Judge Allows Prem Reddy To Move Toward VVCH Acquisition

VICTORVILLE—Victorville Superior Court Judge Steve Malone this week turned back California Attorney General Kamala Harris’s effort to prevent Dr. Prem Reddy and his for-profit corporation, Prime Healthcare Services, from moving into a position that will facilitate an eventual takeover of the non-profit and now bankrupt Victor Valley Community Hospital.

For reasons that have not been entirely publicly specified, Harris has taken a stand against Reddy in his effort to acquire Victor Valley Community. Reddy’s Prime Healtcare Services Corporation is the largest operator of for-profit hospitals in Southern California.

Victor Valley Community has been on the financial rocks for some time and last year, staggering under more than $20 million in debt, the institution filed for Chapter 11 bankruptcy protection. In the same time frame, the 101-bed hospital was put on the auction block, attracting two bidders: KPC Global Care and Reddy’s Prime Healthcare, which runs 14 acute care hospitals in California. KPC Global outbid Prime Healthcare in November 2010 with a $37 million offer at an auction. KPC obtained the state attorney general’s approval for the takeover, but then failed to finalize the acquisition and that deal fell apart. Subsequently, a federal bankruptcy court judge approved an agreement allowing the non-profit arm of Reddy’s for-profit venture, known as Prime Healthcare Service Foundation, to purchase the hospital for $35 million.

On September 20, however, the state attorney general’s office intervened, blocking Reddy, who is the owner and chairman of the board of Prime Healthcare, from absorbing Victor Valley Community into his portfolio. A major consideration was that Victor Valley Community was founded and set up as a non-profit institution. The attorney general’s office had moved to ensure that the High Desert preserve at least one non-profit hospital in an area with a multiplicity of for-profit medical centers, including one already owned by Reddy, Desert Valley Hospital.

“We have concluded that this proposed sale is not in the public interest and will likely create a significant effect on the availability or accessibility of health care services to the affected community,” acting chief deputy attorney general Michael Troncoso said in September.

Victor Valley Community Hospital’s status as a non-profit had seemingly doomed it to insolvency. Its financial outlook was damaged by excessive amounts of uncompensated care to uninsured and low income patients in recent years. According to the hospital’s recently departed CEO, Catherine Pelley, 70 percent of the hospital’s patients are on Medi-Cal, Medicare or charity care.

With Victor Valley Community teetering on the brink of financial collapse, Reddy on October 14, 2011 proffered $6 million in the form of loans and a consulting arrangement to prevent the hospital from having to close its doors. That assistance was codified in the form of what was called a “post-petition revolving credit and security agreement between Victor Valley Community Hospital as borrower and Prime Healthcare Management, Inc. as lender.”

Hospital officials have said Prime Healthcare’s offer is the only way Victor Valley Community Hospital [VVCH] can continue to operate.

Under the terms of the deal, both Reddy and Prime Healthcare are to provide what was referred to as “temporary” financing to keep the hospital up and running. That plan was given backing by a few federal healthcare regulatory agencies. And On October 20, U.S. Bankruptcy Judge Catherine Bauer tentatively signed off on the arrangement.

A day earlier, on October 19, a letter was sent by the state attorney general’s office to Victor Valley Community Hospital’s legal counsel stating that the credit, security and consulting agreement was subject to approval by the attorney general’s office under California Corporations Code Section 5194 et sequitur. On October 19, the hospital’s legal counsel responded that the attorney general’s approval is not required.

According to a complaint for injunctive relief filed by the attorney general on October 28, “The consulting agreement transfers control of a material amount of the operations of VVCH to Prime Healthcare management. The loan agreement conveys and transfers a material amount of VVCH’s assets to Prime, Inc. Accordingly, both agreements are subject to approval by the attorney general. Defendants violated the Corporations Code sections 5914 and 5915 by failing to submit written notice and failing to get written consent of the attorney general prior to entering into this agreement. By entering into this loan agreement without the attorney general’s consent, VVCH will incur additional administrative costs by $6 million, thereby increasing the amount of cash necessary for other potential buyers to purchase VVCH. By increasing VVCH’s debt, the parties will be manipulating the market value of the hospital. The loan agreement also subjects VVCH to default. The loan agreement provides that if VVCH subsequently defaults on the loan agreement, all of Prime Inc.’s loan must be paid in full, in cash immediately.”

The attorney general’s office petitioned the court for “temporary, preliminary and permanent injunctive relief enjoining VVCH, its board members, officers, employees, agents, servants, representatives, successors, and assigns, any and all persons acting in concert or participation with it, and all other persons, corporations, or other entities acting, under, by, through or on its behalf from executing or otherwise entering into the postpetition revolving credit and security agreement between VVCH as borrower and Prime Healthcare Management, Inc., as lender, dated as of October 14, 2011; performing any acts under the postpetition revolving credit and security agreement, including, but not limited to, incurring any debt under that agreement; [and] executing or otherwise entering into the consulting services agreement between VVCH and Prime Healthcare Management, as consultant.”

Harris maintained that in representing Prime Healthcare as a consultant, both entities – Prime Healthcare and Victor Valley Community – were engaging in a ruse to avoid the oversight of the state attorney general’s office in a ploy that would ultimately result in the transference of control and ownership of the hospital to Prime Healthcare.

On November 23, Malone dismissed the attorney general’s assertions, ruling that Victor Valley Community had the autonomy to enlist Prime Healthcare as an independent contractor and that Victor Valley Community is still governed by an independent board of directors, which will have decision-making power over the future of the hospital.

The attorney general’s office has been less than fully explicit in explaining the reasons for opposing Prime Healthcare’s takeover bid for Victor Valley Community, asserting only that Reddy’s ownership of the hospital is “not in the public interest.” Harris has suggested without directly stating that Reddy has a monopolistic motive in seeking to acquire Victor Valley Community since he already controls Desert Valley Hospital. In conferences with her office’s attorneys, Harris has stated that Reddy’s domination of a given region’s medical facilities could deprive the indigent of health care options. In a brief, the attorney general noted Prime Healthcare’s propensity for canceling HMO contracts.

There has been some suggestion that Harris’s opposition to Reddy’s takeover effort is tainted by political considerations. Reddy’s for-profit corporation has had a bruising set of battles with nurses and other health care professionals over wage and benefit concessions. Harris was endorsed by a labor union that represents nurses in her election last year.

Among the contingent of lawyers from the state attorney general’s office was a lawyer for the Services Employees International Union (SEIU), which has represented health care workers in labor disputes with Prime Healthcare and which opposes Reddy’s takeover of Victor Valley Community. When that lawyer sought to go on the record to endorse the attorney general’s call for an injunction against Reddy and Prime Healthcare, Malone denied the request, ruling that the union does not have standing.

While Malone allowed Prime Healthcare to remain involved in the current operation of Victor Valley Community as a consultant and lender, the long term ownership of the facility remains an unresolved issue. KPC Global has now tendered an offer to purchase the hospital, reduced from $37 million to $31.1 million. Victor Valley Community has lodged a suit, asking the court to reduce the attorney general’s barrier to Prime Healthcare’s purchase offer of $35 million.

Malone scheduled the hospital’s lawyers and the representatives from the attorney general’s office to return to his courtroom on December 15 for further briefing of both sides’ positions.

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