Health care reform pushes Wilson Medical to seek partner [The Wilson Daily Times, N.C.]

Dec. 15--Wilson Medical Center has stood as a largely independent hospital since its inception in 1964.

But national health care reform is spurring a trend toward consolidation, a marketplace where bigger isn't simply considered better, but essential to survive, some industry experts believe.

That hasn't escaped the leaders of Wilson's hospital or its board of trustees who have given Rick Hudson, president and chief executive officer, the green light to pursue a suitor. The end result, theoretically, could be as simple as a management agreement or as intricate as a complete sale. But Hudson believes it will fall somewhere in the middle.

Hudson, the hospital's chief executive since March 2006, spoke candidly about the 294-bed hospital's future and his viewpoints on how to preserve it, which includes hiring a consultant to lead the process of finding the right partner.

The implementation of the Affordable Care Act approved by Congress and signed by President Barack Obama on March 23, 2010, stands as the major driver here, Hudson said, as well as some of the fallout from budget deficit talks, particularly expected cutbacks in medical reimbursements.

"We also have the growth of hospital systems around the state that will be north, south, east and west of us," Hudson said. "We feel at this point and time for us to continue to serve and be a player in the future that we really need to look at finding a partner that can bring us the expertise and infrastructure that we are going to need to be successful in the future."

The hospital, which totals more than 1,300 employees, is financially sound at this time and sports a good balance sheet, Hudson said. Wilson Medical Center has emerged as the third largest private employer in Wilson County. The hospital and its related facilities sustain a $56 million payroll, which provides a significant economic impact to the county, he said.

"The example I often use is with everything going around us if we stay in the pot of water and turn the heat up and get it to a boil, we are going to be cooked and we don't want that to take place," Hudson said. "We have a good offering of services. And we want to make sure we protect that and actually grow this hospital and its service offering to the community in the future, and the only way for us to be successful in that, based on our opinion at this point with everything that is going to happen with health care reform, is we really need to find a partner to affiliate with."

The entire process could take up to a year.

There are a number of different models hospital officials can consider.

"In between there are different opportunities, whether you want to do cooperative agreements for different product and service lines to further integrate the clinical piece," Hudson said. "There is a joint operating company where you create a new holding company and you both are members of it. If you're in this holding company and you're having problems and you can't afford to do what you want to do and the other company, a member of the holding company, helps you they probably have first rights of refusal to either fund you or buy you."

There are other options as well.

"Probably, the most prevalent we're seeing is a member substitution agreement where the parent company, in this case Wilson Medical Center, would give up its assets and title to operate this hospital to another company and the control and ownership of assets would transfer with virtually little or no money changing hands. But there would be a commitment from the new parent to reinvest back into this community hospital at the rate we've always been investing in terms of capital outlay and improvements," Hudson said.

There's also a complete asset merger. This option is close to the member substitution but features a few nuances.

Then there is the basic sale where officials bid out the hospital to the highest bidder and pay debts and the reserve back into a community foundation.

"The board doesn't think the management contract is the model we need," Hudson said. "I don't see any interest in a complete liquidation sale of the hospital. Somewhere in that joint operating company to member substitution or merger in the spectrum of opportunities is probably where we'll fall."

There's no escaping this will be an emotional issue for the community and hospital employees, Hudson concedes.

"It is their hospital," he said of the community. "The board has the fiduciary responsibility to manage the assets. The board holds this hospital in trust for the good of the community."

EMERGING TRENDS

A trend of hospital mergers and acquisitions has picked up momentum in health care markets across the country.

There are around 85 hospitals in Virginia but only about six are left that are not affiliated in some manner. There are around 120 hospitals in North Carolina, but there are only 12 that not affiliated or merged.

Vidant Health, which has 10 hospitals now, merged with Duplin General Hospital in 2010.

Carolinas Medical Center now owns or manages 35 hospitals in three states. And earlier in 2008, Lexington Memorial became part of Wake Forest Baptist Health.

Larger affiliations also result in cost savings in purchasing products for the hospital, which reduces overhead. It's known as economies of scale.

Wilson Medical Center has already championed strategic partnerships with systems such as WakeMed for cardiac procedures such as stents. This alone has trimmed some costs. But it doesn't translate into assets.

At a time when corporate Darwinism is sweeping health care, industry experts and futurists are telling hospital officials to survive in the new environment they need to be about a $5 billion corporation.

Wilson Medical Center most recently reported net assets of about $230 million. The hospital also reported net revenue of about $150 million.

"We have a long way to go to be that size and scope," Hudson said. "If you are going to take risks for a defined population, you become an insurance company. You have to have a fairly big footprint and fairly big population to spread that risk over if you are going to accept a payment for a defined population. To be big enough to play in that game of being an ACO and being a provider to a substantial patient population, you have to have some size and some expertise. Those are things we can't afford to provide and set up as a small community hospital."

Under the health care law, an ACO is an Accountable Care Organization. It's a network of hospitals and doctors that share responsibility for providing care to patients. An ACO would agree to manage the needs of a minimum of 5,000 Medicare patients for at least three years. Incentives would be provided to those who provide quality care while keeping costs down. And that's just seven pages of the massive health care overhaul.

"The change in the way health care is going to be delivered and paid for is really driving this," Hudson said. "We are going to be into population management, which is something that very few small community hospitals have the infrastructures or wherewithal or expertise to do. Basically, they're asking hospitals and health systems to take risks managing populations and there are just not a lot of players out there that have the wherewithal in strength as an independent community hospital."

For decades government has been trying to reform health care in various ways, Hudson said.

