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Caritas deal has a secular option

$25m fee to split hospitals, diocese

By Lisa Wangsness and Beth Healy
Globe Staff / May 7, 2010

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The private-equity firm proposing to purchase Boston’s six Catholic hospitals intends to maintain the hospitals’ religious identity, but has also negotiated an escape clause that would allow the firm to end the religious affiliation in exchange for a $25 million donation to charity.

The much-anticipated agreement between the private equity firm, Cerberus Capital Management, and the Archdiocese of Boston, was released yesterday by Attorney General Martha Coakley, who is obligated by law to review the proposed conversion of the hospital system into a for-profit venture. Ultimately, the deal would have to be approved by the state Supreme Judicial Court, the state Department of Public Health, as well as Pope Benedict XVI.

The agreement says that a holding company established by Cerberus, called Steward Health Care, “desires . . . that upon completion of the transaction, the hospitals will continue to be operated as Catholic health care providers.’’

But Steward could terminate the agreement if it decides com plying with Catholic ethical guidelines for hospitals is “materially burdensome,’’ a term that is not defined. In such a case, Steward would have to pay $25 million to a charity chosen by the church, remove all symbols of Catholic identity from the hospitals, and stop using “the name of any pope or saint or any name that is otherwise traditionally associated with the Roman Catholic Church.’’

The archdiocese could also terminate the agreement if it concluded that the hospitals were not following Catholic teachings. The proposed agreement would allow the archdiocese, aided by a bioethicist chosen by the church, to continue to monitor the hospitals’ ethical conduct.

Cardinal Sean P. O’Malley, the Roman Catholic archbishop of Boston, was traveling yesterday, and was not available for comment. But a top aide, the Rev. Richard M. Erikson, said in an interview that the archdiocese believes that Cerberus intends to maintain the Catholic identity of the hospitals, and also has concluded that the proposed acquisition by Cerberus is the best option for preserving the financially strapped Catholic hospitals of Boston.

As Catholic hospitals, the Caritas facilities say they put a special emphasis on caring for the poor and providing pastoral ministry to the sick. They also comply with a set of ethical directives for Catholic hospitals that bar procedures the church considers morally wrong, such as abortion and euthanasia.

The archdiocese had previously tried to maintain the hospitals as an independent venture and also tried twice unsuccessfully to negotiate the acquisition of Caritas by another Catholic hospital group. Caritas, which traces its history in Boston to the 1860s, is one of the last diocesan hospital systems in the United States.

“The bottom line is, if we did not get the capital we needed to continue the mission of the Catholic Church, then Catholic health care might not have existed at all in Greater Boston,’’ said Erikson, who is the vicar general of the archdiocese. “It’s about the continuation of the ministry.’’

Timothy F. Price, managing director of Cerberus, said in an interview that “maintaining this identity is in the best interest of all stakeholders, including patients, employees and the communities in which the health care facilities operate,’’ and Caritas spokesman Christopher Murphy said any break with the church would not be undertaken lightly.

Murphy said the agreement was meant to be permanent, and that the language about terminating the agreement was meant to protect the hospitals if complying with the church’s teachings began to compromise the hospitals’ financial viability.

“I can’t tell you where, 20 to 30 years from now, medicine is going to take us,’’ Murphy said.

Coakley, who has at times been critical of the Catholic Church, declined to discuss the proposed $830 million to $850 million hospital acquisition yesterday, citing her role in the process.

In a detailed set of religious and financial documents filed with the attorney general, Caritas presented an even bleaker description of its own financial health than it has in the past, saying the company was on the brink of insolvency and that it was at risk of defaulting on pension payments. The string of failed efforts to merge with other hospital companies, starting in 2007, ultimately sent Caritas into the arms of Cerberus Capital Management, according to the letter.

By 2008, Caritas was projecting a $50 million loss and a declining cash position, according to the company’s letter to the attorney general. Even Caritas’s borrowing ability was tapped out; at a board meeting that October, amid the nation’s financial crisis, the company’s investment bankers advised that it couldn’t raise capital through a bond offering due to its weakened finances.

Although Caritas’s new chief executive, Ralph de la Torre, had helped engineer an overhaul of the company’s finances, the company’s consultant, Navigant, warned that there was “no reasonable way for Caritas, as an independent system, to meet its pension and debt obligations and survive,’’ the letter said. The company tried to forge yet another deal that year, with Vanguard Health Systems, but the parties couldn’t reach an agreement.

Caritas finally turned to private equity firms for potential acquisition. Three expressed interest, and earlier this year, Caritas agreed to negotiate only with Cerberus.

Under the terms of the proposed sale, Cerberus would repay nearly all of Caritas’s outstanding debt. It would fully fund pension plans covering nearly 13,000 current and former employees. And the equity firm would invest about $400 million on projects at Caritas — financing new electronic health systems for physicians and upgrading facilities such as emergency and operating rooms.

“A primary public interest served by the transaction is that it will provide the resources necessary to transform a crucially important, but financially challenged, system into a financially sustainable, lower-cost, high-quality, community-based provider of hospital and other health care services in the Commonwealth,’’ wrote Christopher M. Jedrey, a lawyer representing Caritas.

Jedrey said the hospitals — which are currently exempt from property taxes as a nonprofit — would, as a for-profit institution, pay up to $100 million in taxes over the next four to five years, and would also continue spending at least $60 million a year on free care for the uninsured and other community benefits.

Lisa Wangsness can be reached at lwangsness@globe.com.