Business conversion

Catholic Healthcare West shed more than words when the 38-hospital system changed its name to Dignity Health. It dropped its formal connection to the Roman Catholic Church.

San Francisco-based CHW envisioned a system with hospitals coast to coast, beyond its three-state region of Arizona, California and Nevada. To realize that vision, the system on Jan. 23 introduced the new name and the restructuring of its governance to separate from the church. Officials cited enhanced opportunities to expand, saying separating from the church would make the system more attractive to executives from secular or non-Catholic hospitals that are looking for an investor.

“What this does is two things: it removes the words ‘Catholic' and ‘West' from its name; I think the intention is for broadening the pool of affiliations,” said Brad Spielman, a vice president and senior analyst for Moody's Investors Service.

The former CHW counts itself as the fifth-largest Catholic system in the country based on revenue, and whether other systems follow suit in an effort to grow remains to be seen. Still, CHW's conversion poses the latest example of a faith-based system taking drastic actions to position itself for impending healthcare reform and the business demands of the future.

Most observers aren't surprised, but also wonder if the system's mission and values have evolved to the point where they were forced to separate. “They view it as removing the ball and chain from themselves,” said Paul Danello, a Washington-based lawyer focused on Catholic canon law.

As a growing number of laypeople continue to be involved in leadership, some question whether the Catholic way will remain a feasible way of doing business.

Lawrence Singer, director of the Beazley Institute for Health Law and Policy at Loyola University, a Jesuit school in Chicago, and his colleagues envision a time when compliance with ethical and religious directives could hamstring Catholic hospitals attempting to conduct business in the modern age. “Are we getting to a point where either government policy in the Affordable Care Act or community demand for certain services is such that Catholic healthcare providers won't effectively be able to compete or serve their market any longer?” Singer said.

Dignity Health President and CEO Lloyd Dean declined to discuss any pending deals that may have served as motivation for the restructuring, but did say the system is looking to expand east. He also said there's no “one-size-fits-all” remedy for all Catholic systems. But this one, he said, gives Dignity Health the flexibility to ally with a larger number of organizations.

“What I can tell you is, this is the right model for us and it allows us to partner with others whose values who are in sync with our mission, vision and organization,” Dean said.

Dignity Health now has 23 Catholic and 15 non-Catholic hospitals.

Dignity Health officials planted the seeds for a name change in 2010, when CHW released its vision statement for the next decade. Besides making bold goals of expanding, the system listed “dignity” as the first of five core values and described aspirations of developing a “vibrant national healthcare system” by the end of 2020.

“We will grow our healing ministry by expanding access and market share within existing service areas, entering new service areas, and significantly expanding our community-based wellness, ambulatory and nonacute services,” the report, titled Horizon 2020, stated.

Dignity Health officials are quick to point out that they aren't severing all ties to the church. Dean said the church's values will remain important at the system's Catholic and non-Catholic hospitals. The system will continue to prohibit most reproductive services at its existing facilities, regardless of the hospital's affiliation, allowing only sterilizations at its non-Catholic facilities.

“I would say our vision has not changed and neither has our mission as being a voice for the voiceless, serving those in need of quality healthcare,” Dean said.

That's a statement supported by the Washington, D.C.-based Catholic Health Association. “We do not see it as separating from the church; they worked this corporate structure out in consultation with many bishops,” CHA President and CEO Sister Carol Keehan wrote in an e-mailed statement.

A changing climate is forcing Catholic healthcare organizations to make changes. Earlier this month, the largest Catholic care group in America, 76-hospital Ascension Health, St. Louis, split into two (Jan. 9). The Ascension Health Alliance will manage support services and subsidiaries, while Ascension Health concentrates on hospital operations and healthcare delivery. Last year, Ascension formed a for-profit partnership with private-equity firm Oak Hill Capital Partners that intends to buy struggling Catholic providers and keep them Catholic (See related story).

Sister Judy Carle, Dignity Health's board vice chair, said CHW leaders discussed splitting the system into non-Catholic and Catholic components, but concluded that would go against the system's belief in inclusivity. CHW has been the rare group with both non-Catholic and Catholic hospitals. However, Danello predicted that other Catholic systems would follow Dignity Health's lead, and that three out of the other top five Catholic healthcare organizations would do so in the next two to four years.

Dignity Health has not acquired a hospital since 2007, when it added St. Mary's Regional Medical Center in Reno, Nev., and the system has been searching for a buyer for that 269-bed hospital.

A published report quoted Dean saying officials from non-Catholic hospitals interested in affiliating with CHW seemed reluctant about joining a Catholic system, worried that they'd have to become Catholic.

