On Nov. 8, the sale of Caritas Christi Health Care to Cerberus Capital Management was completed. In the transaction, Catholic healthcare in the archdiocese now will be part of a for-profit system like St. Vincent's hospital in our neighboring Diocese of Worcester.
Since this transaction was very large and complicated, I expected that there would be some differences of opinion on how good an agreement this was, and what it meant for the long-term prospects for Catholic healthcare in the archdiocese. Most of these concerns were expressed in good faith.
However, what I didn't expect was that some would charge -- falsely -- that Cardinal Seán O'Malley and leaders at the archdiocese did not care about preserving the Catholic identity of the system. Since many presume that silence implies consent, it would be contrary to respect for the truth not to respond to such serious allegations. I hope in this column to address some of those concerns and to provide some background on the situation so that people can make a more factually accurate evaluation of what was decided and why.
I began working at the archdiocese and serving on Cardinal O'Malley's Cabinet in 2006. It was clear from my first weeks here that the viability of the Caritas Christi Health Care system was an area of grave concern. The system was carrying an unsustainable amount of debt. This debt was preventing additional borrowing at favorable interest rates, and the interest payments were limiting the amount Caritas Christi could invest in overdue renovations and in equipment upgrades. The projected amount of capital needed to keep the system competitive was staggering. At the same time, the pension fund for Caritas Christi's employees and retirees was significantly underfunded and, without a massive financial infusion to save the system, those who had and have dedicated their entire professional lives to the ministry of Catholic health care were in danger of losing some part of their retirement benefits.
The archdiocese, and Caritas Christi, faced four possible paths. One option, clearly the least desirable and the last resort, was to close the system and use the proceeds to address the pension and the debt. The three better options, in order of preference were: (1) a "go-it-alone" strategy in which it would seek investments to address the financial shortfalls, or sell elements of the system to strengthen the remaining hospitals; (2) to partner with a national Catholic healthcare system; or (3) to sell the system, ideally to an entity that would maintain its Catholic identity.
The overall goals were to keep Catholic healthcare viable as an option going forward, to preserve full pensions for those that dedicated their lives to Catholic health care ministry, to preserve jobs and health care in the communities that Caritas Christi hospitals served, and to proceed in a way where the financial difficulties at Caritas Christi couldn't jeopardize the archdiocese's parishes and other key ministries.
Cardinal O'Malley first pursued the "go-it-alone" approach. He encouraged the hiring of a talented management team at Caritas Christi who could maximize every chance to make the system viable financially. The management team did an excellent job at improving the financials; however, the staggering pension deficit and the needed renovations and system upgrades required significantly more capital than Caritas Christi could ever produce from operating surpluses, fundraising efforts or through selling portions of the system. All stakeholders eventually agreed that "going-it-alone" couldn't succeed.
Cardinal O'Malley then encouraged the investigation of all possible partnerships with a large national Catholic health care system. Some of these conversations got to the stage where concrete terms for possible deals were discussed. Again, however, the staggering pension deficit and the projected costs of system upgrades were too large for these Catholic systems to absorb and address.
After the "partnership" path was exhausted, Cardinal O'Malley supported conversations to sell Caritas Christi to a non-Catholic system, as long as the sale would address the pension deficit and the needed renovations. His preference was to find a buyer that would commit to keeping the system Catholic, but he also realized that it was possible that some options might not allow this. He definitely wanted to avoid the system closing, as St. Vincent's Hospital in New York had earlier this year, because that would clearly endanger the pensions of those who had dedicated their professional careers to Catholic healthcare within Caritas Christi, lead to those currently working in the system losing their jobs, and lead to communities losing their hospitals. He encouraged the exploration of all options so that the best possible deal for all Caritas Christi stakeholders could be reached.
On March 25, 2010, Caritas Christi announced that it had reached an agreement with Cerberus Capital Management to acquire the system. The terms called for more than $830 million of investment to satisfy Caritas Christi's pension obligations, to repay Caritas' debt, to launch capital projects and to fund immediate upgrades. It also specified that the hospitals would remain Catholic, although it provided ways for Cerberus to choose not to maintain the system's Catholic identify in the future.
Reaction to the sale terms was mixed. Several Catholic leaders recognized that, under the circumstances, this was a victory for Caritas Christi to find a partner with significant capital to invest in Caritas Christi's infrastructure, fully satisfy pension obligations, and desire to maintain the Catholic identity of the system.
Several other Catholic leaders expressed concern. Some wondered if all options to "go-it-alone" or "partner" had been attempted. Others asked what the implications of conversion to a for-profit system would mean for the quality and sustainability of care in poorer communities. Others criticized the "out-clause" that allowed Cerberus to drop the Catholic identity of the system, forecasting that a for-profit system would jettison the U.S. Bishops' Ethical and Religious Directives (ERDs) for health care as soon as they could do so, especially if the cost for exercising that clause was a relatively small payment of $25 million. Others speculated that a private equity firm like Cerberus would someday "carve up" the system's assets to provide a greater return to its investors. Others criticized the statements and actions of Caritas Christi officials throughout the process, stating that they didn't speak forcefully enough about their desire to adhere always to the ERDs and act in ways that clearly communicated that they fully supported them. A few, recently, have charged that Cardinal O'Malley didn't do enough to guarantee Catholic identity of the system.
Many of these criticisms make broad and false assumptions. In the absence of full information, some have presumed bad motives, denying any and all benefit of the doubt to Cardinal O'Malley and to the Caritas Christi management team. In fairness, some could legitimately point out that the archdiocese and Caritas Christi should have shared more information with the Catholic community and the general public to prevent those with serious concerns from drawing erroneous conclusions. I think that's a lesson learned. This article seeks to address a few of these false assumptions and provide some additional information.
The first major assumption is that there would have been another adequate or even better option available if the Cerberus transaction fell through. There wasn't a better option -- or even another acceptable option -- on the table. Cardinal O'Malley and Caritas Christi's leaders had exhausted the "go it alone" and the "partner with a Catholic healthcare system" paths. The agreement with Cerberus fully-funded the outstanding pension liability, invested hundreds of millions in upgrades and renovations, and preserved the Catholic identity of the system for at least three years. The total transaction amount was more than $830 million of investment, which is a massive infusion of capital into a system that had a tenuous future.
Would Cardinal O'Malley and all those with an interest in Catholic health care have preferred a deal that would guarantee the Catholic identity of the Caritas Christi system forever? That's undeniable. Would Cardinal O'Malley and the archdiocese have preferred Cerberus to donate a larger amount if they change the hospitals to non-Catholic status? Categorically, yes. But those options did not exist. Anyone that has been involved in a business transaction or the sale of a home realizes that there is give-and-take in any negotiation. Even with no ready alternative, this agreement produced a positive outcome for the retirees, employees and communities. I also think all can agree, even if critics' worst case scenarios come to pass, that three years of guaranteed Catholic identity is better than zero years -- something that would have occurred if the system closed or was sold to an entity that converted the hospitals immediately to secular status.