In Quest to Grow, Catholic Hospital System Pares Religious Ties

Catholic Healthcare West, one of the nation’s largest hospital systems, is ending its governing board’s affiliation with the Catholic Church and changing its name, two steps intended to help the system expand throughout the states in which it operates — California, Arizona and Nevada — and beyond.

The changes, which executives announced today, underscore the unique challenges facing Catholic hospitals in the marketplace, where there are tremendous financial pressures for hospitals to merge or form formal alliances with other health care providers in order to survive and thrive. The change will have no effect on any patients or the medical care provided at the 25 Catholic and 15 secular hospitals in the system. But executives hope it will make it easier to merge or affiliate with other hospitals, doctors’ practices and other health care providers.

In the past few years, proposed mergers between Catholic and secular hospitals in Louisville, Ky., and Sierra Vista, Ariz., have collapsed in part because of concerns about the church’s bans on abortions, in-vitro fertilizations and sterilizations. Other mergers have succeeded only with the help of unusual contortions, such in Troy, N.Y., where a separately licensed maternity ward free from Catholic doctrine was created on the second floor of a secular hospital taken over by a Catholic system. In Seattle, Swedish Medical Center last fall agreed to fund a Planned Parenthood office next door to quell objections about its planned affiliation with a Catholic system.

Lloyd Dean, the president and CEO of Catholic Healthcare West, said the concerns about his system’s Catholic affiliation have hampered some potential deals. “I have been contacted over the last couple of years by many, many different constituencies who have an interest in Catholic Healthcare West and what we have accomplished,” Dean said. “But one of the things when we get down to what I’ll call the real discussions as they confer with their boards is, ‘What does the future mean if we’re a non-Catholic entity? Will we have to become Catholic? What will be the Catholic influence?’ “

The San Francisco-based system, which has $11 billion in revenues, making it the fifth largest in the country, is seeking to triple in size and build a national footprint. It treated 6.2 million patients last year.  As of today, the system’s new name will be Dignity Health. Dean said the system’s change to a nondenominational board will create “a tremendous opportunity that will help accelerate our growth.”

The system’s Catholic hospitals will continue to adhere to Catholic directives and have relationships with the religious orders of nuns that governed the system. Those orders will retain final authority should Dignity want to sell a hospital, change its name or make other substantial alterations. In addition, the secular hospitals will continue to adhere to some rules based on church doctrine, such as a ban on abortions except when a mother’s life is in danger.  Still, the system’s governance change is more dramatic than those made at some other Catholic hospital systems.

“It’s more like two families under one roof as opposed to ‘you have to join our family,'” said Martin Arrick, a managing director at the rating agency Standard & Poor’s. “If this proves to be successful—and I have no reason to think it won’t be—I think you’re going to see a wave of Catholic and non-Catholic partnerships.”

Catholic Healthcare West was founded in 1986 when two congregations of the Sisters of Mercy combined their 10 hospitals into one system. Catholic Healthcare West added its first non-Catholic hospital in 1995 and has been engaged in a battle for dominance in Northern California against Sutter Health, a secular nonprofit system. Catholic Healthcare West had tension with the church last year when a bishop revoked the Catholic status of St. Joseph’s Hospital and Medical Center in Phoenix after officials terminated an 11-week pregnancy to save the life of a mother.

Catholic Healthcare West’s leaders, like those at other systems, believe that as government and private insurers have moved to limit reimbursement increases, long-term survival requires becoming bigger and leaner. Catholic Healthcare West had a healthy operating margin of 8.1 percent in its most recent fiscal year, but much of that was due to strong investment earnings. Excluding those, its operating margin was 1.9 percent, and a recent Standard & Poor’s report said Catholic Healthcare West’s performance was “only adequate.” The report said its “overall operations have been burdened” by the increasing portion of patients who are covered by government insurers such as Medicaid instead of better paying commercial coverage.

Nationally, hospital profits also are being squeezed by increasing pressure for more care to be provided outside hospitals—in doctors’ offices, ambulatory surgical centers and at home. These changes are being accelerated by the 2010 health care law, which is pushing providers to share in financial risks and rewards of treating patients.

“Everybody recognizes that it is a new day in health care,” said Sister Carol Keehan, president and CEO of the Catholic Health Association of the United States.  “Everybody wants to be part of a healthy vibrant system.” She said that given Catholic hospitals’ strong emphasis on caring for the poor and providing affordable treatment, “it is also our responsibility to help drive a more efficient health care system.”

Catholic ministries have played a major role in the history of American health care, with orders of nuns establishing and running many early hospitals. There are now 629 Catholic hospitals and 56 Catholic hospital systems, according to the Catholic Health Association. Four of the 10 largest healthcare systems in 2010 as ranked by revenue were Catholic, according to Modern Healthcare, a trade publication.

The change to Catholic Healthcare West will resolve another common challenge for Catholic hospitals: how to address the dwindling number of nuns able and willing to run a healthcare system. Catholic Healthcare West’s top governing board, known as the Corporate Members, was made up of nuns from six religious orders. Dignity Health’s new nine-member board of directors includes two nuns, with the rest being lay business leaders and health care executives.

“As we looked at our demographics, the desire and ability of sisters to carry on the mission of health care into the future, we saw this was really the time to move,” said Sister Judy Carle, who will remain on the board. “Our mission, our vision, our values are not changing nor will they change. This particular restructuring can carry on that mission.”

Catholic Healthcare West leaders said the change has been in development since 2009, when it was raised by the sisters. They said they consulted with Archbishop George Niederauer of San Francisco and he determined the governance change was consistent with the church’s teachings and that it could proceed. Future secular hospitals added to the system will be required to adhere to the “Statement of Common Values” that apply to Catholic Healthcare West’s secular hospitals. In addition to elective abortions, those rules prohibit in-vitro fertilizations but not sterilizations such as tubal ligations.

The concerns about financial viability are not hypothetical for Catholic hospitals. Last year, Caritas Christi Health Care, a debt-ridden Massachusetts-based Catholic system with six hospitals, was purchased by a private equity firm and turned into a for-profit system called Steward Health Care System. Like Dignity, its Catholic hospitals retained their religious affiliations, but the system has expanded to include four nonreligious hospitals.

“The number of mergers is on the uptick. It’s no different for Catholic hospitals,” said Lois Uttley, the director of The MergerWatch Project, which seeks to protect reproductive services in places where religious and secular hospitals propose mergers. “What we are seeing on the Catholic side is a willingness to let the secular partner develop a way to keep the services intact.”

This story was updated at 7:53 a.m. to reflect new information provided by Catholic Healthcare West on the abortion policy in its secular hospitals.

jrau@kff.org