 p.m. PT:

A federal bankruptcy judge has denied a bid by California Attorney General Xavier Becerra to postpone the sale of two nonprofit hospitals to Santa Clara County.

The ruling is a win for county officials, who had argued any delay could lead to the closure of the hospitals.

Becerra’s effort to temporarily block the sale “would set in motion a series of events that, in all probability, would reduce the availability of healthcare services to the public,” Judge Ernest Robles wrote in his 18-page ruling.

When U.S. Sen. Kamala Harris approved the sale of six nonprofit California hospitals in 2015 as the state attorney general, she imposed strict conditions on the new corporate owners, requiring them to continue to provide critical health services to area residents.

Now her successor, fellow Democrat Xavier Becerra, is asserting his authority in court to enforce those conditions on Santa Clara County, which wants to buy two of the hospitals out of bankruptcy. County officials warn that the attorney general’s stance could force the closure of the hospitals, limiting health care access for hundreds of thousands of people.

A court hearing is set for Wednesday.

At the heart of the power struggle is whether Santa Clara County, which has made a $235 million bid to acquire the financially troubled Verity Health System hospitals, must abide by a 2015 agreement between the attorney general’s office and the new corporate owner.

“To some extent the attorney general doesn’t want to give up this authority,” said Susan Channick, a law professor emerita at California Western School of Law, San Diego. “The idea of the attorney general’s office is to make these hospitals provide health services.”

The attorney general is the state watchdog who oversees sales of nonprofit hospitals. In this role, legal experts say, the attorney general can take steps to ensure that key services, such as emergency room care, and surgical and reproductive health services aren’t dropped because they don’t make money for new owners.

That’s what happened when Harris, who last week announced her candidacy for president in 2020, intervened in the purchase of two Verity hospitals — O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy — along with four other nonprofit hospitals in San Mateo and Los Angeles counties. As part of the deal with Harris, Verity would keep a number of services running for five to 10 years, including intensive care and obstetric services in Gilroy and 24-hour medical services in San Jose.

Now Verity has filed for bankruptcy and its hospitals are for sale.

Santa Clara County was the only bidder for the two hospitals within its borders, and in December a federal bankruptcy judge in Los Angeles ruled that the county didn’t have to meet any of the attorney general’s requirements, saying that Becerra had stated in court documents that he didn’t object to the sale and had waived the conditions during his failed negotiations with the county.

Becerra vehemently disagrees with the judge’s assessment and denies that he waived the conditions, arguing that the new owner must comply with the conditions even though it’s a government entity.

He filed an appeal and a motion to temporarily block the sale, hoping to give both sides more time to negotiate. A hearing on his motion is scheduled for Wednesday. If Becerra loses, the sale would likely proceed.

“We’re going to do everything we must to make sure that the people who live and depend on those health facilities know that their health services will be protected,” Becerra told California Healthline.

Local elected officials say Becerra isn’t acknowledging that the hospitals would likely close without them, and that a purchase by the county government — whose mission is to provide safety-net health services — is a far cry from a corporate takeover.

“There’s a difference between a corporate acquisition and a rescue operation,” said County Board of Supervisors President Joe Simitian, a former state senator. “The attorney general’s office has been clear about its need to assert jurisdiction, but let’s focus on the patients.”

“It shouldn’t be about power and politics,” Simitian added. “It should be about the residents of Santa Clara County who may not have a hospital if this deal crumbles.”

Although Santa Clara County makes up part of the wealthy Silicon Valley, more than 403,000 of its residents are eligible for Medi-Cal, the state health insurance program for low-income people. County officials say the purchase of the two hospitals — especially St. Louise in rural Gilroy — will expand the county’s safety-net health care system and relieve pressure on its overcrowded public hospital, Santa Clara Valley Medical Center.

The KPC Group, which owns hospitals, clinics, commercial real estate and agricultural research centers around the world, has bid $610 million to purchase the four Verity hospitals in San Mateo and Los Angeles counties, but the sale has yet to be approved by a court.

The dispute between Becerra and Santa Clara County is troubling to area residents, who showed up to support local officials at a news conference last week to denounce the attorney general’s attempt to block the sale. If the 93-bed St. Louise Regional Hospital closes, the nearest major hospital would be at least 20 miles away.

“South County really needs a major hospital. We are a community of farmworkers, of low-income people,” said Gilroy resident Sally Armendariz, 76.

While Becerra wants to ensure certain health services remain, county officials argue the requirements are too prescriptive. For example, they don’t want to agree to provide a specific number of beds for intensive care and obstetrics, they say, because they need flexibility to organize public health services across the region.

Santa Clara County Counsel James Williams described Becerra’s legal action as “really dangerous,” because it threatens not only the sale of the hospitals — but their existence. The county’s purchase agreement with Verity expires Feb. 28, and if the deal isn’t concluded by then, it’s voided, county officials said.

It’s not clear whether county officials are posturing to get out of the conditions that Harris imposed, or expressing a legitimate concern that the hospitals would indeed close, said Thomas Greaney, professor of law at UC Hastings College of the Law-San Francisco.

“There’s clearly a factual question here. Is it really true?” Greaney asked. “Is it really an endgame that they are presenting?”

Over time, attorneys general around the county have become more vigilant about sales of nonprofit hospitals that have been supported by the public for years with tax exemptions and other benefits, Greaney said.

“There are important concerns they are protecting,” he said. “It is the kind of thing I think should be subject to negotiation and settlement.”

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California Cost and Quality Courts