By JUDITH VANDEWATER
Ascension Health has teamed with a private equity firm to create a new type of enterprise: an acquisitive, equity-based, for-profit Catholic health care system.
The company, Ascension Health Care Network, has the audacious goal of securing a stable future for equity-starved Catholic hospitals and health systems. Publicly launched late last month, it will grow through the acquisition of Catholic hospitals and networks. Nonprofit Catholic facilities acquired by the joint venture will retain their Catholic identity, although they will be converted to for-profit entities.
Neither Ascension Health nor Oak Hill Capital Partners, the equity firm in the joint venture, will discuss the new company's capitalization.
Ascension Health, the nation's third largest health system, continues as a nonprofit health ministry. It is investing in the new entity and will serve as its managing partner. Ascension Health holds sole authority to set the charity and community benefit policies of Ascension Health Care Network. In addition, Ascension Health will provide financial, clinical and operational services to the hospitals and other entities in Ascension Health Care Network.
Starting from scratch
Anthony R. Tersigni, Ascension Health's president and chief executive, chairs the board of the joint venture. He also chairs CHA's board.
In an interview late last month, Tersigni said Ascension Health Care Network will acquire — and preserve the Catholic identities of — providers along the full continuum of care.
The new company is bidding on a group of hospitals right now, Tersigni said, although he declined to identify the acquisition target.
Ascension Health Care Network is housed in Ascension Health's St. Louis offices. Until its size warrants dedicated hiring, the joint venture's staff will be comprised of Ascension Health executives who contribute a portion of their time. Leo P. Brideau, an Ascension Health executive tapped to lead the new venture, is its only full-time employee. He is the former president and chief executive of Columbia St. Mary's Milwaukee and simultaneously served as Wisconsin/Missouri ministry market leader for Ascension Health.
Brideau said the joint venture is open to acquisitions anywhere in the U.S. Rather than shopping for "distressed assets" or failing hospitals, it will be in the market for hospitals or health systems that have a large enough "vital presence" in their local markets to be sustainable for the long term given a capital infusion.
The next few years will test providers' financial agility. Provisions of the Patient Protection and Affordable Care Act will make providers responsible for managing the health status of groups of healthy and sick individuals. These groups will be defined by Medicare based on patient use patterns, and providers will be rewarded or penalized for their group's health status. Brideau said to thrive in that environment, health systems will need to offer a wide range of services and invest in integrated electronic health records and other kinds of expensive infrastructure.
"You need critical mass in a market," he said.
Brideau said Ascension Health Care Network can offer a lifeline to capital-starved Catholic hospitals and provide the value of being part of something much larger. Brideau said that executives have not predetermined the optimal size for the joint venture. Although he expects the new company to be competing against other buyers, he said it offers boards and sponsors the opportunity to sell Catholic facilities to a long-term investor that is able to maintain in perpetuity the Catholic identity, sponsorship and mission of its operating properties.
Sr. Maureen McGuire, DC, Ascension Health's senior vice president of mission integration, said sponsors and the board of Ascension Health strongly support the venture "as an expression of our vision to have a (continuing) strong, vibrant Catholic health care presence in the country. It's all about Catholic identity," she said.
Catholic identity
Ascension Health assessed the theological, ethical and canonical implications of the undertaking before it went looking for an equity partner, Sr. McGuire said.
Pope Benedict XVI's 2009 encyclical, "Caritas in veritate," was the starting point for its theological analysis. "There is a very clear calling in there to think in new ways about economic structures and place them in service to human need," said Sr. McGuire, noting that she considers Ascension Health Care Network to be just such a "wonderful, creative endeavor."
Tersigni said Ascension Health Care Network will report up through Ascension Health's sponsor board. In the future, the joint venture may report to a public juridic person. The local ordinary in the diocese where Ascension Health Care Network properties operate will continue to hold all authority related to the hospital or local health system's Catholic identity and adherence to the Ethical and Religious Directives for Catholic Health Care Services.
Sr. McGuire said Ascension Health found a good fit with Oak Hill Capital Partners with respect to the firm's business ethics, labor practices and ethos of social responsibility.
"Oak Hill has a very simple core statement which is, they won't invest in anything that hurts people," she said. "They have an interest in the continuing improvement of health care in America and saw that strengthening Catholic health care was a contribution to that," Sr. McGuire said.
American businessman Robert M. Bass is the lead investor in Oak Hill Capital Partners, a firm with more than $8.2 billion in investments. When all Oak Hill partnerships are combined, the investment capital tops $30 billion.
In the fiscal year ending June 30, 2010, Ascension Health had a net income of $1.2 billion, primarily due to non-operating investment returns of $723 million.
Brideau said Ascension Health Care Network may take in new private investors down the road or make an initial public offering of stock. Regardless of shifts in equity ownership, Ascension Health always will retain the permanent reserve powers necessary to ensure Catholic ownership, sponsorship and Catholic identity, he said.
Catholic alternative
Tersigni said Ascension Health Care Network is an alternative financing vehicle that fills a void at a pivotal time in the evolution of the U.S. health care delivery system. As mentioned, many stand-alone hospitals and small nonprofit systems will require access to capital to adapt to reforms in health care financing and a shift to population-based health care management. But debt service is cutting into financial performance and limiting strategic options for many. With the capital markets still tight, there is unmet need for money for deferred maintenance, equipment, building projects, and to add service lines. Too, many small hospitals and health systems have significantly underfunded pension plans dragging down their balance sheets. There are concerns around regulations and regulatory compliance, Tersigni said.
Without ready access to capital, Tersigni thinks the 300 Catholic hospitals that are not part of the largest nine Catholic health systems may be economically vulnerable.
"I've got to believe a portion of that 300 will need to find a home, and that is what this vehicle is about. It is not going to be suitable for everybody, but it will be a conduit to allow those who are facing these issues to begin looking at the situation now. There are already sales of Catholic hospitals, there are Catholic hospitals that are closing, that is happening whether we add this vehicle or not."
"If we look 10 years from now and we don't have an alternative financing vehicle like we've tried to put together, where are they going to end up? They are going to end up either going to another nonprofit, selling to a for-profit, or shutting down, and that is a real concern of ours." Catholic hospitals serve one in six inpatients in the U.S. "And usually they are serving the most needy and they are safety net providers," Tersigni said.
A bright line between affiliates
Ascension Health decided to create a new company rather than bring the Catholic hospitals and health systems into its nonprofit portfolio in order to preserve the financial integrity of its operating properties.
Tersigni said that all of the cash generated by Ascension Health ministries for the next five to seven years is committed to current health ministries, pension funds, bondholders and construction projects. "So every dollar that I would take away from our current ministries (to invest in an acquisition property) would put them both in jeopardy," Tersigni said. "So that is where we came up with the idea of saying, wait a minute, let's create another funding source that brings the same expertise we have on the Ascension Health not-for-profit side and use someone else's money to go out and help Catholic health ministry."