Compliance Concerns For Catholic Health Care Collaborations

Originally published in Law360

Catholic-sponsored and -operated health care facilities represent a considerable market segment of the United States’ health care system, which is in the midst of significant and constant change. The Catholic Health Association recently reported 654 hospitals, 1,634 long-term care facilities and numerous outpatient practices and locations in operation as Catholic organizations.[1] This translates, based on this same report, to one out of every six patients on a given day receiving care in a Catholic hospital.[2] Two key factors are driving Catholic health care facilities and systems to seek affiliations, joint ventures and other transactions to preserve their mission and maintain health care services — the first being shifts in care modalities and reimbursement in the market at large necessitating consolidation, and the second being reduction in the numbers of women and men whose religious congregations have sponsored Catholic health care organizations.

In response to these developments, the United States Council of Catholic Bishops, or USCCB, undertook extensive review of its “Ethical and Religious Directives for Health Care Services,” or ERDs, and published updates on June 15, 2018.[3] The ERDs, first published in 1981 as a more general theological statement simply titled “Health and Health Care,”[4] have developed over time to provide a more specific framework for the Catholic Church’s health care ministry and identity in the United States. Applicable to various constituencies within Catholic health care,[5] the dual purpose of the ERDs is to “reaffirm the ethical standards of behavior in health care that flow from the Church’s teaching about the dignity of the human person” and to “provide authoritative guidance on certain moral issues that face Catholic health care today.”[6] In so doing, the ERDs further the charitable mission of Catholic health care and provide a “robust moral framework for taking care of the poor and marginalized, despite financial pressures and consequences.”[7]

The ERDs are comprised of six separate and interrelated parts, addressing social responsibility (part one); pastoral and spiritual responsibility (part two); professional-patient relationships (part three); issues in care for the beginning of life (part four); issues in care for the seriously ill and dying (part five); and collaborative arrangements with other health care organizations and providers (part six). Part six, which addresses interactions between Catholic and non-Catholic providers, was extensively modified after years of study and discussion and is the portion of the ERDs discussed in this article.

Failure of a Catholic organization to comply with the ERDs and underlying Catholic teaching is a violation of canon law, and a failure to comply with the ERDs can result in loss of Catholicity, but also poses civil law implications. Since most Catholic health care organizations have obtained their federal tax-exempt status through inclusion in the Catholic Church’s “group ruling” from the IRS, any change to an exempt organization’s status as a Catholic organization risks termination of its exempt status. In addition, many Catholic organizations benefit by receiving property tax exemption for their real estate, and church plan treatment for certain employee pension/benefit plans, all of which could be jeopardized by a finding that the organization had not complied with the ERDs and thereby was no longer a “church” entity. Accordingly, administrators and potential partners of Catholic health care organizations need to understand and apply the latest ERDs to avoid triggering these or other compliance concerns. While some commentators have indicated there is nothing new to report with respect to the application of the new ERDs, others have indicated that the enhanced requirement for demonstrated oversight by local bishops could lead to different interpretations and enforcement for existing as well as new collaborations.

In the context of Catholic to non-Catholic collaborations, this article will provide a brief summary of common definitions used in the ERDs and an analysis of the recent updates to part six that bring potential additional complexities to affiliations between Catholic and non-Catholic organizations

Common Definitions

The following definitions are unique to Catholic health care, and involve both common understandings as well as canon law concepts that apply to Catholic organizations.

“Alienation” is the “conveyance or transfer of ownership of ecclesiastical goods to another. This can be carried out by sale, gift, exchange or other recognized means.”[8] Note that leasing of ecclesiastical goods, while not an alienation, may require some actions akin to an alienation, i.e., a church authorization.

“Bishop” is the title of an “ecclesiastical dignitary who possesses the fullness of priesthood to rule a diocese as chief pastor, subject to the primacy of the Pope.”[9]

“Canon law” is the “code of ecclesiastical laws covering the Catholic Church.”[10] Accordingly, canon law is the law of the Roman Catholic Church, which governs sponsors (e.g., congregations, juridic persons) and individuals (e.g., women and men religious). Catholic organizations in the United States are generally formed as corporations under civil law, but their sponsors are governed by canon law.

“Diocese” is a territory of churches and other Catholic ministries, e.g., hospitals, subject to the jurisdiction of a bishop.[11]

“Ecclesiastical goods” are temporal goods belonging to a juridic person such as a diocese, parish, religious institute or a ministerial juridic person that are acquired to carry out a specific mission.[12] Stable patrimony (defined below) is a subset of ecclesiastical goods.

