When leaders of a firm seeking to acquire the financially struggling St. Rose Hospital in Hayward began poring over its books last fall, they were surprised to find higher debt and operating losses than anticipated.
The $50 million they had offered for the hospital would not be nearly enough to pay off its financial obligations and keep its doors open, they concluded.
So Alecto Healthcare Services has decided to manage St. Rose with an option to buy it over the next three years, instead of acquiring it immediately.
In the meantime, "I'm trying to recruit people that can really turn this facility around," said Lex Reddy, who heads Alecto and is St. Rose's new president and chief executive officer.
The agreement between Alecto and St. Rose requires approval from the state attorney general's office by Feb. 13.
Founded in 1962, St. Rose serves large numbers of the uninsured and low-income people on Medi-Cal and is considered crucial to the health care safety net in southern Alameda County.
It has about 35,000 visits to its emergency department each year and delivers more than 1,000 babies.
Yet the hospital, originally operated by the Sisters of St. Joseph, has struggled for years to survive after becoming independent in 2005.
It now loses about $1 million a month and was on the verge of bankruptcy before its board reached an agreement with Reddy, the former chief executive of a controversial health care company.
If that agreement takes effect, Alecto would receive a portion of the hospital's net operating revenue as its management fee.
Reddy this week declined to speculate on when or if he would buy the hospital.
"I can't say anything until I have the documents from the attorney general's office," he said during an interview. "I want to see what the final terms and conditions will be."
Consultants hired by the attorney general's office concluded that if Alecto is unsuccessful and St. Rose is forced to close, a flood of its patients to surrounding hospitals could make it tougher for everyone to access care.
The state's consultant, Medical Development Specialists, recommended several conditions if the transaction is approved, including that the hospital continue to operate as a nonprofit, maintain 24-hour emergency services, continue serving Medi-Cal patients, and maintain a specified level of charity care for patients who lack adequate insurance. A review of 2010 data by this newspaper found St. Rose had the highest charity care level of all nonprofit hospitals in the East Bay.
Despite the challenges, the chairman of St. Rose's governing board said he is optimistic.
"Mr. Reddy is getting his staff together," said Charles Ramorino, founder of Roadstar Trucking in Hayward. "He's at the hospital all of the time and is looking at every piece of hospital operations."
Reddy said he is attempting to boost revenue by negotiating higher rates from insurers. "Most of the contracts that we have here are far below the market," he said.
He also has been seeking to persuade more doctors in the area to bring their patients to the hospital, and said he hopes to persuade Alameda County leaders to give St. Rose a larger share of Measure A tax funds.
Reddy was the CEO of Prime Healthcare Services for 11 years before resigning in February. The company had become the target of investigations by the inspector general of the U.S. Department of Health and Human Services, the state attorney general's bureau of Medi-Cal fraud, and the state Department of Public Health.
Reddy declined to discuss the controversies surrounding Prime. Ramorino said the board was aware of the allegations but concluded that Reddy was the best person for the job.
Under the agreement, if Alecto does buy St. Rose, it would not assume responsibility for a $1.28 million severance package owed to former CEO Michael Mahoney, a hospital pension plan and the repayment of a $1.15 million loan from the Eden Township Healthcare District.
Last month, Eden publicly urged Alecto to repay the loan, as it plans to do for banks and other creditors. Eden noted that it cannot legally make a gift of public funds and said it may pursue legal remedies if the money is not repaid.
Sandy Kleffman covers health. Contact her at 510-293-2478. Follow her at Twitter.com/skleffman.