MEDICAL—Three Local Hospitals Bolt Struggling Catholic System

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During the 1990s, Catholic Healthcare West rapidly expanded to nearly 50 facilities, making it the largest Catholic hospital system in the western U.S., and with eight facilities locally, the largest not-for-profit system in L.A. County.

But now, in a replay of some other troubled mergers across the nation, the company is contracting as the Daughters of Charity, Province of the West, pull its seven hospitals out of the system in California. This includes St. Vincent Medical Center, St. Francis Medical Center and Robert F. Kennedy Medical Center.

The contraction comes as CHW, based in San Francisco, continues a far-reaching reorganization intended to bring efficiencies and economies of scale that have been promised but never realized.

CHW posted successive operating losses of $307 million in 2000 and $309 million in 1999, prompting a management change this past summer and promises of an overhaul.

The company will not release its results for the year ended June 30 for a few weeks, but it is expecting to cut those losses in half.

It is that overhaul that has led to the cutbacks. CHW is streamlining administrative operations to put its chief executive Lloyd Dean in greater control of the entire system, and cutting hundreds of jobs in a move expected to save $100 million alone.

The reorganization also will create a single fiduciary board to oversee operations, leaving the system’s hospitals with boards of only advisory capacity, said Sister Arthur Gordon, health counselor for the daughters.

“The driving force was that with the new reorganization it was placing us further away from the direct hands-on-control of our hospitals,” Gordon said. “We just felt at this point in time it was better for us to reclaim them.”

The new system being set up, which will be headquartered in Los Altos Hills in Northern California, will create strong local boards for each hospital on which the sisters will have seats, she said.

Other details about the withdrawal are still being negotiated. Moreover, both sides have signed confidentiality agreements that will shield much of the financial transaction from public scrutiny.

But a spokesman for CHW said that the breakup will not harm the remaining system hospitals and that both sides are maintaining amicable relationships to the point where the sisters may continue to use some of CHW’s administrative services.

“We would never do anything to financially jeopardize the system,” said Mark Klein, CHW’s vice president of corporation communications.

Nationwide, however, breakups of systems formed in the 1990s have sometimes left both sides licking their wounds as they grapple with such expenses as legal fees, the cost of new information systems and adding support staff.

Lisa Zuckerman, a director with Standard & Poor’s, said the large size of CHW and the relatively small number of hospitals peeling off should not necessarily provide problems.

“CHW has had a really rocky ride the last couple of years, and management’s assessment was that there was not enough central control,” she said. “There may be one or two orders that decide they are not now a good fit, but I don’t see this as the beginning of the end.”

Standard & Poor’s has downgraded the system’s bonds several times, and they now stand at BBB with a negative outlook. However, Zuckerman noted the turnaround seems to be progressing with CHW hitting its goal of reducing operating losses by half in 2001.

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