Inside the Wilson Medical Center deal

Feb. 10--Everything appears quiet on the surface, but there's a lot of work going on behind the scenes regarding the proposed deal to sell an 80 percent stake in Wilson Medical Center to Duke LifePoint.

Supporters are looking to close a deal they believe will improve the hospital and make it more competitive in the turbulent world of health care reform. Opponents, who have started a petition in the community, say the deal has problems and they hope to turn the tide.

Dr. Joseph Russell told top North Carolina Department of Justice officials they should turn away Duke LifePoint's bid to acquire a majority stake in the hospital. Russell met recently with Special Deputy Attorney General Phil Telfer and Assistant Attorney General Creecy Johnson at the N.C. Attorney General's Office.

"The merger is not in the best interest of our hospital nor our community, both financially and in the delivery of medical care," Russell said.

Russell is a retired physician and was a member of the Wilson Medical Center medical staff for 35 years.

"Dr. Russell presented us with a great deal of information, all of which we will consider as we conduct our review," said Noelle Talley, spokeswoman for Attorney General Roy Cooper.

Meanwhile, the previously unseen valuation document was obtained by The Wilson Times. Following a public records request to the attorney general's office, Wilson Medical Center withdrew its claim of privilege with regard to the valuation conducted by CBIZ Valuation Group LLC.

The valuation date is Oct. 1, 2013, and documents include a letter dated Nov. 25. The hospital's business enterprise can be reasonably estimated between $65 million and $70 million.

The valuation report did include different approaches and valuations. A market approach with a mergers and acquisitions method in the selection of comparable transactions had a valuation of $75 million. A Guideline Public Company Method resulted in a $79 million valuation.

The valuation was of the hospital's business enterprise and appeared to be in line with the $70 million Duke LifePoint offered.

Opponents pointed out the date of the valuation. It came after the first public hearing. Duke LifePoint was announced as the hospital's partner in July. The first financial details of the deal were publicly disclosed in late October.

QUESTIONS

Russell has other concerns related to the valuation and the contribution agreement.

The agreement obligates the joint venture to spend $120 million in connection with capital improvements at the hospital during the next 10 years.

If Duke LifePoint sells its interest in the joint venture during that 10-year period, only "commercially reasonable efforts" will be made to compel the third party to assume the additional capital commitment.

There is no requirement for Duke LifePoint to remain in the joint venture for 10 years, Russell said.

"The capital improvement commitment of Duke LifePoint is vaporous," he contends.

One of the concerns he presented was a correlation between LifePoint as the acquiring hospital and Stroudwater as the consultant.

"LifePoint has a history of acquiring other hospitals with Stroudwater acting as the consultant," Russell said.

Stroudwater was Wilson Medical Center's consultant. When Maria Parham Medical Center in Henderson went to Duke LifePoint, Stroudwater was the consultant.

The same is true for Twin County Regional Hospital in Virginia and Haywood Regional Medical Center along with Person Memorial in North Carolina. Bell Hospital in Michigan went to LifePoint with Stroudwater as consultant. The list goes on, Russell said.

Russell told the attorney general's office this information hasn't been divulged to the hospital, the trustees or the county commissioners and it raises certain questions.

The specific deal on the table calls for an 80/20 joint venture with Duke LifePoint HealthCare securing majority ownership interest. There would be a 50/50 governance board composition. Duke LifePoint is essentially offering $56 million for an 80 percent majority ownership interest in Wilson Medical Center.

The Wilson County Board of Commissioners signed off on the deal by releasing the county's reverter clause after adding a provision that would ensure a county commissioner would always serve as a voting member of the hospital's new governing board.

Both sides have spoken with the state attorney general's office as officials there must approve the deal. The latest closing target date is the end of February.

"When the Wilson County commissioners made the decision to have a permanent seat on the joint venture governing board, they violated, certainly compromised, their fiduciary responsibility to the citizens of Wilson County whom they represent," Russell said. "The commissioners were no longer making a judgment based on the merits of the proposal. Indeed, they were now in business with the joint venture by and between Wilson Medical Center and Duke LifePoint."

Under the proposal on the table, the hospital will continue to operate as a nonprofit.

"Under that existing corporation, the trustees serve as the hospital authority in Wilson County as stipulated in the Hospital Authorities Act," Russell argues. "The county board appoints the members of the hospital authority. Has that responsibility or authority been dissolved under the proposal? Would the commissioners not want to maintain that local control whereby they appoint all five members to the Wilson Medical Center side of the joint venture governing board? Would maintaining that statutory authority not provide for the best local candidates (CEOs, health care executives, professionals, business leaders, civic leaders, clergy, educators) for the Wilson Medical Center side of the governing board?"

Russell questions whether commissioners exercised due diligence in considering these factors when they made their proposal to amend the motion to release the reverter stipulating a permanent seat on the governing board for a commissioner.

Questions have been raised as to why Vidant Health did not respond to the request for proposals as the affiliation process started, said Russell. He took those concerns to the attorney general as well.

