St. Joseph Vies for Leadership in Health Care

When a group of Catholic nuns in the lumber town of Eureka was called on to nurse influenza epidemic victims 60 years ago, the medical assignment was supposed to have been a temporary one.

The Sisters of St. Joseph, after all, wanted only to run a girls boarding school. But after nursing the influenza victims, the nuns saw both a bigger challenge and bigger rewards in health care, and their nursing stint provided the beginning of what has evolved into one of California’s largest hospital chains.

The nuns were convinced that operating a hospital was just as much a way of doing God’s will as running a school, “but operating a hospital was more financially advantageous,” said Sister Mary Therese Sweeney, the order’s communications director and unofficial historian.

And today, the 300-member religious order is sole owner of St. Joseph Health System, a nonprofit corporation that employs 6,000 people in its nine hospitals and operates an insurance company, health-maintainence organization and several other ventures.

Located in Orange County

The nuns’ main residence, their corporate headquarters and their largest hospital all are located on the 10-acre parcel in Orange that the sisters purchased when they moved to Orange County from Eureka in 1922.

While St. Joseph Health System officials say they are in the throes of deciding what the company’s future will be, some industry analysts say the corporation is a likely contender to become one of the nation’s major health-care providers.

Many health-industry specialists are predicting the emergence of a few large, national hospital chains over the next decade--chains that will swallow some small regional hospital operators whole while driving others out of business altogether.

Some analysts believe St. Joseph is poised to become one of those surviving mega-systems.

“I suspect that there will be one or more Catholic systems that will operate on a national basis,” said Darrell Thorp, editor of Healthcare Strategic Management magazine. “St. Joseph is already preparing for what appears to be the future of health care, and I wouldn’t be surprised if they are one of the national companies.”

Modern Healthcare, a respected trade journal, ranks St. Joseph as California’s fifth-largest hospital chain in terms of revenue. St. Joseph’s 1985 revenue totaled $396.7 million, and it reported earnings of $40.7 million--nearly twice what it earned in 1984.

Fund balance--the nonprofit corporation’s equivalent of retained earnings--grew to $209 million from $166.3 million a year earlier.

Although St. Joseph is planning for growth, it has not solidified its plans for that expansion. Robert O’Leary, St. Joseph’s president and the former head of the Illinois Hospital Assn., said he wants to pursue an aggressive growth strategy.

Additional hospitals and new businesses, such as nursing homes, are likely to be added to the chain, and St. Joseph soon may begin competing for wider market share, including opening new hospitals in other western states, he said.

Expects Transformation

O’Leary, who prides himself on being a practical-minded president, agrees that the nature of the health-care industry will undergo a major transformation before the turn of the century, but he says he is skeptical of predictions that St. Joseph will become a mega-system.

Instead of large national chains, O’Leary said, he believes link-ups between regional operators, both for-profit and nonprofit, are more likely to occur. And while he will seek opportunities for the system’s growth, O’Leary said he plans careful expansion.

“This is a field full of people who follow the latest fad. We want to look at everything and throw a little cold water on ourselves,” O’Leary said. “We want to make sure that we are not just doing something because it is appealing for the moment.”

St. Joseph’s early growth came in bits and pieces after the sisters moved their motherhouse from Eureka to Orange. They didn’t break ground for St. Joseph Hospital of Orange--still their premier facility--until 1928, but by 1939 they were operating five hospitals.

During the 1950s, the order acquired three more hospitals, and in 1957 the Sisters of St. Joseph of Orange, as the order now is called, built St. Jude Hospital of Fullerton to replace Fullerton General Hospital. The system’s newest facility, the 106-bed St. Jude Hospital of Yorba Linda, opened in 1980. While the system’s Lubbock, Tex., hospital and California hospitals in Pasadena, Napa, Fortuna, Santa Rosa and Eureka have close to 1,000 beds in all, St. Joseph’s three Orange County facilities alone total slightly more than 900 beds.

While it is not owned by the St. Joseph Health System, the, 202-bed Childrens’ Hospital of Orange County is connected to St. Joseph Hospital by underground passageways, and the two facilities often share equipment, services and, sometimes, patients.

Adopted Key Feature

Although it trails some large for-profit hospital chains in both size and revenue, St. Joseph has adopted one key feature of the industry giants--operations like Oakland-based Kaiser Permanente and American Medical International Inc. of Beverly Hills--when it acquired its own health-maintainence organization last year.

Unlike traditional health-insurance plans, which typically reimburse patients after a service is performed, HMOs provide a wide range of medical services, including hospitalization in exchange for a prepaid fee.