Dean downplayed that dynamic when asked in an interview to elaborate on how the system's Catholic sponsorship may have derailed CHW's previous efforts to add hospitals. “We had rapid growth over the last decade and two decades; that's a misnomer and not a correct statement.”

The system reported $917 million in net income for fiscal 2011, which ended June 30, 2011, an 89% increase from $485.7 million in 2010. Operating income increased 138% to $197.6 million in fiscal 2011 from $83.2 million the previous year.

Though financial analysts say the move may aid Dignity Health's expansion efforts, neither Moody's nor Standard & Poor's adjusted its credit ratings after hearing the announcement. Both companies said there hasn't been enough time to review the changes and intend to monitor the long-term impact.

Martin Arrick, a managing director in S&P's Public Finance Ratings Group, said dropping the church affiliation will accelerate merger and acquisition plans.

Dignity Health's board of directors now serves as the top level of governance. Previously, the system's six Catholic sponsoring congregations served that function. A new group, dubbed the Sponsorship Council, will now hold direct responsibility for the system's Catholic hospitals and facilities.

The new leadership infrastructure makes Dignity Health unique, Arrick said. He views that as a positive, because prospective deals would allow the system to address problems that historically get ignored, such as supply chain consolidation. “I don't think this structure, per se, speaks to whether a merger will or won't ultimately be successful,” Arrick said. “I just think the structure makes it easier for Catholics and non-Catholics to work together, that's a key point.”

Danello, meanwhile, suggested that friction with the church's positions, in addition to the need for growth, may have motivated the restructuring, recalling that Pope Benedict XVI recently warned American bishops of a rising sect of radical secularism that threatens Catholic values in America.

In 2010, CHW-affiliated St. Joseph's Hospital and Medical Center, Phoenix, provided a case study in that conflict after Phoenix Bishop Thomas Olmsted stripped the hospital of its official Catholic status.

Olmsted declared that the hospital's staff violated church directives when doctors performed an abortion in November 2009. The hospital said the procedure was the only way to save the woman. Despite the bishop's actions, St. Joseph officials say the 673-bed hospital has continued to follow the facility's Catholic mission as set forth by CHW without the church's formal sponsorship.

Now St. Joseph's Vice President for External Affairs Suzanne Pfister calls St. Joseph's “the poster child” for Dignity Health's new path. “Our mission had not changed, and will not change throughout this,” she said. “We continue to operate with respect to what the bishop's actions were to us, but we have not changed our procedures, we have not changed who we are in the marketplace, and we continue to treat patients, literally, from all over the world.”

CHW contacted San Francisco Archbishop George Niederauer in February 2011 about the proposed changes, according to the San Francisco Archdiocese. Niederauer then spoke with Catholic officials, including the U.S. Conference of Catholic Bishops. Those conversations prompted him to issue a nihil obstat, meaning the church held no faith or moral objections with the separation. He concluded CHW's move would allow its hospitals to continue to comply with ethical and religious directives, a statement from the Archdiocese of San Francisco read. CHW also consulted with the Philadelphia-based National Catholic Bioethics Center on the matter, a spokesman for the center confirmed.

A spokesman for the Phoenix Diocese had no comment on the Dignity Health development, saying the matter was still new and that officials continued to review the situation.

The move could soothe criticism from those who worry that reproductive services will be eliminated when their community hospitals entertain offers from Catholic systems.

“This is a positive development, it's recognition by Catholic Healthcare West that non-Catholic hospitals can be reluctant to partner with a Catholic hospital or health system because of worries about having restrictive services they provide and submit to the orders of a local bishop,” said Lois Uttley, the executive director of the New York City-based MergerWatch Project.

MergerWatch is a watchdog group that scrutinizes hospital mergers involving Catholic organizations, with concerns over accessibility to reproductive services.

CHW acquired its first non-Catholic hospital in 1992, Methodist Hospital of Sacramento (Calif.). Having Catholic and non-Catholic hospitals together under one system is like having two families living under the same roof, said several Dignity Health officials, including Glenna Vaskelis, senior vice president of operations for the Bay Area.

Vaskelis oversees 276-bed Dominican Hospital in Santa Cruz, Calif., and 165-bed St. Mary Medical Center in Long Beach, Calif., which are Catholic. She also oversees 153-bed Sequoia Hospital in Redwood City, Calif., and 239-bed St. Francis Memorial Hospital in San Francisco, both of which are non-Catholic.

All four of her hospitals follow the system's directives, which prohibit euthanasia and abortions. “When we gather at corporate meetings,” Vaskelis said, “you wouldn't know who was Catholic and non-Catholic among the leadership in the room.”