2. Trends in Affiliations Involving Catholic Providers
A. National Affiliation Trends
Dynamic market forces are transforming the financing, organization, and delivery of health care services. One of the products of the new marketplace has been the integration of health care providers and health plans in alternative types of affiliations. Driven by the growth of managed care and increasing competition for patients, as well as by pressures to contain costs, health care organizations are seeking to realize the benefits of multi-organizational arrangements. These benefits include cost savings through economies of scale, operating and financial improvements, and the potential for organizational growth (Jaeger, Kaluzny, and Magruder-Habib 1992).
Different affiliation types have emerged, including relatively loose arrangements - such as joint undertakings of limited activities and shared services - as well as "merged identity" organizations - such as holding companies, mergers, acquisitions, and consolidations. Coalitions are forming and dissolving at an unprecedented pace and are often difficult to track, especially in the case of organizations that change ownership more than once during the same year. Overall, 997 health care mergers and acquisitions were reported in 1996, a 58% increase over 1995 (Haas-Wilson and Gaynor 1997). These figures reflect transactions in major segments of the health care industry, including hospitals, long-term care facilities, physician groups, and other providers.
Affiliations between various types of health care organizations have dramatically increased in recent years. Integrated delivery systems that include inpatient, out-patient, and long-term care facilities are proliferating. Physician-hospital organizations (PHOs) and management service organizations (MSOs) have emerged as new forms of joint activity between hospitals and physicians. Further, the divisions between the insurance and service delivery markets seem more permeable than before, as mergers and exclusive contracts between insurers and providers are developed and as providers begin to carry full insurance risk for the services they deliver.
Affiliations among the same type of health care organizations also are growing. Examples of recent activity among managed care organizations include the acquisition of U.S. Healthcare by Aetna Health Plans and the merger of Foundation Health and Health Systems International, each of which created a health plan with several million enrollees in many states. Among physicians, the shift from solo to group practice and the growth of Independent Practice Associations (IPAs) and physician management firms illustrate fundamental changes. In 1996, more than one-third of all physicians were in group practices, and approximately 4,000 IPAs were in operation (Haas-Wilson and Gaynor 1997).
Record numbers of hospital affiliations involving corporate and individual hospital activity have been reported. In addition to the factors motivating health care organizations in general, hospital affiliations have also been driven by the declining financial performance of a large proportion of hospitals as a result of the shift to non-hospital care settings and prospective payment systems. Poor financial outcomes have been observed particularly among small, not-for-profit community hospitals. For example, a three-year study of the financial performance of 1,297 such hospitals found that one-fourth of all sampled facilities were in a "crisis or warning status" (Prince 1991).
Approximately 235 transactions (involving 768 hospitals) were announced or completed in 1996, compared with 230 transactions (involving 735 hospitals) in 1995 and 184 transactions (involving 650 hospitals) in 1994 (Japsen 1996). These figures indicate that almost 40% of the 5,200 nonfederal U.S. hospitals have been involved in some type of affiliation in the past three years. Corporate affiliations (i.e. between systems), numbered 11 in 1996, six in 1995, and eight in 1994, and accounted for many of the above transactions. Recent examples include the 1996 acquisition of OrNda HealthCorp by Tenet Healthcare to create the second largest hospital chain in the country (Japsen 1996) and the 1995 acquisition of Healthtrust (a 115-hospital chain) by the largest hospital chain, Columbia/HCA (Lutz 1995).
From the perspective of community hospitals, 1,018 community hospitals have been involved in affiliations with hospitals, health systems, or chains in the past three years via 581 affiliations (Japsen 1996; Lutz 1994). (This figure excludes academic medical centers or large teaching hospitals, specialty hospitals, and hospitals that were already owned by an investor-owned chain.) In 1996, 63 hospitals involved in affiliations changed ownership from not-for-profit to for-profit status, compared with 48 such cases in 1995 (Japsen 1996; Lutz 1995).