Currently, about 10% of the U.S. population participates in prepaid medical insurance plans. By the year 2000, some experts say, half of all Americans could belong to HMOs.

While HMOs offer patients access to health care at a generally lower cost, they also provide major benefits to hospital chains, particularly in their ability to “feed” patients to the hospitals themselves. Additionally, because HMOs attempt to minimize what they must pay in benefits, HMO subsidiaries assist hospitals in keeping their costs down.

Chains such as St. Joseph need to diversify to protect themselves from unpleasant shifts in market conditions, according to Paul Ellwood, founder of Interstudy, a health-policy research group based in Excelsior, Minn. Hospital operators, he said, “have to integrate, or be at the whims of organizations they can’t control.”

Started Slowly

St. Joseph’s own Healthplan of America was founded by several Catholic hospitals in 1980, but limped along, hindered by shortages of both patients and cash, until last November when it was acquired by St. Joseph, essentially for free in exchange for a promise to the founders to stop the pattern of losses and recover some of their investments.

One industry analyst said there was a “lot of head-scratching” when St. Joseph took over the struggling HMO, but O’Leary said the the acquisition provided St. Joseph a low-cost and already established entry into a rapidly growing segment of the medical industry.

The acquisition cost nothing up front, but St. Joseph has poured $4 million into Healthplan of America and subsequently increased the number of patients to 41,000 from 22,000. Though it is expected to continue losing money for the foreseeable future, St. Joseph nevertheless plans to invest another $5 million to $6 million in the next 12 months.

Still, with HMOs posting the fastest growth of all segments of the health-care industry, particularly in California, experts warn that competition is heating up and may ultimately lead to economic Darwinism among smaller providers.

Although it has operated as a chain for more than 50 years, the St. Joseph Health System underwent extensive reorganization in 1981, when the nine hospitals were restructured around a newly centralized system.

Enjoy Wide Autonomy

Within the reworked health company, individual hospitals enjoy wide autonomy, but services such as data processing, financial management, marketing and legal assistance are managed from St. Joseph’s corporate headquarters in Orange.

Additionally, last year the company formed its own liability insurance company to provide its hospitals with low-cost liability coverage and has established the Center for Bioethics to assist hospitals throughout the nation--religious and secular, for-profit and nonprofit--in dealing with issues such as when to discontinue a life-support apparatus.

Of the 300 women belonging to the Sisters of St. Joseph of Orange, only about 65 actually work for St. Joseph Health System, said Sister Sweeney, the order’s communications director. While collectively the sisters of St. Joseph may well be among Orange County’s wealthiest residents--their hospitals and other property holdings, including vacation retreats throughout California, are worth hundreds of millions of dollars--they continue to lead frugal lives and most live either in the Orange motherhouse or in convents located near St. Joseph-owned hospitals in other areas.

As their health-care company has grown, it has also transformed. Pinstripe suits and wing-tip shoes have become prevalent where nuns in black habits and wimples once predominated. Nevertheless, the presence of professional lay managers hasn’t diluted the sisters’ influence.

Remains in Control

Five of the company’s eight directors belong to the religious community, including the chairwoman of the board who also is the current head of the Sisters of St. Joseph. The chief executives of several of the system’s hospitals also are members of the order.

And the lay professionals don’t have any trouble remembering who the bosses are.

“There is no question about the fact that they let me run the show,” said O’Leary, St. Joseph’s president since 1983. “But I never forget who owns the company.”

Sister Suzanne Sassus, St. Joseph’s chairwoman, said the nuns enjoy certain “reserved powers,” including the right to select the directors and approve financial auditors and the system’s budget. The nuns also retain sole authority to change the corporate philosophy.

While the sisters provide but a tiny fraction of St. Joseph’s work force, they exert strong influence on the corporate operation through a systemwide corporate values committee.

“Some of the language we use (in committee meetings) is interesting (in comparison to the typical board room) . . . we talk about our mission and our philosophy and our values” as a hospital system owned by Roman Catholic nuns. “And we also talk about our business,” said Sister Corrine Bayley, who also heads St. Joseph’s bioethics center.

In large measure, those values affect everything from the amount of charity work the hospitals will handle to the positions the company will take on important public health issues to the way St. Joseph-run companies treat their patients and employees.

“I think the way you do your business is reflective of your mission,” Bayley said. “And that means means everything from who we take care of to how we take care of them to the kind of relationships we have with our competitors, other organizations and our employees.”