“Holy See” is the universal government of the Catholic Church which operates from the Vatican City State, which is a sovereign, independent territory. The pope is the ruler of both Vatican City State and the Holy See. As it is the government of the Catholic Church, the Holy See is a sovereign juridical entity under international law.[13]

“Prohibited procedures” or “immoral procedures” are those that contravene Catholic teaching, which, in the health care setting, most commonly include abortion, elective sterilization, contraception and euthanasia.

“Scandal” is defined as an “attitude or behavior which leads another to do evil”.[14]

“Sponsorship” is present where there is a formal relationship between an authorized Catholic organization and a health care system, hospital, long-term care facility or other institution for the sponsoring organization to take spiritual responsibility for a ministry (i.e., an activity or component of operations under religious auspices).[15] Traditionally, religious congregations of women and men were the most common sponsor of Catholic health care organizations; however, other Catholic entities, often with significant lay involvement, have become more common sponsors of such organizations.[16]

“Stable patrimony” is generally regarded as ecclesiastical goods consisting of those assets that are designated via a formal inventory by the leadership of a juridic person or religious institute or ascertained as such over time (i.e., over the course of decades) for the long-term security of the members of a religious institute and of their sponsored works. Stable patrimony includes lands and buildings, other specific assets (e.g., historical, religious or cultural items), long-term investments and endowments, and restricted funds set aside for a specific purpose.[17]

“Temporal goods” are assets held by a Catholic organization.[18]

Background

Separate and apart from the ERDs, canon law imposes requirements on a religious sponsor to obtain certain approvals related to the alienation of stable patrimony or other collaborations. For example, in the case of an alienation by a pontifical-ranked sponsor, such as the sale of a Catholic hospital sponsored by a congregation of women religious, where the transaction includes buildings and real estate, the alienation of stable patrimony could first require the receipt of a nonobjection letter from the local bishop (referred to as the “nihil obstat”) and then the approval of the Holy See (referred to as the “Indult”) in order to consummate the transaction. Even if the transaction fell below the threshold for alienation,[19] the transaction could still require the approval of the local bishop. These approval requirements are not new, and Catholic organizations and those that have entered into transactions with them are familiar with the time and resources necessary to secure these approvals. Such approvals are generally obtained within the same time frame for other regulatory approvals required in connection with a sale of a hospital (e.g., certificate of need, Federal Trade Commission, attorney general, etc.), and transactions are usually not delayed for such canonical approvals. However, with the changes to part six of the most recent edition of the ERDs, the processes and the potential time necessary to obtain diocesan and other approvals may be increased, requiring transaction parties to plan accordingly.

In addition to the potential for extended timelines to secure approvals required in connection with an outright sale transaction (that is considered an alienation), other collaborations or ventures will also be subject to additional planning and scrutiny. These changes are relevant to those operating within Catholic health care, including non-Catholic partners in or pursuing collaborations with Catholic health care organizations. Part six of the sixth edition of the ERDs incorporates stronger language in previously existing directives, provides enhanced process-oriented details and articulates five new directives specific to health care collaborations.

New Processes

One of the specific changes in part six is the affirmative obligation on the bishop of a diocese where a Catholic organization’s headquarters is located to coordinate approvals among the bishops for all diocese(s) that include impacted locations of the organization.[20] Many Catholic health organizations have operations and assets in more than one diocese. Historically, the “local” diocesan leader (e.g., the bishop of the diocese where the particular stable patrimony was physically located) was involved, but the diocese of the “corporate headquarters” was not, other than perhaps where a courtesy notice was provided. Since the diocese with the “corporate headquarters” now serves as the “quarterback” among any involved diocese(s), this process is likely to become more time-consuming than the prior process, depending on resources and calendars. It is anticipated with the issuance of these new ERDs that each diocese or region will give thought to how it would handle such responsibility.

The effect of this change in the process is that there will be renewed emphasis on the approval process, which will likely result in additional time and preparation on the part of Catholic organizations and their sponsoring congregations, and understanding and cooperation on the part of non-Catholic participants.