This recent growth in the number of affiliations in the health care industry can be attributed in part to the clarification of guidelines and the review process of the Department of Justice (DOJ). For more than a century, the United States has subjected proposed affiliations between organizations to close scrutiny under various antitrust laws. In response to the growing number of affiliations between health care providers, the DOJ and the Federal Trade Commission published six policy statements in September, 1993, to provide guidance to hospitals, physicians, health systems, and other provider networks interested in mergers, joint ventures, and other types of affiliations. Included in the guidelines were outlines of "antitrust safety zones," described as "the circumstances under which the Agencies will not challenge conduct under Antitrust laws," and guidelines for providers falling outside the DOJ safety zone (U.S. Department of Justice and the Federal Trade Commission 1994). Additional DOJ guidance is expected as the agencies acquire more experience reviewing affiliations among health care providers (U.S. Department of Justice 1996).
B. Affiliations Involving Catholic Partners, 1990-1996
Like other health care organizations, Catholic providers have participated in affiliations. After matching the American Hospital Association's (AHA) and
Modern Healthcare's annual lists of hospital affiliations with the
Official Catholic Directory (1995) and the
AHA's Guide to the Health Care Field (AHA 1990-1996), we identified 131 transactions involving one or more Catholic hospitals or health systems between 1990 and 1996. These transactions represented 18% of all hospital affiliations (N=718) reported by these sources for this seven-year period. (See
Appendix B for a more detailed description of methodology.)
Reported affiliations involve significant organizational changes, namely, acquisitions, consolidations, mergers, joint ventures, and longterm lease agreements. They do not include looser arrangements, such as management contracts or cases where a hospital joins a network. In addition, these transactions focus on community hospitals that affiliated with other hospitals or health systems. They exclude corporate merger activity such as the 1996 merger of Sisters of Charity Health Care Systems, Catholic Health Corp., and Franciscan Health System to create Catholic Health Initiatives, a Denver-based system of 63 hospitals (Japsen 1996) or the 1995 merger of six-hospital Daughters of Charity National Health System-West into then 18-hospital Catholic Healthcare West, San Francisco (Lutz 1995).
Table 1 shows the 131 affiliations involving Catholic hospitals between 1990 and 1996 categorized by type of ownership of the partner. Nearly 80% of affiliations were between Catholic hospitals and a non-Catholic partner. Two-thirds of the affiliations were between Catholic hospitals and non-Catholic not-for-profit hospitals or systems. Twelve percent involved a Catholic hospital and a for-profit hospital or system. This distribution may reflect Catholic hospitals' preference to affiliate with other not-for-profit providers with whom they share similar values, rather than with for-profit entities (Japsen 1995b,c).
Table 2 presents the 131 affiliations by type of organizational arrangement. Overall, mergers and acquisitions were the dominant types (40% and 37%, respectively), followed by joint venture/holding company arrangements (11%). Transactions between Catholic and other not-for-profit providers were more diverse with regard to affiliation type, compared with cases involving Catholic partners only or those between Catholic and for-profit organizations. For example, consolidations and lease agreements were only pursued between Catholic and other not-for-profit organizations. The majority of affiliations involving Catholic and for-profit partners were cases in which the for-profit partner acquired the Catholic hospital (56%). The most common type of affiliation involving Catholic and other not-for-profit organizations was merger (48%).
An evaluation of the financial performance of Catholic hospitals helps shed light on the factors motivating Catholic hospital affiliations. Financial stress in Catholic hospitals is thought to be related to their tendency to be located in underprivileged communities, to provide charity care, and to incur more bad debt than other hospitals. Kwon et al. (1988) examined the 1982 total population of Catholic hospitals and classified more than half as deficit hospitals (in which total operating cost exceeds patient revenue). The study found that compared to the surplus hospitals, the deficit hospitals were older, smaller, treated more Medicaid patients, had larger debt burdens, had longer length-of-stay and lower occupancy rates, and were less likely to belong to multihospital systems. Prince and Ramanan (1994) conducted a similar analysis of the operating performance of a sample of 235 Catholic community hospitals from 1986-89 and concluded that 30% of these facilities were in a "warning zone of fiscal stress" and threatened with a possible closure. Factors contributing to financial distress were similar to those in the Kwon et al. study.
