This post examines how former Swedish CEO and now Providence CEO Rod Hochman engineered, and the Swedish board authorized, a takeover by Providence Health that resulted in a $810 million gift to the Catholic Church. Although many board members have resigned since then, no one has investigated or held them to account for the deal that enriched an entity of the Catholic Church by more than $800 million and gutted the independence of what had been Seattle’s largest secular nonprofit medical system.
In 2012, Providence Health completed its takeover of Swedish Medical Center. Swedish is now a wholly-owned subsidiary of Providence.
A few years earlier, the prospects for such a deal looked remote. A glowing 2010 report in the Puget Sound Business Journal crowed about Swedish CEO Hochman, saying he was “at the top of his profession and known as one of the most powerful physician executives in health care. Hochman has been at Swedish three years, and in that short time has made dramatic strides in everything from broadening regional and national conversations on the delivery of health care, to fundraising.”
So when the deal between Providence and Swedish was first announced in October, 2011, many medical providers, business watchers, and patient advocates from throughout the Seattle community were taken aback. Rod Hochman portrayed it as all good news. The Seattle Times quoted him saying, “Health care must be made more cost-effective, and the only way you get there is by clinical transformation – change led by health care providers and not a bunch of bureaucrats.”
Patient advocates, who viewed the deal in terms of how Catholic restrictions would impact patient care, were skeptical, even after a 10-year deal with Planned Parenthood was announced.
In providing context for the deal, the Seattle Times reported that, “Citing a $19 million budget gap, (Swedish) recently announced it planned to reduce its workforce, evaluating some 300 positions.”
The affiliation would provide financial strength and operational efficiencies to Swedish. The Seattle Times referred to conversations with both the CEO of Providence and Hochman, then the CEO of Swedish (and now CEO of Providence): “It is not, the two emphasized, a merger or acquisition.”
Since its inception in 1907, Swedish had been known for scientific evidence-based care and prudent financial management. Then in the 21st century, as Seattle-area whispered narrative went, Swedish went on an aggressive expansion spree, eventually overextending itself to the point where it needed rescuing from a larger, more financially secure system.
Or did it?
According to the Providence Health Systems financial statements for 2013, the “affiliation resulted in an excess of assets acquired over liabilities assumed, reported as a contribution from Swedish to the (Providence) Health System of approximately $810,299,000. The unrestricted portion of the contribution of $744,252,000 is included in net nonoperating gains in the accompanying combined statement of operations.”
For the year ended December 31, 2013, Providence reported assets of $13.97 billion and total liabilities of $6.6 billion. Total operating revenues were $11.1 billion. In a section labeled “Organizational Changes,” Providence reported that:
“On February 1, 2012, Providence Health & Services (Providence) and Swedish Health Services (Swedish) (Providence and Swedish are collectively referred to as the Health System) effected an Affiliation Agreement, which financially, clinically, and operationally integrated the two health systems….Providence and Swedish have affiliated to create a fully integrated, nonprofit charitable health care system serving communities throughout Western Washington….This transaction was accounted for as an acquisition under Accounting Standards Codification (ASC) 958-805, Not-for-Profit Entities – Business Combinations. No consideration was paid by the Health System to acquire the net assets of Swedish. Swedish also operates the Swedish Medical Center Foundation to provide fundraising to further the charitable, educational, healthcare, and scientific activities of Swedish. The results of operations of these entitities have been included in the combined statements of operations of the Health System since the February 1, 2012 effective date of the Affiliation.”
The 2012 financial results of Swedish included in the “Health System’s 2012 combined statement of operations during the eleven-month period from the date of the affiliation through December 31, 2012 showed an “Excess of revenues over expenses of $330,209,000.” In other words, over an 11-month period after it supposedly needed to be rescued by Providence, and after its takeover was counted as an $810 million gift to the bottom line, Swedish contributed more than $330 million in additional profit to Providence.
A 19 million shortfall in one year, followed by an $810 million dollar asset contribution to Providence, and a $330 million 11-month post-acquisition contribution from Swedish to Providence’s bottom line.
Providence rewarded Rod Hochman by making him CEO over all of Providence. His total compensation in 2012 was $1.7 million dollars – an absolute bargain for a dealmaker who arguably brought in more than $1 billion to Providence in his first year.