It started more a century ago with a couple of idealist nuns who left Newark, N.J., to care for sick and injured loggers and fishermen in a remote corner of Washington state. Members of the Sisters of St. Joseph, they carried with them a reputation for reformist zeal, and few personal possessions. They took vows of poverty, and as they ministered to the poor they also served an order with a reputation for clashing with church hierarchy.
Now the organization that they founded has become one of the Pacific Northwest’s largest healthcare companies. A chain of nine Oregon, Washington and Alaska hospitals, with more expected to join its family soon, PeaceHealth employs more than 13,000 people, and it reported $2.2 billion in revenue in its last fiscal year, which ended June 30, 2013.
Once known for bucking the Catholic establishment, the Vancouver, Wash-headquartered nonprofit is now under fire from the American Civil Liberties Union over concerns that church dogma could affect the care the chain provides. Once run by nuns who lived in poverty, its highest-ranking executive, Alan Yordy, saw his compensation climb by 43 percent in just three years, rising to $1.27 million in fiscal year 2012.
And as it defends itself against its critics, PeaceHeath’s leaders are also trying to position their nonprofit to weather a nationwide healthcare overhaul that Chief Financial Officer Kevin Wallstrom describes as “a blizzard in a crystal ball” – a swirl of new regulations, changing payment structures and growing pressure on the bottom line.
Rapid expansion
PeaceHealth is on a growth tear. In the past two years it has added two new hospitals – the former Southwest Washington Medical Center in Vancouver, acquired through a merger, and Peace Island Medical Center in Friday Harbor, Wash., built in collaboration with a local government group.
Two more hospitals are expected to join the chain in the year ahead. United General Hospital, owned by a Sedro-Wooley, Wash., hospital district, will be operated by PeaceHealth starting July 1 under a 30-year agreement signed in 2012. And in November the voter-owned Cascade Valley Hospital of Snohomish, Wash., inked a 50-year affiliation agreement with PeaceHealth.
Another merger that could have expanded PeaceHealth even more significantly fell apart last year. Catholic Health Initiatives, a Colorado-based chain that owns Mercy Medical Center in Roseburg and St.Anthony Hospital in Pendleton, had spent months of 2013 in talks with PeaceHealth leaders.
“PeaceHealth and CHI shared a vision to take the best of both organizations to create a joint health organization,” said Peter Adler, chief strategy officer at PeaceHealth.”The vision was right, but the ability for each organization to deliver what was needed was challenging.”
PeaceHealth would have wholly entered the partnership, Adler said, but CHI would have had to separate the 20 percent of its business that is based in Oregon and Idaho from the rest of its national network. Ultimately that would have cost too much to the portion of CHI that did not enter the joint venture, Adler said, so negotiations concluded amicably.
Though Alder said no unannounced merger talks are currently under way, PeaceHealth is likely to continue to expand.
“Growth at PeaceHealth is a means to an end, it’s not an end in and of itself,” he said. “It’s critical today in healthcare to be large enough to achieve economies of scale, and to remain small enough to be nimble and not be bureaucratic.”
Though Adler said that PeaceHealth will only expand in communities that seek out alliances, and that it will maintain a focus on under-served areas, he also said that annual revenue of $4 billion to $5 billion would provide the chain with more effective scale and purchasing power than the $2.2 billion it reported in its most recent fiscal year.
Though PeaceHealth has been the fastest growing chain in the Pacific Northwest in recent years, its growth tear is part of a wider national trend. According to analysts at Booz & Co., over 100 hospital mergers took place in 2012, and mergers and acquisitions have been climbing steadily since the Affordable Care Act was passed.
Recent layoffs
Even as PeaceHealth has added hospitals, the chain has been cutting staff. In 2013, it eliminated about 500 positions – about half by lieaving open jobs unfilled, the other half through layoffs.
“The primary reason for our reductions was a Kaiser contract change,” Adler said.
Kaiser Permanente had been sending Clark and Cowlitz County patients to PeaceHealth Southwest Washington Medical Center for 15 years, but early last year it announced that it would instead start sending those patients to Legacy Salmon Creek in Vancouver. The financial impact of the switch was not made public, but Legacy officials said they expected to see about 8,000 more patient visits per year under the Kaiser contract.
Federal budget fights also cut into PeaceHealth’s bottom line, said CFO Wallstrom. For example, the 2013 shutdown and sequester cost the chain some $13 million as a result of cuts to Medicare. With other cuts to government reimbursements, federal payments to PeaceHealth were down by more than $30 million last year.
Layoffs earn big headlines, but Wallstrom said the staffing reductions are just part of an ongoing effort across the organization to cut costs and improve operating performance. The chain will continue to focus on the bottom line even as it expands, he said.
The abortion question
As PeaceHealth has taken over hospitals in rural communities across the Pacific Northwest, the ACLU and other activist groups have increasingly raised alarms about whether a Catholic chain can adequately meet healthcare needs.
