The New York Times Hasn’t Scratched the Surface: For-Profit Catholic Healthcare

By Kathleen M. Boozang
In Health Reform
February 24, 2012
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kathleen m. boozangPresident Obama has begun the process for healthcare reform by improving access through insurance reform, but achievement of his aspirations will require reform of our healthcare delivery system as well.  Changing where and how healthcare is delivered and paid for is of particular importance given the emerging and generally non-acute needs of the aging baby-boomers, and the lack of sufficient primary care to serve the many who will become insured as health insurance reforms are implemented.  Healthcare providers realize this, and the market is indeed adjusting as we speak.

Three examples of these changes to the delivery system include, first, moving much of the delivery of services out of hospitals and into the community.  Healthcare systems are rapidly affiliating with or employing physicians to facilitate this change, in the hopes of enabling the various parts of the health care system to work more collaboratively, efficiently and cost-effectively.  In many parts of the country, hospitals have been too cash-strapped to invest in necessary updating to their hospital facilities. Now that we are thinking differently about how to use the physical plant that hospitals occupy, and investing in new technology, these investments need to happen.  As a third example, President Obama is infusing money into hospitals and physician offices to enable the United States to catch up to other developed nations in the digitizing of its medical records.  The benefits of this change are numerous, but it is a very expensive transformation.

In order to provide quality service and compete in the fast-changing healthcare market, hospitals and the systems of which they are a part, need money to pay for these changes.  A February 21, 2012 New York Times article on the expansion of Catholic hospitals provides a glimpse of this phenomenon of market reform.  Cash-poor hospitals unable to access capital to invest in the new initiatives necessary to keep them competitive are looking for financially stronger partners with this investment ability.  There are currently 56 Catholic healthcare systems in the country, ranging from the financially successful to the distressed.  Thus it is unsurprising that a potential partner for some hospitals might be found among Catholic systems.

But there are some Catholic providers who are struggling and require an affiliation to survive; other Catholic providers are simply considering alternative business models which might provide more market flexibility as well as increased options for access to capital.  The former Catholic Healthcare West is an example of the latter situation.  CHW was sponsored by six religious orders and operated 25 Catholic and 15 non-Catholic hospitals; just weeks ago, it announced changes to its name — it is now Dignity Health — and its corporate and governance structures.  The parent holding company for Dignity Health is no longer Catholic, and is no longer sponsored by the religious orders — those orders now sponsor directly the Catholic hospitals that are part of Dignity Health.  These Catholic hospitals adhere to the Ethical and Religious Directives for Catholic Health Services, of which each hospital’s local bishop is the ultimate arbiter.  The non-Catholic hospitals adhere to a Statement of Common Values, which preclude assisted suicide and euthanasia, as well as pregnancy terminations and assisted reproductive procedures that deviate from Catholic teaching; the Statement of Common Values does allow the performance of direct sterilizations, which is something precluded at Catholic hospitals.  I would venture to say that many, whether Catholic or not, likely embrace the content of this Statement of Common Values.  I would also suggest that many secular hospitals operate according to similar policies, but it just doesn’t get talked about.

The religious orders hope to perpetuate their evangelical influence on the culture of Dignity Health and its constituent non-Catholic hospitals — if successful, I would suggest that this will be an important and significant contribution to those providers who are the beneficiaries of the Catholic ethos of healthcare delivery, because it can be transformational.  The change from CHW to Dignity also sought to clarify the confusion among patients about which hospitals are Catholic, and provide market flexibility with respect to future affiliations with service providers.    A statement by San Francisco Archbishop Niederauer provides a helpful description of the reasons for Catholic Health West’s transformation to Dignity Health, and the process by which deliberations occurred.

Other Catholic hospitals are engaging in even more “radical” transformations in order to put themselves in a position to survive and/or thrive in the emerging healthcare market.  After years of unsuccessful attempts to prop up the six Boston-area hospitals that comprised Caritas Christi Health Care, Cardinal Sean O’Malley surprised many when he agreed to sell the system to Cerberus Capital Management, which is a private equity firm.  The system was burdened with debt, its pension was underfunded, and its physical plant was in desperate need of significant upgrades. The sale to Cerberus transformed this Catholic health care system, now named Steward Health Care System, to a for-profit Catholic health care system. Cerberus agreed to ensure that the Steward hospitals adhere to the Ethical and Religious Directives, subject to the authority of the Cardinal who has the power to strip a hospital of its Catholic status, as happened to a Phoenix Catholic Healthcare West hospital, St. Joseph’s, in 2010, over a disagreement regarding an interpretation of the Ethical and Religious Directives regarding abortion.

