As the man anointed to run the country's largest not-for-profit healthcare system, Don Brennan is amazingly calm.
Beginning Nov. 1, Brennan will preside over Ascension Health, the new $6 billion Roman Catholic giant created by the merger of St. Louis-based Daughters of Charity National Health System and the Ann Arbor, Mich.-based Sisters of St. Joseph Health System.
Despite Ascension's eye-popping revenues, its 73 owned or affiliated hospitals and its geographic expanse of 15 states and the District of Columbia, Brennan says he isn't feeling any added pressure because of the sheer size of it all.
"No, that's not part of my daily consciousness," says Brennan, formerly the Daughters' chief executive officer. "I feel blessed with the opportunity to be in a leadership role in this."
After all, he adds, "it's not like the Daughters (which brought 52 hospitals to the deal) has been pretty small."
As the Daughters-Sisters deal illustrates, the big are getting bigger in Catholic healthcare.
Like mergers between giant automakers and oil companies, consolidation among Catholic healthcare systems is creating new industry behemoths.
In addition to Ascension, Mercy Health Services of Farmington Hills, Mich., and Holy Cross Health System Corp. of South Bend, Ind., are merging to become the country's third-largest Catholic healthcare system. The newly merged system, which should be operational early next year, will have $4 billion in revenues and 52 hospitals.
Some Catholic systems are growing through smaller-scale acquisitions, such as Bon Secours Health System's pending purchase of eight of the nine hospitals owned by Latham, N.Y.-based Franciscan Health Partnership. The deal gives Marriottsville, Md.-based Bon Secours $1.8 billion in annual revenues and 24 hospitals.
"Stronger systems are going to get stronger, and weaker systems very likely will go away," says Jeffrey Villwock, a healthcare analyst at Atlanta-based Lazarus Partners. "It's a very competitive market; you've got to know what you're doing to run a hospital today."
The next generation. The creation of these mega-systems is part of the latest generation of consolidation in Catholic healthcare.
According to the latest figures from the St. Louis-based Catholic Health Association, the nation's 619 Catholic hospitals account for about 11% of U.S. hospitals.
The lines are being blurred as healthcare systems and hospitals, once tied to individual religious congregations, merge with one another and take on multiple sponsors.
For instance, St. Louis-based Ascension will have five religious sponsors: four provinces of the Daughters of Charity, and the Sisters of St. Joseph, whose congregation is based in Kalamazoo, Mich.
The country's second-largest Catholic hospital chain behind Ascension, Catholic Health Initiatives, with $5 billion in annual revenues, was another mega-system created by the merger of three major Catholic systems in 1996. Denver-based CHI operates 70 hospitals. To date, it has brought together 12 religious congregations.
Multiple religious congregations have joined forces in other catchall Catholic systems, including Newtown Square, Pa.-based Catholic Health East and San Francisco-based Catholic Healthcare West.
This ever-growing consolidation between religious orders and healthcare systems is as much a part of an ongoing movement in Catholic healthcare as a reaction to market forces in the industry as a whole. The movement, called the New Covenant, promotes collaboration within the ministry.
"In this country, absent of federal health policy, it leaves providers to rationalize and reconfigure the healthcare delivery system to make it responsive to the communities we serve," says Sister Patricia Vandenberg, Holy Cross' president and CEO.
For Holy Cross and Mercy, it's not yet known what form the consolidation will take or who will run the new organization, even though Mercy is the larger player, with three times as many hospitals as Holy Cross.
The Mercy-Holy Cross deal will be structured so that other healthcare systems can join, which is the route Judith Pelham, Mercy's president and CEO, predicts future consolidation will take.
Pelham also anticipates that large Catholic healthcare systems will begin to trade facilities "as they solidify geography in ways that make sense."
She says systems also will form joint ventures with one another-as Mercy already has done with CHI in its Iowa operations-to combine assets in local markets to jointly operate delivery systems.
The outer limits. But how big is too big?