That's how managed care and HMOs came into existence.

PRESERVING THE NAME

Local identity remains a concern for hospital officials and to the physicians.

"The board has talked about maintaining some local identity and local autonomy," Hudson said. "We could actually put in the RFP that we're going to retain our name as Wilson Medical Center. We can be the Wilson Medical Center, a member of the XYZ health system. That is something you can put in the RFP (Request For Proposal) that it's non-negotiable, that if you are going to talk to us you have to realize that we are going to protect our name brand and our name identity in the community."

Hudson noted he can't guarantee it.

Officials will also look for some local autonomy. But that may come down to the model they ultimately find acceptable and one a partner also finds acceptable.

"Any model we look at other than a complete sale our local board would have certain local governing powers and be a self-appointing board," Hudson said. "Whoever we affiliate with will want to have system approval, capital budget and strategic operating plan approval and that's a very legitimate oversight for any parent system to have. Beyond that, I think there are a lot of local decisions and autonomy that our board will be able to maintain. That's all part of the negotiating process. It depends on your partner and what they are comfortable with."

There will certainly be oversight and requirements from any parent company, he said.

Officials hope to pick a consultant to guide the process by the end of January, perhaps sooner.

Even though he's talking openly now, there's a silent phase during this process when no one will talk.

"There will be a lot of lobbying behind the scenes, you can imagine, with folks," Hudson said. "That's just a part of the process."

INDUSTRY TRENDS

According to a report on hospital consolidation trends by the Governance Institute, hospital companies must become larger to remain competitive in the marketplace to reduce their overall expenditures on health care.

The Governance Institute is a membership organization serving not-for-profit hospitals.

"Ironically, as national attention is being paid to the 'too big to fail' structure of the banking industry, the hospital industry appears to have the opposite problem, the small size of its companies and market fragmentation suggest it might be characterized as 'too small to succeed,'" the report said.

The report found the total number of existing hospitals declined by 10 percent from 1995 to 2008, with the majority of the decrease occurring in the late 1990s.

"A large number of freestanding hospitals and small hospitals are questioning whether they can thrive, post health-care reform, without becoming part of a large system," the report said.

The report concluded leaders of today's community hospitals and health systems have much to consider for the future viability of their organizations.

"It is a unique time in history when external forces are asking organizations to make decisions that may be for the better of the health-care industry overall, but may not be for the benefit of each individual organization," the report said. "However, there is much to be played out in the coming years as providers seeking the ultimate task, to integrate care delivery systems, improve quality and efficiency, and reduce cost. Consolidation might be one way hospitals can be closer to the goal of making the U.S. health care industry sustainable. However, as with all complex industries, there will not be only one answer."

In fact, Johnston Health in Johnston County is facing a similar situation and seeking a partner.

LOOKING TO THE FUTURE

Hudson envisions improvements to Wilson Medical Center.

"It's very realistic to put into our request for a partner that we still have an interest for a patient tower," he said.

Hospital officials temporarily shelved plans for a 120-bed tower during the economic downturn. The hospital received a required certificate of need from the state back in 2008.

"We would have to start from scratch to redesign the tower due to the time gap," Hudson said.

A new tower could cost between $75 and $80 million and officials believe the right partner could help bring these plans to fruition.

"We are in a 1964 building," Hudson said. "We have had two water leaks in the last six months that have caused damage. We have to protect our infrastructure. We would like to have a new patient tower with larger rooms and nicer amenities for folks. It's an important piece of our facilities planning that we want to keep on the table and we would hope anybody that we would partner with would support us in our efforts to make that happen."

Wilson Medical Center has also filed an application to renovate the women's and children's unit. The proposed renovations include increasing the size of rooms and creating a better environment for women and children being cared for at the hospital. The project is expected to cost $12 million and should be completed in October 2014, according to state information.

Hudson hopes to start the project in late summer if all goes as planned, he said.

The hospital has already spent $6.2 million to upgrade its energy plant.

PART OF THE DEAL

The hospital also owns Eastern Carolina Joint Replacement Services, Wilson Regional Cancer Center, Wilson Nursing Care & Rehabilitation Center, and physician offices such as New Hope Primary Care, Stantonsburg Medical Center, Wilson Arthritis & Osteoporosis, Wilson ENT and Sinus Center, Wilson Gastroenterology and Wilson Neurology. They would all be part of any merger agreement.

"Anything we have ownership of could be on the table," Hudson said.

But hospital officials learned researching the potential partnership that certain organizations, such as the hospital's foundation, would always maintain a certain level of independence.

Wilson County must approve any change in the hospital's corporate structure.

The hospital's board assumed full responsibility following a 1988 Restated Charter agreement. Before that time, the hospital was considered a public hospital. A commissioner still serves on the board of trustees.

According to the restated charter in 1988, upon dissolution of the corporation, exempt from federal income tax under section 501(c)(3), trustees shall -- after paying or making provision for the payment of the liabilities of the corporation -- dispose of the assets of the corporation under North Carolina law to Wilson County or at the option of the Wilson County Board of Commissioners to such organization organized and operated for substantially the same purposes as this corporation.

The purpose of Wilson Memorial Hospital Inc., as it was named in its charter, is to own, lease, establish, maintain and operate a community general hospital, clinics and other related facilities, among other stated purposes.

[email protected] -- 265-7821

___

(c)2012 The Wilson Daily Times (Wilson, N.C.)

Visit The Wilson Daily Times (Wilson, N.C.) at www.wilsontimes.com

Distributed by MCT Information Services