Cardinal O’Malley was not the first person to find salvation for financially distressed hospitals in the private equity world.  St. Vincent’s Hospital in Worcester, Massachusetts is owned by for-profit Vanguard Health Systems of Nashville, which owns both Catholic and Baptist hospitals, primarily in the south and west.  And Ascension Health, the nation’s third largest health system with a 2010 net income of $1.2 billion has teamed up with Oak Hill Capital Partners to build a new for-profit enterprise with an eye towards “offer[ing] a lifeline to capital-starved Catholic hospitals.”

Myriad questions arise from this new mechanism for infusing capital into Catholic healthcare.  No precedent exists for a Catholic for-profit healthcare ministry.  In terms of the issue about access to services raised by the February 21 New York Times article, “Catholic Hospitals Expand, Religious Strings Attached,”  it is likely that the public will become even more confused about what rules govern hospitals as for-profit systems include both Catholic and non-Catholic entities.  While the interpretation and application of Catholic teaching will vary by diocese and the deal reached by the parties, it is certainly possible that, as was the case with Catholic Healthcare West (now Dignity Health), some or all of the Ethical and Religious Directives will be extended to the secular hospitals which are part of any system that includes Catholic facilities.  This makes sense, as Catholic teaching encourages Catholics to distance themselves from acts which are deemed immoral.  Sometimes, the act in question, such as abortion or euthanasia, is held to be so fundamentally immoral that Catholics can have no association with the situation, which would be the case if a Catholic hospital belonged to a healthcare system in which affiliates offered these services.  As such, even though a hospital may itself be non-Catholic, if it participates in a system which includes Catholic hospitals, its services may necessarily be circumscribed.  Again, most of these proscriptions are ones with which many Americans likely agree.  Transparency should prevail nonetheless. As I discussed in my February 22, 2012 blog post, there are significant benefits from affiliating with a Catholic entity, including commitment to the care of all segments of society and an ethos of care that attends not only to the physical, but to the mental and spiritual as well.  Catholic healthcare is also an important voice in public debates about reforming our healthcare system and the dignity of every person.  These attributes of Catholic healthcare should be given significant weight in assessing collaborative arrangements.

While I believe that there is much that is wonderful about the culture, ethics and ethos of Catholic health care, there may be some other consequences of affiliation that some would fine unappealing. The United States Conference of Catholic Bishops opposes the health care reform mandate that would require employers to offer health insurance to employees that includes contraception as a covered benefit. In addition, some bishops have refused to comply with laws requiring equal treatment of spouses and gay partners with regard to eligibility for employer-sponsored health insurance. While it is unclear to what extent Catholic hospitals have followed these policy positions (the Catholic Health Association has announced that it is pleased with President Obama’s contraception compromise), the obvious question is whether they will be extended to secular affiliates as well.

Most of the questions that arise from the transition to for-profit status must obviously be resolved by the religious congregations and others that sponsor Catholic healthcare.  What makes a service or entity essentially Catholic, and whether that can be preserved in a for-profit context is likely unanswerable without experimentation.  For-profit providers ultimately exist to make money for investors.  Non-profit providers must operate in fidelity to their mission.  If a hospital is truly unable to survive, which was apparently the case with the six Boston hospitals that comprised Caritas, then for-profit conversion was the only means to continue its mission.   Even less dire situations may call for serious consideration of this alternative: a provider unable to access the resources to provide quality care irrespective of patients’ ability to pay is not in a position to actualize its mission.

The biggest question for stakeholders, presumably, is how long the private equity firms that are acquiring Catholic hospitals will hold on to them, especially if they are losing money.  The co-head of Cerberus was quoted in the Boston Globe as saying that Cerberus would own the Steward hospitals for at least three years; the article also suggested that it would not close any hospital for the first three years of its ownership, and would extend that time for an additional two years unless a hospital operated at a loss for two consecutive years.  So, one risk of these arrangements might be that they are simply stop-gap measures.  What happens if the private equity firms and their shareholders aren’t making enough money?

Another question is whether the for-profit model will result in the discontinuation of unprofitable yet essential services, which some empirical evidence suggests occurs more frequently with for-profit as opposed to not-for-profit providers, although it is important not to generalize.

This conversation will continue for some years, as we assess the on-going experiment that is for-profit Catholic healthcare.  This month, Seton Hall Law School is looking at some of the issues raised from the Catholic sponsors’ perspective, at a Symposium entitled Is a For-Profit Structure a Viable Alternative for Catholic Health Care Ministry? Return to Health Reform Watch for future discussion of this fascinating issue.

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