The U.S. Conference of Catholic Bishops has issued directives to all Catholic hospitals that explicitly prohibit abortion, do not allow the hospitals to help terminally ill patients who seek to end their own lives, and that discourage hospitals from providing contraceptive care.
When asked if PeaceHealth’s arrival in new communities has led to a reduction in contraceptive options, abortion access or access to death with dignity care, officials at the chain grew visibly uncomfortable.
“There’s been undue attention to this,” Adler said. “In every community we have ever grown into we have expanded services that are there, not retracted them. There are two things that PeaceHealth does not engage in. One is elective abortions. The other is Death with Dignity prescription writing. That goes back to our values, valuing life. But elective abortions are typically not hospital procedures. And the Death with Dignity laws in both Washington and Oregon don’t happen in hospitals either. There’s a two week waiting period once a person chooses that option.”
As to contraception, according to an official statement from PeaceHealth the chain leaves decisions about surgical and prescription birth control options to patients and their doctors.
Adler said that PeaceHealth has been the only hospital chain willing and able to meet local healthcare needs in many rural communities, and that he’s frustrated in attention to abortion and Death with Dignity restrictions, given that care might not be available at all without PeaceHealth’s presence.
The ACLU is not appeased. Already more than 40 percent of Washington’s hospital beds are in Catholic-owned facilities, and the advocacy group says it is concerned about allowing PeaceHealth to run more rural hospitals.
“We are deeply concerned that PeaceHealth's religiously-based policy of restricting access to reproductive and end-of-life health services violaties the Washington Constitution and state law," Kathleen Taylor, executive director of ACLU Washington, wrote in a letter to the Skagit County Public Hospital District, which owns United General Hospital.
PeaceHealth’s two pending hospital partnerships both involve public hospital districts, and "government cannot subsidize health care facilities that deny reproductive health services to the community based on its religious views,” Taylor said.
Leadership pay
Executive compensation at PeaceHealth has also come under recent fire, perhaps most prominently in a scathing essay by Oregonian columnist Steve Duin.
“When you slap Jesus Christ on your masthead, when you insist that your primary mission is to relieve pain and suffering and treat ‘each person in a loving and caring way,’ how do you defend laying off employees while your execs continue to live high on the hog?” Duin wrote.
Sister Andrea Nenzel, chairwoman of PeaceHealth’s board, acknowledged that compensation packages can look hefty – but she said executives are not overpaid.
PeaceHealth CEO Alan Yordy made $1.27 million in combined pay and benefits in 2012, and the 12 highest paid employees in the organization averaged $781,000 in total compensation that year.
“I understand where concerns about pay are coming from, but setting compensation is complicated,” Nenzel said. “We strive to compensate all of our caregivers, including our executives, based on the 50th percentile of the market. We verify that using independent third-party resources.”
It’s important that pay for top executives reflect their position within the hospital hierarchy, and also that it reflects the complexity of their jobs today, Nenzel said.
“For instance, if you take a highly qualified nurse, they can be earning $250,000 to $300,000, and doctors in certain specialties make quite a bit more,” she said. If PeaceHealth were to only pay Yordy $500,000, “there would be others in the system getting more than that, simply because of longevity, or because of their specialty. I’m sure we could find people to run PeaceHealth for $500,000, but I’m not sure how long they would stay at that salary.”
Nenzel said she believes that a focus on executive pay overlooks the important work the hospital chain does. PeaceHealth’s mission has led it to set “living wage” salaries for even the lowest-paid people on staff, she said, and the nonprofit also provides significant care to people with low incomes who might be turned away elsewhere.
Looking to the future
But in a post-Affordable Care Act world, will patients still be turned away? The healthcare reform law was supposed to allow nearly everyone in the country to gain access to health insurance – a change that could have significantly boosted the bottom line for hospitals that today are not paid for much of the care that they provide.
The reality does not appear to have matched the dream. Thanks to problems rolling out health insurance marketplaces, considerably fewer people enrolled in new health plans than had been initially forecast.
That’s contributed to the “blizzard in a crystal ball” that CFO Wallstrom referred to when asked to predict how health reform will affect PeaceHealth’s finances in 2014.
“With what’s occurring – especially in Oregon – it’s very difficult to get any insight,” Wallstrom said. “We’re continuing to make our best estimates, but we need to get a few months out to see what happens.”
Longer-run, Wallstrom said that healthcare reform is also changing how hospitals are being paid.
“We’re seeing a shift in payment methods from paying for individual episodes of care, to paying for population health,” he said.
Nunzel echoed that sentiment, and said that PeaceHealth is still in the early stages of a long-term transformation.
“We need to look at the emphasis on quality care, appropriate care, and we need to help people much more take responsibility for their healthcare,” she said. “What I eat, the choices I make about my lifestyle, that dramatically influences my health. We are becoming very conscious that healthcare is influenced by the environment. The health of a community and people living in a community are about much more than medical care. That’s where the emphasis should be.”
Courtney Sherwood can be reached at [email protected].