A more recent study documented that the average 1992 Catholic community hospital was less profitable than the average matched not-for-profit community hospital (Prince 1994). The author argued that although more than 80% of Catholic hospitals were part of church-related health care systems, many were not realizing the benefits of system membership because the systems were geographically dispersed across regions, with no significant concentrations in local service areas. The study concluded that serious threats exist to the economic viability of Catholic hospitals and that closures will occur unless relationships with local providers are established.
C. Alternative Outcomes for Reproductive Health Services
Affiliations involving Catholic health care organizations have produced varied outcomes with respect to the availability of reproductive health services. From public sources, affiliations can be identified in which reproductive health services have continued unchanged, have been provided in different organizational arrangements, or have been discontinued following affiliation. In addition, it has been observed that because of Catholic moral distinctions between abortion and other proscribed reproductive health services, affiliations may treat each of these services differently (Bayley 1995).
First, it is noteworthy that some proposed affiliations between Catholic and non-Catholic providers have been derailed by failure to agree on issues related to the provision of proscribed reproductive health services, particularly abortion. For example, a proposed merger between a Catholic and non-Catholic hospital in Poughkeepsie, New York, was canceled in 1995 when the non-Catholic hospital's governing board reversed its decision to discontinue abortion services following community objections. Instead of merging, the Catholic and non-Catholic hospitals announced plans to pursue looser forms of collaboration (Family Planning Advocates 1996). In another case in Portland, Maine, a Catholic hospital withdrew from merger negotiations with two non-sectarian providers after intense lobbying by reproductive rights activists. The non-Catholic hospitals proceeded with their merger plans (ACLU 1995). In Kalamazoo, Michigan, a proposed merger broke down when a Catholic medical center could not agree to the partner hospital's continued performance of late-term abortions of anencephalic fetuses. Such cases illustrate that abortion can be a "deal breaker" in affiliation attempts, but because these cases may not be publicly disclosed, it is not known how often this occurs.
Cases are known in which controversial reproductive health services have continued unchanged at the non-Catholic hospital following affiliations with Catholic partners. Typically, these are cases that do not involve merging assets or the acquisition of non-Catholic assets by the Catholic partner. Instead, they tend to be transactions involving a lease agreement, a joint venture, the formation of a holding company, a virtual merger, or the acquisition of Catholic assets by the non-Catholic partner. For example, reproductive services continued at a city-owned hospital in Texas after the facility was leased to Seton Medical Center, a Catholic provider, in 1995. Catholic officials explained that although Seton would govern and fully manage the public hospital, it could continue to provide reproductive services since the city retained ownership of the facility. Similarly, infertility and sterilization services continued at hospitals in Cincinnati, Ohio, following their 1995 virtual merger with a Catholic hospital; the three partners unified their management under one parent corporation and merged their income statements but kept separate assets and liabilities (Catholics for a Free Choice 1995).
Contrary to the cases in which a Catholic hospital does not provide proscribed reproductive services on campus but shares in the revenue generated from the provision of these services by its partner, there have been cases where the partners agreed that the Catholic hospital would not share in such income. This strategy further distances the Catholic provider from the proscribed activities. An example is the 1995 joint operating agreement between St. Mary's and Columbia Hospitals in Milwaukee, Wisconsin. The two providers merged their revenues and expenses but retained their assets. Columbia continued to provide sterilization and infertility care, but St. Mary's would not share in income from these services (Family Planning Advocates 1996).
The creation of a separate corporate entity or facility to provide proscribed reproductive services is not uncommon. The new entity typically is created by the non-Catholic party prior to the completion of the affiliation. For example, Owensboro-Daviess County Hospital created a separate entity to provide contraception and sterilization when it merged with Mercy Hospital in Owensboro, Kentucky, in 1995 (Lewin 1995). Similarly, Good Samaritan Medical Center created an independent clinic on its campus to provide sterilizations prior to its 1994 affiliation with St. Mary's Hospital, a Catholic facility in West Palm Beach, Florida (Catholics for a Free Choice 1995).
