For 15 years, Herman Pepper, M.D., was a regular at the monthly board meetings of Sequoia Hospital in Redwood City, Calif. The octogenarian, a retired internist, raised hell from his front-row seat when the board took stances he deemed bad for the city.
But two years ago, Pepper stopped going. Why? Catholic Healthcare West, a San Francisco-based system, took over the 245-bed district hospital. Pepper figured the votes of the Sequoia board didn't matter anymore. "The final decision is not made by the board; it is made by CHW," he says.
That's true in many matters. Like other systems, CHW is revamping its hospitals' boards and management into regional structures. One result is communities lose influence on local hospitals, at least at the board level. Richard Kramer, president of CHW, argues its regional structure works for the ultimate good of the community. He says CHW aggressively seeks community advice outside the board room, as well as inside. In fact, the system was instrumental in writing a new California law requiring not-for-profit hospitals to assess community needs in cooperation with local agencies.
CHW is a case study in how rapidly growing systems balance the need for local advice and regional operational effectiveness. Unlike hospitals without religious ties, it faces the additional obligation of responding to the seven orders of nuns that sponsor it.
More than triple its size a decade ago, CHW has placed most of its 35 hospitals into 10 regional systems since 1995.
The system appears to have a knack for making the right choices, at least as judged by its financial results. It pocketed $160.5 million, roughly a 6% profit margin, in the year ended June 30, 1996, on revenues of $2.7 billion.
In the same period, it spent $174 million on community benefits, largely on traditional charity care and unpaid costs of Medicaid programs, research and education. CHW's efforts also included about $15 million in support for community services, such as investments in three community development banks.
After the completion of two deals this week, it will operate 37 hospitals with assets of $4.7 billion. A pending merger with Samaritan Health System in Phoenix, expected to be completed near year-end, will bring six more hospitals. CHW also owns a foundation of 300 physicians, and it recently affiliated with a 400-physician independent practice association. Its investments include a 3% stake in MedPartners, a Birmingham, Ala.-based manager of physician practices.
A 17-member CHW board of directors, composed almost entirely of healthcare executives and bankers, overlays the regional structure. It controls regional board appointments, acquisitions and capital expenditures over $5 million. On major decisions, it must consult its sponsoring organizations' board of 10 nuns, who, in turn, sometimes will ask the Vatican for guidance.
Regional boards of 15 to 20 people usually include one or two members from the CHW system, the remainder being physicians and community leaders. The largest region covers six hospitals, the smallest only two.
Kramer says regional boards do the visionary thinking: What percentage of the region's population can it serve? How many beds will be needed and where?
"To be an effective provider, you really have to have convenient access, consistent quality, affordable costs," Kramer says. "The development of regional delivery systems is geared to meeting those needs. Within the first couple of years, we're probably getting 15% to 20% in (administrative) savings by reducing redundancies."
Local boards negotiating with CHW must buy into the idea of regional delivery systems right away. But the conversations don't stop there. "The psychological changes need to be worked on for two or three years to make sure everybody understands the new way of delivering healthcare," Kramer says.
In some cases, local boards continue to exist, taking on the tasks of medical-staff appointments, quality monitoring and community advocacy. For example, Sequoia kept a local board to oversee those issues when it joined CHW. Half the members are named by CHW; half are named by the original elected board of Sequoia, which also controls a $30 million foundation left over from the sale.
Columbia/HCA Healthcare Corp. also bid for Sequoia. The board's decision to join CHW instead was approved by 96% of voters in the district. Although he no longer attends board meetings, Pepper says Sequoia desperately needed a partner. He thinks CHW was a better choice than Columbia, believing it will be more community-oriented.
Not everyone sees a difference between the companies. Unions in California accuse CHW of empire-building and undermining community service and quality care with staff cuts. Its deal with Samaritan was one factor behind Arizona's decision to require more public disclosure in all not-for-profit hospital deals, regardless of the acquirer's tax-status. The Samaritan transaction will be excluded, however, because it was reported to regulators before 1997.
Stephen Morris, retired president of Samaritan and a former American Hospital Association president, says the only difference he sees between the two ownership sectors is that for-profit companies have better access to capital. Morris lashed out at the Phoenix community for thinking a deal with CHW would keep the facility under local control.
Kramer says that's not affecting negotiations because the community wanted Samaritan to remain not-for-profit. "What the local community is giving up to the region is the strategic planning and the capital financing and the development of a delivery system," he says. "What they are retaining, what it is essential they retain, is the connection to the local community."