The pitfalls of joint operations between secular and religious hospital groups was made clear in Denver last week when an arbitrator ruled that one foundation trying to get out of such a deal could not accept a $311 million buyout.
The moral is the story
An arbitrator in Denver recently ruled that a Catholic system cannot buy out its secular sponsor--at least not for money--which exemplifies the difficulty of such relationships
The arbitrators decision, which is destined for scrutiny as financial pressures mount at not-for-profits across the country, was intended to resolve a dispute that has festered for years at three-hospital Exempla Healthcare because of abortions and contraceptive practices provided at two of its Denver-area hospitals. Exempla is co-sponsored by a Roman Catholic system, which considers such practices intrinsically evil.
In a binding June 5 ruling, an arbitrator decided that the Catholic Sisters of Charity of Leavenworth Health System, Lenexa, Kan., could not buy out the secular 50% partner, though the arbitrator left open the possibility that the transfer could happen without an exchange of money. But the ruling in the 2-year-old legal dispute turns on a legal conclusion that experts say would likely be appealed if it were recorded in a public courtroom.
The referee ruled that a transfer of money in exchange for a board membership would be illegal because sponsorship of a not-for-profit healthcare system is not an asset that can be sold. The member has no vested property rights in a membership and a member has no equity interest in a charitable nonprofit corporation, arbitrator William Meyer wrote on June 5.
Although the legal battle may be over, the hospitals still lay in an uncertain state because Meyer did not say that the transfer itself was improperonly the exchange of money. But would the secular sponsor, Community First Foundation, agree to transfer its sponsorship and board membership for free instead of $311 million?
Were committed to working this out, said Jean Galloway, spokeswoman for the Community First Foundation.
Board members of Exempla, the Sisters of Charity and Community First were huddled in separate and joint meetings last week but issued no resolution as to whether the foundation would transfer its sponsorship to the religious order by deadline. Sisters of Charity President and CEO William Murray proclaimed victory in several key issues in the case, including the arbitrators rejection of an argument advanced by abortion-rights groups that Exemplas charitable mission would prohibit the application of Catholic healthcare directives at formerly secular hospitals
The controversy began in an unusual quarter, with Exemplawhich handles the day-to-day operations of the three hospitals and has its own boardlodging legal actions in order to block a transaction that would have occurred between its two sponsors.
The conflict generated widespread community interest, with more than 9,000 signatories supporting a petition to preserve the secular practices of one of the hospitals involved; three separate bills introduced and ultimately defeated in the Colorado Legislature last year; at least three separate lawsuits that led to a ruling by the state attorney general; and the seven-page arbitrated ruling June 5. Denver Archbishop Charles Chaput publicly spoke out against legislation that would have blocked the transfer. Carla Murphy, president of the medical staff at Exempla Lutheran, one of the secular hospitals, told the Denver Post that hospital physicians were upset by the proposed transfer. Murphy did not return a call for comment.
Different result in court?
Paul Danello, a lawyer with Polsinelli Shughart who has expertise on Catholic canon law, said that the decision in the Exempla case likely would have been different if it had been hashed out in a public court because the assertion that sponsorship does not carry a vested property right appears to contradict legal precedents. Invariably, in my experience that type of transfer has involved a sale of some type, Danello said. Such transactions usually include the transfer of the interest, and also a payment, either by way of assumption of debt or cash consideration, or both. Thats been very typical.
Michael Peregrine, a partner at McDermott Will & Emery, agreed, saying many not-for-profit sponsors would feel that they have rights to assets upon dissolution of such an organization.
Exempla President and CEO Jeff Selberg said that the arbitrator made a bold statement at a time when financial pressures could be sending other systems looking for guidance in similar situations. Not-for-profits are acting as if they are for-profits. They are acting as if they can be sold. The judge said, I am going to put the brakes on this, at least this one transaction, Selberg said. Our sponsors are not owners. They have limited reserve powers, and it does not equal an equity position.
Sisters of Charity and Community First CEOs and other officials declined comment beyond a joint statement.
Sister Carol Keehan, president and CEO of the Catholic Health Association, said it was difficult to comment on legal disputes involving a member organizationMurray was even a featured speaker during a session at the assembly June 8 titled Governing in Catholic Health Care: How Boards Make Decisions. Keehan also said it would be inappropriate for her to comment on industry trends at work in the issue because each joint operating agreement offers unique circumstances. If youve seen one case, youve seen one, Keehan said.
