Like a relationship between two people who have discovered they no longer have much in common-and maybe never did-the 6-year-old partnership between a Cleveland-based Roman Catholic hospital system and for-profit giant HCA-The Healthcare Co. has fizzled. And along with it, so has a strategy that was supposed to bridge the gap between the not-for-profit and for-profit hospital sectors.
Nashville-based HCA and the Sisters of Charity of St. Augustine Health System joined forces in 1995 to jointly oversee what was at the time a group of four hospitals the CSA owned in Ohio and South Carolina. In June 1999, HCA sold its 50% stake in the partnership's three Ohio hospitals and late last month announced it was selling its 50% stake in two jointly owned hospitals in Columbia, S.C., which would effectively end the partnership (Feb. 26, p. 6).
Terms of the sale, set to be completed by the end of June, were not disclosed.
Six years ago, HCA and the Sisters decided that working together would be worth the challenges of dual governance and the inherent difficulty of separating revenue streams between a for-profit organization and a not-for-profit religious-based system.
Though the partnership was profitable, history did not bear out its initial purposes, according to both sides. The long-anticipated HCA exit from its experiment in Catholic healthcare and an ongoing clash between another not-for-profit HCA partner and the Internal Revenue Service illustrate the obstacles-from a tax perspective and from a mission perspective-involved in such arrangements.
"I don't think either side realized the complexity associated with all this," said John Faulstich, the CSA's senior vice president of finance.
Jeffrey Prescott, HCA's spokesman, offered a similar analysis.
"There are portions of the decisionmaking that are more complex because you have a partnership board," he said.
A spark of controversy
The initial courtship between the Sisters of Charity of St. Augustine and HCA in 1995 was controversial enough. The partnership drew fire from other Catholic congregations and cost the CSA hospitals their membership in the Catholic Health Association.
Susanna Krey, vice president of corporate development at the CSA, said the Sisters joined forces with HCA, then called Columbia/HCA Healthcare Corp., at a time when integrated delivery systems were all the rage and capitation was expected to alter the managed-care landscape.
When those forces did not reshape national healthcare trends as expected and when HCA was investigated for Medicare fraud and decided to cut back on its acquisition spree, the interests of the two partners began to veer in different directions.
"We'd hoped to develop strong networks in our markets, but part of it was dampened by the corporate restructuring HCA went through in 1997 and 1998," Krey said. "As those factors were happening, the Sisters and HCA entered into a process where they did a research assessment of their markets and came to the mutual decision to restructure all three partnerships in 1999."
Prescott said the Ohio and South Carolina joint ventures did not make sense anymore to a leaner HCA focused on core markets. Although HCA does not have other Catholic partnerships, he said, it has joint ventures with at least 12 other not-for-profit hospitals and healthcare systems.
HCA unwound the Ohio joint ventures in June 1999, and the CSA formed 50-50 partnerships with University Hospitals Health System, one of Cleveland's two dominant providers, to own 374-bed Mercy Medical Center in Canton, 183-bed St. John West Shore Hospital in Westlake and 471-bed St. Vincent Charity Hospital in Cleveland. HCA also wanted to get out of the South Carolina joint venture at the time, but the process took longer because it was not driven by an interested buyer.
Last month, HCA and the CSA announced a nonbinding letter of intent for HCA to sell back to the CSA its half of a partnership that owned 228-bed Providence Hospital and Providence Hospital Northeast in Columbia. The hospitals have been profitable, posting pretax income of $5.8 million in 2000 on net revenue of $150.7 million, according to unaudited figures provided by Providence.
The partnership was not tax-exempt, but each organization treated its income from the partnership according to its tax status. Income flowing to HCA was taxed, and income flowing to the CSA was not, Faulstich said.
The CSA is confident it did not run afoul of IRS standards for charitable organizations, he said, although he acknowledged the 50-50 ownership was examined by the IRS several times, which added an extra layer of uncertainty for the system. The IRS has not challenged the CSA's tax-exempt status, he said, but "you never get a clean bill of health."
Facing the IRS
Another such partnership has had a more difficult time with the IRS. St. David's Health Care System in Austin, Texas, recently sued the IRS to reverse the agency's revocation of its tax-exempt status because of its joint venture with HCA (Feb. 26, p. 6). The case could test a 1998 IRS ruling, known as revenue ruling 9815. According to that ruling, not-for-profit partners must control a majority stake of joint ventures with for-profit companies to maintain their charitable tax status.
St. David's formed a 50-50 joint venture with HCA's Round Rock Hospital in Austin in 1996. The partnership now operates six hospitals and several clinics. Last November, the IRS revoked St. David's tax-exempt status because of the partnership and demanded about $1.2 million in taxes, interest and penalties for 1996. St. David's paid under protest, exhausted its administrative remedies and now has filed suit in U.S. District Court in Austin for a return of its tax-exempt status and a refund. St. David's did not pay taxes for 1997 through 2000 because both parties agreed to settle the case in court.
Washington healthcare tax lawyer T.J. Sullivan of Gardner, Carton & Douglas said the St. David's case could set a precedent.
St. David's has been a tax-exempt not-for-profit organization without religious sponsorship since 1925. President and Chief Executive Officer Neal Kocurek said the system has not changed its behavior in the joint venture with HCA.
The venture provided $67 million of uncompensated care and charity care in 2000; invested half of its profits in equipment, maintenance and care; and funded various community healthcare ventures, Kocurek said.