New Directives

Part six now includes five additional directives, numbered 73 to 77, which focus on the duties and obligations of Catholic health care entities involved in health care “collaborations” with non-Catholic partners.[21] As in the prior edition of the ERDs, the United States Council of Catholic Bishops notes that to reduce the risks of collaboration with non-Catholic partners, Catholic health care administrators should first seek relationships with Catholic organizations or others who “operate in conformity with the Church’s moral teaching.”[22]

This focus is further seen within Section 6, the introduction to which notes that Catholic organizations must

…assess whether becoming associated with the wrongdoing of a collaborator will risk undermining their institution’s ability to fulfill its mission of providing health care as a witness to the Catholic faith and an embodiment of Jesus’ concern for the sick. They must do everything they can to ensure that the integrity of the Church’s witness to Christ and his Gospel is not adversely affected by a collaborative arrangement.” [23]

Outside of like-minded relationships among Catholic organizations, which the introductory language to part six acknowledges may not be “practicable,” the USCCB provides that arrangements with non-Catholic partners may be necessary “in pursuit of the common good.”[24]

Each of the new directives added to part six is set forth below, with a summary statement identifying potential impact for Catholic health care providers or those seeking to enter into collaborations with them. Note the directives use the word “collaboration” throughout, as well as the word “affiliating,” neither of which are defined, though it is generally understood that the threshold is significantly lower than “transformative” level transactions. Accordingly, any arrangement between a Catholic organization and a third party should be evaluated under these directives, to ensure that any collaboration maintains a culture that gives witness, as set forth in section six.

For purposes of this article, we will generically refer to “transactions,” recognizing that collaborations and affiliations can be structured in many ways, including sales, mergers, joint ventures, contractual joint ventures, joint operating entities, etc. We also refer throughout to hospitals, but the statements made generally apply to all Catholic health care entities. Lastly, we note the “immoral procedures” most commonly impacted at a hospital are elective sterilizations (e.g., post cesarean section tubal ligation) and prescriptions of birth control, and less so the more controversial topics of elective abortion (which are generally not performed in hospitals other than for limited clinical reasons) and euthanasia (which is generally prohibited by state law and also not undertaken at hospitals). Historically, changes in the availability of such services have triggered concerns for communities without other sources for care, such as secular hospitals or health facilities providing a full spectrum of women’s health services.

Directive 73: Cooperation With Immoral Procedures

Before affiliating with a health care entity that permits immoral procedures, a Catholic institution [i.e., a juridic person] must ensure that neither its administrators nor its employees will manage, carry out, assist in carrying out, make its facilities available for, make referrals for, or benefit from the revenue generated by immoral procedures.[25]

Prior to these new directives, most transaction documents in Catholic/non-Catholic transactions typically included provisions that required compliance with the ERDs (even in outright sales, the buyer is often obligated to operate the facility in accordance with the ERDs moving forward). Moving forward, directive 73 makes clear that a Catholic entity involved in a transaction with a non-Catholic entity must safeguard its organization, and at all organizational levels, from cooperation in activities that are not in accord with Catholic teaching. One way of demonstrating this would be to have an affirmative covenant in the transaction documents stating as such (i.e., administrators and employees of the organization shall not …). Of course, the more practical question becomes how does a combined Catholic/non-Catholic organization, no matter how it is legally combined (e.g., through merger, “affiliation agreement” with separate corporate entities, joint operating agreement, or otherwise), adequately segregate and/or silo administration and employees? The view that the directives now require such separation may be a significant change for existing health care organizations.

Directive 74: Control by Catholic Institution

In any kind of collaboration, whatever comes under the control of the Catholic institution — whether by acquisition, governance, or management — must be operated in full accord with the moral teaching of the Catholic Church, including [the ERDs].[26]

This newly stated directive but long-standing principle seems to articulate that in any collaboration wherein the Catholic organization becomes the controlling party (as noted, which control can be obtained by standard ownership/corporate control, reserved powers and/or the right to manage), the controlled entities must be operated in full accord with the ERDs and Catholic teaching. This is the case with wholly owned and controlled entities under the health system corporate umbrella, but may not be so with managed facilities, so Catholic organizations may need to revisit such collaborations and evaluate where control is at issue, including management arrangements, to account for the broad concept of “control” in this directive.

Directive 75: Prohibitions on Separate Entity

It is not permitted to establish another entity that would oversee, manage, or perform immoral procedures. Establishing such an entity includes actions such as drawing up the civil bylaws, policies, or procedures of the entity, establishing the finances of the entity, or legally incorporating the entity.