Other observers said that the case was noteworthy despite its unique facts, because of the small number of cases involving disputed mergers-and-acquisitions activity that result in legal rulings. Such disputes are likely to become more common during a lengthy and painful recession that has followed a period of relatively rapid industry consolidation. The economy is going to breed more disputes between merger partners, Peregrine said.
The legal battle over Exempla is the product of a long-standing tension within its organizational structure that potentially could have been foreseen when the partnership was forged in 1997, observers said. Although Catholic bishops strengthened their resistance to such partnerships in 2001, the church has never sanctioned practices like abortion, vasectomies and tubal ligations, or withdrawing feeding tubes as part of end-of-life procedures. Yet the Sisters of Charity of Leavenworth, through Exempla, were sponsors of hospitals that performed those procedures.
Theres a fair amount of moral cognitive dissonance in that type of arrangement, Danello said. The parties could or should have been aware of these issues back in the mid-1990s when they put together the arrangement.
Exemplas Selberg said that the organizations refer to it as their dual heritage and they have historically viewed their diversity as a strength, not a weakness. The founders felt very strongly that they wanted to perpetuate that dual heritage into perpetuity, Selberg said. Yet the arbitrator did not find evidence in the records to confirm that maintaining the hospitals dual character was foremost on the founders minds in the Oct. 1, 1997 affiliation agreements.
St. Joseph Hospital has adhered to Catholic ethics since it was founded by the Sisters of Charity more than 130 years ago. Today, the 436-bed hospital known as Exempla St. Joseph, Denver, is operated by Exempla but is still owned by the Sisters of Charity system, whose flagship is 43-bed St. John Hospital, Leavenworth, Kan.
Lutheran Medical Center was founded in the early 1900s as a tuberculosis hospital in Wheat Ridge, Colo., and is today the sole acute-care hospital in Jefferson County. It has been secular for decades, and between 1975 and 1997 was operated through the Community First Foundation and predecessor foundations. The 423-bed hospital is owned by Exempla and has been known as Exempla Lutheran Medical Center since 1997. Although its name implies otherwise, LMC is a secular community hospital, Meyer wrote in his ruling. The third hospital is another secular facility, 150-bed Exempla Good Samaritan Medical Center, opened in 2005 as a wholly owned subsidiary of Exempla in the city of Lafayette, Colo.
Observers said the fact that such disparate hospitals as St. Joseph and Lutheran could be operated under a single not-for-profit shows the intense merger pressures that came to bear on providers. The Denver market, like many areas in the 1990s, came to be dominated by integrated systems and partnerships that could realize economies of scale, Colorado Hospital Association President and CEO Steven Summer said. The healthcare delivery system that was created was in response to the environment that was here at the time, Summer said. And the payment structure was driving people toward systems.
Enter the Vatican. In 2001, the U.S. Conference of Catholic Bishops followed prompting from the Holy See and revised its Ethical and Religious Directives for Catholic Health Care Services to address the ongoing misinterpretation and misapplication of the principle of cooperation with other-than-Catholic organizations, including secular hospitals, according to a 2001 article in the Catholic Health Associations journal, Health Progress.
The result was that hospitals could no longer cite financial duress as a justification for continuing to offer services like elective sterilization at partner hospitals. Observers predicted at the time that the change would start to unspool some of the partnerships between Catholic and non-Catholic systems.
In 2002, a long-planned merger between hospitals in New Yorksecular Nathan Littauer Hospital and Nursing Home, Gloversville, and Catholic St. Marys Hospital, Amsterdamwas inexplicably canceled, even after the hospitals won a lengthy and successful court battle defending their right to merge. In 2007, differences in religious philosophies regarding reproductive healthcare derailed a proposed merger between four hospitals in Niagara County, N.Y. (Dec. 24/31, 2007, p. 14).
In the case of Exempla, Sisters of Charity executives were prepared to pay $311 million to buy sole sponsorship of the three hospitals in Denver less than a decade after the partnership was first forged. But after the three-week closed-door arbitration session that featured more than two dozen witnesses, a seven-page ruling was released declaring that the financial portion of the proposed deal would violate state law.
Jennifer Kraska, executive director of the Colorado Catholic Conference, which lobbies on behalf of the states three dioceses, said the 2001 amendments of the Ethical and Religious Directives were responsible for sparking widespread backlash to partnerships between Catholic and non-Catholic systems, like Exempla. Thats what at the heart of this, what a Catholic hospital does and does not do, she said.
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