A complex joint operating agreement structured 10 years ago to sanction a mixed marriage between Roman Catholic and Lutheran hospitals has waylaid Exempla Healthcare as it tries to position itself for growth in the booming Denver market.
Citing a religious and a financial issue, the Exempla board last week said it will oppose a sponsorship change with Sisters of Charity of Leavenworth Health System in Lenexa, Kan. Months in the making, the deal would make the Sisters of Charity the obligated group in issuing debt for capital projects and Exemplas sole sponsor. The pitfalls in the original joint operating agreement point to the unintended consequences of some of the creative deals of the late 1990s, when the hospital industry was consolidating at breakneck speed.
The irony of all this, I think, is that all parties agree that for 10 years Exempla has had a great track record, and, frankly, the way the corporate structure was set up, it cant be dissolved unless all three parties agree, said Jeff Selberg, Exemplas president and chief executive officer.
Under the terms of the proposed deal the eight-hospital Sisters of Charity of Leavenworth Health System would buy out three-hospital Exemplas co-sponsor, the Community First Foundation for $311 million. The Sisters of Charity also agreed to invest $300 million in Exempla, which would go a long way toward building a replacement hospital for Exempla St. Joseph Hospital.
Throughout months of discussion, Exemplas board has insisted that patients should continue to have access to services that are prohibited by the Catholic Ethical and Religious Directives at its two non-Catholic hospitals543-bed Exempla Lutheran Medical Center, Wheat Ridge, Colo., and 172-bed Exempla Good Samaritan Medical Center, Lafayette, Colo., said William Jessee, president and CEO of the Medical Group Management Association and chairman of Exemplas board. The board also has raised concerns that the proceeds paid to the Community First Foundation to buy out its 50% stake in Exempla would be directed away from hospital services.
The board plans to write a letter to the Colorado attorney general stating its opposition to the deal and asking him to review the agreement.
The Exempla boards religious objections date back to the systems formation in 1997 when the board promised that services would never be limited under the joint operating agreement with Roman Catholic sponsored Sisters of Charity, Jessee said. We felt a fiduciary duty to the community to at least raise the red flag and let our objection known, he said.
The proposed deal was conceived as a way to provide Exempla with better access to capital, Jessee said. But the Sisters of Charitys uneasiness in partnering with secular hospitals eventually got in the way. No longer comfortable with some of the so-called forbidden services conducted at Lutheran and Good Samaritan medical centers, the Sisters of Charity several years ago relinquished its seats on the Exempla board and prohibited Exempla from borrowing against Exempla St. Joseph Hospital, which the Sisters of Charity own but Exempla manages under the existing joint operating agreement. As a result, two years ago, the Exempla board and the two co-sponsors began exploring ways to give Exempla better access to capital so it can grow and at the same time give the Sisters of Charity enough control over their assets, Jessee said.
The $311 million to buy out the Community First Foundation would be a real windfall for the once small charity, Jessee noted. The foundations predecessor originally was the small fundraising arm of Exempla Lutheran Medical Center but became a co-sponsor of the system under the joint operating agreement. I dont think (the Exempla founders) ever imagined a situation where the system would be sold because of the attractiveness of the money to the (Community First) Foundation, he said. Its so strong, it almost overwhelms the commitment. I think it speaks to the need first to create simplicity. This is the most complex governance structure I have seen.
William Murray, president and CEO of Sisters of Charity, said the proposed deal represents a compromise.
While its not the perfect solution, its the best solution, Murray said. The Exempla board doesnt apparently have much standing in the matter, relinquishing its control over its destiny when it signed on to the joint operating agreement, he added. This is a right that was reserved for the sponsors, he said. Because everything was provided for in the bylaws, I think it will move through, although certainly with public discourse. But we expect an orderly process.
Jessee acknowledged that what the Exempla board is now facing is more a political process than a legal question. Our feeling is that it will all depend on whether we are the only party that objects to this transaction.