This directive makes clear that a Catholic entity involved in a collaboration with a non-Catholic entity cannot distance itself from the immoral procedures by creating a legally separate entity, even prohibiting participating in ministerial roles in forming the entity. This eliminates the prior discretion sometimes exercised by the local bishops to “grandfather” or permit non-Catholic entities within a combined system so long as such entities were separate legal entities and the revenue from immoral procedures was segregated. It remains to be seen how these arrangements would be evaluated on a prospective basis as collaborations are formed, rather than through a retrospective review.

Directive 76: Governance Roles of Catholic Representatives

Representatives of Catholic health care institutions who serve as members of governing boards of non-Catholic health care organizations that do not adhere to the ethical principles regarding health care articulated by the Church should make their opposition to immoral procedures known and not give their consent to any decisions proximately connected with such procedures. Great care must be exercised to avoid giving scandal or adversely affecting the witness of the Church.[27]

Directive 76 places an obligation on representatives of a Catholic organization who are serving on governing boards of non-Catholic organizations (such as, joint venture boards, or system boards where not all hospitals within the system are Catholic) to make explicit their objection of “immoral procedures” and withhold consent to any decisions associated with such procedures.

Withholding consent and documenting objections could compromise governance influence of the representatives of the Catholic organizations. In prior commentary,[28] commenters noted that recusal of the Catholic representative may be appropriate. While this may provide a pathway to comply with the directive, this may (1) impact the ability of trustees to fully serve; (2) conflict with fiduciary duties to act in the best interest of the corporation; or (3) impact the ability of the board to take action where law or corporate documents require a supermajority or unanimous vote to undertake certain actions or decisions that encompass immoral procedures. It remains unclear where this line may be drawn, and as such, Catholic organizations must plan to consult with an ethicist, and possibly also a canon lawyer, in making any determination.

Directive 77: Duty to Inform and Resolve

If it is discovered that a Catholic health care institution might be wrongly cooperating with immoral procedures, the local diocesan bishop should be informed immediately and the leaders of the institution should resolve the situation as soon as reasonably possible.[29]

This new directive places a self-reporting obligation on Catholic health care organizations where it is determined to be “wrongly cooperating” with immoral procedures. This raises the question as to whether the directive necessitates affirmative vigilance and auditing (e.g., an ERD compliance program that from time to time engages in assessment of compliance with the ERDs).

In addition to reporting to the local bishop “immediately,” the Catholic organization must “resolve the situation” as soon as reasonably possible. Depending on the circumstance, resolution could be time-consuming and costly to the Catholic organization and the collaboration parties, and also impact the provision of services in communities that may already have access to care issues. For example, resolution could mean changing the structure of the collaboration, divesting of the assets/activities by the venture (in egregious cases), removing the Catholic entity from management or oversight that amounts to cooperation, or altering the services provided by the collaboration to more clearly avoid procedures or activities considered immoral.

The addition of this directive speaks to the focus placed by the USCCB and local diocese on Catholic health care organizations’ careful tracking and auditing of compliance with the ERDs and Catholic teaching in its operations. As each local diocesan bishop may interpret and apply the ERDs as they determine to be appropriate for their diocese, how such reporting structure may be established, and what requirements are placed on ascertaining and confirming compliance with the ERDs, may vary by diocese.

Practical Guidance for Compliance

While the new directives state, in some cases, long-standing and well-known principles, others provide new obligations and processes. Health care organizations embarking on or operating within existing collaborations should be aware of and develop their own processes to ensure and demonstrate compliance.

For Catholic organizations, which are in or considering a transaction with a non-Catholic party, the following are suggested approaches to support compliance with the new directives:

• Sponsoring congregations and orders should develop and/or update a stable patrimony inventory to know immediately which assets are impacted by collaboration discussions and subject to the approval processes related to alienation. This is a canonical expectation that may inadvertently be overlooked in day-to-day operations.
• Health care organizations should consider updating policies and procedures to reflect the changes. In addition, education programs for employees can be updated with changes, particularly given the specificity of directive 73.
• With respect to collaboration discussions,

• • Update scope of due diligence on potential partners to understand what their activities entail and how Catholic organization employees and administrators will be involved as a result of the proposed transaction. Many organizations are well-equipped to do this now, but it would be beneficial to more clearly document that they have been done and any issues have been addressed.
  • Add ethicist and canonical lawyers/consultants to transaction teams, to permit active participation in transaction structuring and planning as well as due diligence to permit the early development of the analyses that will be needed in communicating with the involved bishop(s). These analyses would be well-informed by a review of transactions that have previously received approval, with the caveat that the interpretation of the directives may suggest additional scrutiny on even those arrangements that were determined to be “acceptable” in the past.
  • Connect early with the local bishop regarding the transaction to avoid inadvertent delays to or other effects on transaction timelines.

