Saldy, this bug is known, and I heard there is a fix in the works.
First, at the beginning of the fight there is a note about this. There is a sign that Story Anon has somewhere..
To get around this issue, heal the Hostage to full health and don't let Sarah/CJ die.. You may need to give Cro a punch to allow the Heals reach the Hostage. Also at the beginning of each round you can choose how much Magic Sarah takes of CJ give her as much as she can take.