CEO Robert Braithwaite says that he hopes the timeline for dissolving the affiliation is “expeditious.”
The founders of Hoag Memorial Hospital Presbyterian filed a lawsuit last week to dissolve Covenant Health Network (CHN), the vehicle for the organization’s affiliation with Providence Health to promote population health initiatives in Orange County.
Hoag, a nonprofit regional healthcare delivery network based in Orange County, California, has been affiliated with St. Joseph Health, a nonprofit health system based in Irvine, California, since 2012. In 2016, St. Joseph merged with Providence Health, a nonprofit health system based in Renton, Washington. The new combined system, Providence-St. Joseph Health, reported over $25 billion in total operating revenues at the end of 2019.
Hoag, which operates two hospitals in southern California, has net assets of nearly $2.2 billion, according to the organization’s most recent 990 form.
Despite the enthusiasm surrounding CHN, Robert Braithwaite, President and CEO of Hoag, tells HealthLeaders the effort “struggled for a number of years with fits and starts.”
Braithwaite says Hoag anticipated scaling up CHN’s population health efforts in Orange County as a result of the merger but added that it also introduced a “more diffuse” business structure with “more bureaucratic” challenges.
“There are good people [at Providence] but it was becoming apparent to us that they have more of a national presence,” Braithwaite says. “They’re one of the biggest health systems in the United States and they do have more of a regional or national lens, compared to that of Hoag, which is more concentrated on southern California, specifically Orange County.”
Those issues prompted the legal action by Hoag to end an affiliation that has lasted eight years, as the hospital aims to “reclaim its independence.”
In the filing, Hoag claims that the CHN executive staff had “formally abandoned” the organization in 2017.
Hoag leadership analyzed the struggles surrounding CHN and determined in June 2019 that the initiative was “not right for this community,” according to Braithwaite. He says Hoag reached out to Providence to ask for a realignment of the CHN arrangement, noting that the current arrangement was “not fulfilling the measure of its creation.”
Negotiations with Providence lasted until March 2020, before Hoag proceeded with a mediation process, according to Braithwaite. He says that process, which took place Thursday, April 30, failed and led to the complaint filed on Friday, May 1, to dissolve CHN.
In the filing, Hoag claims that Providence executives told the board earlier this year that population health was “no longer relevant.”
Braithwaite tells HealthLeaders that he hopes the timeline for dissolving the affiliation is “expeditious,” but added that Hoag will continue to operate as a controlled subsidiary of Providence until a resolution is reached.
“We are going to continue to work with [Providence] and encourage them to think about a collaborative model that could work,” Braithwaite says. “We’re hoping that through some productive dialogue that we can achieve that kind of a mindset and commitment as we go forward.”
In a statement, Erik G. Wexler, CEO of CHN and chief executive of Providence St. Joseph’s Southern California segment, said the organization was “disappointed” with Hoag’s legal action and “believe it is without merit.”
“Now, at a time when all hospitals and health systems are battling the COVID-19 pandemic, the Hoag leaders took legal action to sever its relationship with Providence for reasons that remain unclear,” the statement read. “The Hoag leaders’ so-called ‘realignment’ plan would negatively impact patient care, diminish resources and medical expertise available to Orange County. In fact, this move could undo nearly a decade’s worth of enhanced access to high quality, dependable, affordable, and compassionate care to the communities we serve, especially to our most vulnerable members.”
Bucking the M&A Trend
Looking at the increased consolidation among provider organizations in recent years, Braithwaite says a “paradox of scale” has emerged for smaller hospitals and health systems.
“On the one hand, everybody oftentimes just thinks of the upside of scale, where maybe [organizations] need a brand lift, financial help, or access to more physicians,” says Braithwaite. “[However], there is the other side, where, at times, scale is too big and does constrain, or it’s not efficient and nimble for the communities that healthcare organizations are trying to serve. When [leaders] examine both sides of that paradox, they’ve got to keep what the community needs front and center in that conversation.”
Many hospital leaders and healthcare stakeholders have been eyeing the potential effects of the COVID-19 outbreak, with some expecting a rise in provider consolidation due to the financial crunch smaller, independent health systems are facing.
“[Community hospitals may] join up with a larger system that may have better access to capital or may just have the scale and the operating expertise to manage in environments like this,” Phil Kaplan, a managing director at Hammond Hanlon Camp LLC, says.
Commenting on how the pandemic might affect M&A activity going forward, Braithwaite says the ultimate impact will depend on whether organizations are primarily focused on finding available capital or if that is a “secondary or tertiary” concern.
Braithwaite says some hospitals, like Hoag, desire the ability to “act and decide locally” for the communities. He says hospital finance leaders examining their options for consolidation as they emerge from the pandemic should focus on their role as financial stewards for the community and then “decide accordingly.”
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