• Be prepared to educate potential partners about the ERDs pretransaction and provide educational materials for administration and employees of the combined collaboration entities post-transaction.
• Formalize monitoring of efforts taken to demonstrate compliance, including formalizing processes on reporting and resolving noncompliance as required by directive 77.
• Update transaction documents to reflect and set transaction party expectations regarding timelines for necessary canonical approvals. Again, involving Catholic ethicists and canon lawyers as part of the transaction team to ensure the more detailed local diocesan approvals and preparations for requesting an Indult are well coordinated within the transaction timeline.
• If in an existing collaboration where there are Catholic representatives on joint governing boards, review joint venture transaction and/or governing documents to evaluate effectiveness of board governance in light of directive 76.

[1] Catholic Health Association, Catholic Health Care in the United States, (Jan. 18, 2018), https://www.chausa.org/about/about (last visited Aug. 21, 2018).

[2] Id.

[3] United States Council of Catholic Bishops, Ethical and Religious Directives for Health Care Services, Sixth Edition (June 2018) (referred to herein as “ERD Sixth Edition”), Preamble, p. 4.

[4] ERD Sixth Edition, Preamble, p. 4.

[5] The ERDs apply to and provide guidance for Catholic health care organizations’ trustees, leadership, physicians and other health care personnel, staff providing spiritual care and other services, as well as patients and residents of facilities. See ERD Sixth Edition, Preamble, p. 4.

[6] ERD Sixth Edition, Preamble, p. 4.

[7] Pijnenburg, Martien A. M. et al. Catholic Healthcare Organizations and the Articulation of Their Identity, HEC Forum 20.1 (2008): 75–97, available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2797850/ (last visited Aug. 21, 2018).

[8] The Resource Center for Religious Institutes, Temporal Goods Q&A (December 2017), https://www.trcri.org/page/temporal_goods_qa (last visited Aug. 21, 2018) (referred to herein as “RCRI Q&A”).

[9] New Advent, Catholic Encyclopedia, available at http://www.newadvent.org/cathen/02581b.htm (last visited Aug. 21, 2018) (referred to herein as the “Catholic Encyclopedia”).

[10] United States Conference of Catholic Bishops, What We Believe, http://www.usccb.org/beliefs-and-teachings/what-we-believe/canon-law/index.cfm (last visited Aug. 21, 2018).

[11] See, Catholic Encyclopedia.

[12] See, RCRI Q&A.

[13] U.S. Department of State, Bureau of European and Eurasian Affairs, Fact Sheet (Feb. 22, 2018), https://www.state.gov/r/pa/ei/bgn/3819.htm (last visited Aug. 21, 2018).

[14] Catechism of the Catholic Church, Second Edition, Libreria Editrice Vaticana (2012), Section 2284 (referred to herein as “Catechism”).

[15] Catholic Health Association, Sponsorship Overview, https://www.chausa.org/sponsorship/overview (last visited Aug. 21, 2018).

[16] Such sponsors often take the form of juridic persons, which, from a canon law perspective, are “aggregates of persons … or of things … ordered for a purpose which is in keeping with the mission of the Church and which transcends the purpose of the individuals.” Catechism, Section 114. Juridic persons may function as sponsors were authorized by the Holy See (for public juridic persons) or the Catholic organizations in which they are formed (such as the diocese of origin for diocesan juridic persons).

[17] Rev. Frank Morrisey, OMI, Ph.D., JCD, Canon Law – What is Stable Patrimony?, Health Progress (March – April 2008), p. 14.

[18] See, RCRI Q&A.

[19] As of the date of this article, approximately $11 Million USD.

[20] See, ERD Sixth Edition, Directive #69, p. 25.

[21] See, ERD Sixth Edition, p. 26.

[22] Id. at p. 23.

[23] Id. at p. 24.

[24] Id.

[25] See, ERD Sixth Edition, p. 26.

[26] Id.

[27] Id.

[28] Catholic Health Association, CDF Principles for Collaboration with Non-Catholic Health Care Entities: Ministry Perspectives (Summer 2014).

[29] See, ERD Sixth Edition, p. 26.