"I don't know if there's a magic number," says Villwock, the Atlanta-based analyst. "There seem to be upper limits as to how big someone can get."
For example, he points to the for-profit giant, Columbia/HCA Healthcare Corp., once a $20 billion company. After Nashville-based Columbia topped 300 hospitals, "all of a sudden things weren't working as well in reality as they were on paper."
When a company gets that big, it faces new issues of effectively managing many far-flung facilities.
Ascension's Brennan knows that size "is a blessing and a curse."
On the plus side, size means a system can spread its risk over several markets, making it possible to stay in communities where that wouldn't otherwise have been possible.
But size does have its drawbacks.
"You worry that size becomes unmanageable or the economies and benefits you get are offset," Brennan says. "You have to work very hard to offset the negative side of size."
Although Ascension will function as a consolidated health system, the deal was not an asset merger. The sponsoring religious congregations will maintain historic ownership of their assets.
For not-for-profit healthcare systems, such as Catholic healthcare systems, mergers and acquisitions always carry risks.
One chief risk is that a whirlwind of healthcare transactions can cost a system in its bond ratings, ultimately making debt more expensive, according to a recent report from Moody's Investors Service, a New York-based bond-rating agency.
Moody's says mergers and acquisitions affect ratings because providers fumble trying to integrate disparate parts, don't take costs out of the newly merged system fast enough or can't mesh the facilities' cultures (Oct. 4, p. 56).
Good ratings. Although mergers cause bond-rating agencies to raise their antennae, Moody's recently gave the newly merged Ascension a favorable Aa2 rating on $2.4 billion of debt.
Ascension sold the bonds in October so the proceeds could be used to recapitalize some outstanding debt from the Daughters and the Sisters.
According to Moody's, Ascension earned high marks on its bond rating because of the geographic and cash-flow diversities its portfolio of hospitals offers, its strong liquidity and the "solid and generally stable" financial performance of most of its hospitals.
John Lore, who was president and CEO of the Sisters of St. Joseph Health System, has a dual role at Ascension as executive vice president of system development and lead executive for the system's Great Lakes division.
However, the Moody's rating report also highlighted some possible land mines. They included integration and operating challenges in Michigan, financial troubles in Nashville and Rochester, N.Y., and a declining trend, "albeit modest," in Ascension's consolidated financial performance.
In spite of those, Moody's outlook was stable "based on our expectation that Ascension Health's initiatives to stabilize and then improve upon operating performance in its difficult markets will be successful."
As for the pace and type of future consolidation in Catholic healthcare, Brennan says: "I don't have any better crystal ball than anyone else."
But, he adds, "my gut sense (is) . . . if the current trends continue, you probably will see eight or 10 major Catholic systems in the country."
Growth platform. For Bon Secours, buying the Franciscan operations, including eight hospitals, gives it "some size and scope we can use as a platform for growth and continuing the ministries of the Sisters," says John Shea, the system's senior vice president of business development.
The deal, expected to close by year-end, meshes nicely with Bon Secours' strategy to focus its attention on the East Coast.
"We will be an East Coast provider of the health ministry," Shea says.
He predicts judicious growth in Bon Secours' hospital holdings. "I think that has to happen," he says.
But things might be different if the Franciscan deal wasn't happening.
"I truly believe if Bon Secours did not make the merger happen with the Franciscans, we probably would have been out in the marketplace two years from now, thinking whether we should be part of a larger healthcare system," Shea says.
The reason, he says, is that with facilities spread over six states, a system starts looking for the next advantage of scale to reduce costs, better serve patients and keep the ministry going.
"Do we talk with Catholic Health East or someone else who would give us that size or scale?" Shea asks.
He says he can't say whether Bon Secours will one day merge with another Catholic powerhouse.
The Rev. Michael Place, president and CEO of the Catholic Health Association, which represents 1,200 healthcare providers, says it's not clear where this consolidation trend is headed.
"What will be an effective strategy today is not necessarily one that will be effective tomorrow," Place says. "At the present moment, for mission purposes, these are the best ways to proceed."