The continuation of proscribed reproductive services may or may not involve the continuation of abortion services in cases where abortion was provided by the non-Catholic partner prior to the affiliation. For example, reproductive services including medically indicated abortions (i.e. abortions to save the life of the woman or of a fetus with a serious defect) continued at Charlotte-Mecklenburg Hospital Authority, a two-hospital public system in Charlotte, North Carolina, after its 1994 affiliation with Mercy Hospital. Hospital Authority acquired 70% of Mercy, but the hospitals remained separate entities. In another case, contraception and sterilization services continued, but abortions (except to save the life of the woman) were prohibited at Sierra Nevada Memorial, a community hospital in Grass Valley, California, after it joined Mercy Healthcare, a Catholic system based in Sacramento, California (Catholics for a Free Choice 1995).
Hospitals may establish mechanisms to facilitate women's access to abortion if the service is to be discontinued on campus. For example, Deaconess Medical Center in Great Falls, Montana, chose this strategy during its 1994 merger with Columbus Hospital, a Catholic facility. Following an agreement that Deaconess would discontinue abortions following the merger and given that the closest hospital to Great Falls was 90 miles away, Deaconess transferred funds to the local Planned Parenthood affiliate to establish a travel fund for low-income women needing a hospital abortion for medical reasons. Deaconess continued to provide tubal ligations and emergency contraception to rape victims (Family Planning Advocates 1996). This arrangement distanced the merged entity from the provision of abortions.
Other cases illustrate strategies to provide proscribed services in different organizational arrangements. The accommodations reached in these cases seek to preserve women's access to specific services without jeopardizing the partners' collaboration. For example, in 1994, General Hospital Medical Center and Providence Hospital, both in Everett, Washington, merged into Providence General, a Catholic organization that does not provide any of the proscribed services. Before merging, General Hospital donated funds to the local Planned Parenthood and a group of obstetrician-gynecologists to provide sterilizations and abortions to low-income women (Lutz 1993). In another 1994 case, Leonard Hospital and its primary care clinics discontinued family planning and sterilization services after merging with St. Mary's Hospital to form Seton Health System, a Catholic provider in Troy, New York. Local activists and two women affected by the loss of services filed suit to challenge the state's approval of the merger. An agreement was reached in which Seton maintains a list of local reproductive service providers and Seton practitioners make referrals and follow-ups (Center for Reproductive Law and Policy 1996).
Discontinuation of proscribed reproductive services at the non-Catholic facility has occurred in some affiliations. These cases tend to be mergers in which a new organization with a Catholic identity is created or in which a non-Catholic provider is acquired by the Catholic partner. Examples include the 1990 merger of Burnham and Mercy Hospitals into Covenant Medical Center, a Catholic provider in Urbana, Illinois; the 1994 merger in New Jersey of Dover General and St. Claire's-Riverside Medical Center into Northwest Covenant Medical Center, a Catholic institution; and the 1995 acquisition of Mount Sinai, a Jewish hospital, by St. Francis Hospital in Hartford, Connecticut (Catholics for a Free Choice 1995). The latter case involved the closure of a prominent infertility service at Mount Sinai, in addition to the discontinuation of sterilization and abortion services except to save the life of the woman.
These transactions do not illustrate the outcomes for provision of proscribed reproductive services in cases in which a Catholic hospital is acquired by a non-Catholic hospital or system, or in which a Catholic hospital merges into a dominant non-Catholic organization. Such transactions may or may not involve alienation of Catholic property (see Glossary, Appendix A) and loss of Catholic identity. Cases in which Catholic ownership is not maintained may result in one of two outcomes: expansion of reproductive health services if the
Directives are no longer followed, or continued compliance with the
Directives and therefore continued restrictions on reproductive services. An example of the latter scenario is the 1994 acquisition of St. Francis Hospital in Charleston, West Virginia, by Columbia/HCA. Despite new for-profit ownership, St. Francis continued to comply with the
Directives as a condition of the affiliation agreement (Catholics for a Free Choice 1995).
This diversity of affiliations and of strategies for the provision of reproductive health services characterizes the current context for affiliations involving Catholic providers.