Russell, along with Wilson resident David Glover, a former hospital trustee and commissioner, and businessman Averette Lamm previously met with Dr. David Herman, CEO and president of Vidant Health.

Vidant signed the confidentiality agreement and asked if its officials could make a visit to Wilson Medical Center to tour the facilities and speak with senior management to get an idea of the institution's culture, according to Russell's letter to Attorney General Cooper. Vidant's request wasn't granted, he said.

He contends Vidant chose not to pursue it further as it appeared a choice of affiliation had been made.

Herman later agreed to come to Wilson and meet with several community leaders and county commissioners. Commissioners Roger Lucas, Leslie Atkinson and Chris Hill attended two separate meetings.

Herman and a development officer attended and also talked about what Vidant could offer in regards to a management affiliation, Russell's letter said. Several community leaders and elected officials were also in attendance, including City Councilman Donald Evans and businessman Steven Leder.

At the "request of community members in Wilson, Vidant Health officials, including Herman, did meet with community members in Wilson to answer questions they had about Vidant Health," said Christine Mackey, a Vidant corporate communications specialist.

DUKE LIFEPOINT

Duke LifePoint officials say they have no doubt they can strengthen Wilson Medical Center and be successful. They also have said they don't necessarily see the opposition that has formed as a negative. It shows people care about their hospital and are invested in its future. They want the chance to prove to the community just what they can do for health care here, they've said.

Dr. William J. Fulkerson Jr., executive vice president of Duke University Health System, said their goal is to help community hospitals be strong, identifying programs that can be enhanced expanded or created.

"Our primary goal is to strengthen Wilson and make that hospital the best it can be and develop the kind of services that Wilson can deliver so patients can get care closer to home," Fulkerson said in an earlier interview. "When a bigger tertiary specialized academic medical center is necessary if the physicians there want to refer to Duke, we will facilitate that."

LifePoint Chairman and CEO William F. Carpenter III said together, officials bring resources to help hospitals work to deal with all of the regulatory changes, and they are vast.

Duke LifePoint is a joint venture of Duke Medical and LifePoint Hospitals formed to build a network of hospitals and health care providers. Duke University Health System calls Durham home. LifePoint Hospitals is headquartered in Brentwood, Tenn.

Fulkerson talked a little about where the Duke LifePoint partnership is headed.

The Duke LifePoint partnership won't be limited to North Carolina, he said. It's already acquired Marquette General in Michigan.

"We believe there is an opportunity outside of North Carolina and southern Virginia, where hospitals that have a tertiary platform ... so larger hospitals, more specialized hospitals, more specialized services may benefit from a Duke and a LifePoint relationship going forward," Fulkerson said. "This was the picture of Marquette. They were doing cardiac surgery and advanced cancer care. The appeal to the people and physicians in Marquette was to have a Duke LifePoint relationship to have the advantages of Duke assisting them in the safety and quality and the program development. The specialized programs they already had they wanted to take to a higher level. Working with LifePoint, we've identified a number of hospitals around the country not in our referral area but that can benefit from our partnership. We are considering a number of things outside of North Carolina today in somewhat of a different model that we're offering to hospitals like Wilson."

When asked about potential operating efficiencies down the road, Carpenter said Duke LifePoint would look for opportunities in order to be able to deal with the kinds of pressure on reimbursement.

"But we will be very careful about how we do that," Carpenter said. "Any change like that will only be done following a long consideration taking into account the views of our joint venture governing board."

Dr. Harry Phillips of Duke said physician recruitment is a high priority.

"We need to understand the needs clearly. Both Duke and LifePoint have strong physician recruitment abilities," Phillips said. "Once they are recruited to make sure they are engaged and are able to develop successful careers in our communities, and at the end of the day we retain them for a long and successful career."

"This is a quality operation today, and we think we will have ability to enhance quality outcomes that are achieved at Wilson Medical Center in the future," Carpenter said.

REGULATORY ENVIRONMENT

The Federal Trade Commission has potential oversight over hospital deals as well.

The Hart-Scott-Rodino Antitrust Improvements Act establishes transaction thresholds that can trigger automatic filing with the FTC.

The act requires companies to notify authorities if the size of the parties at issue and the value of a transaction exceeds the filing thresholds absent an applicable exemption.

The threshold is going up this year from $70.9 million to $75.9 million, effective Feb. 24.

But federal officials can challenge any transaction they want. They often focus on anti-trust issues, and Wilson hospital officials believe they've avoided such issues with their choice of Duke LifePoint.

Any automatic review under the threshold comes with a minimum $45,000 filing fee.

A recent published report noted there were about 333 hospital mergers from 2007 to 2011, according to the Center for Healthcare Economics and Policy.

About 111 of those were reported to the Federal Trade Commission under the Hart-Scott-Rodino Act. Fewer than one in 10 triggered second requests.

Only four were challenged in court -- less than 2 percent of all hospital mergers over the last five years.

WEIGHING IN

Wilson Medical Center officials announced their intention late in 2012 to seek a partner for the future. And a united Wilson Medical Center board of directors later announced it had signed a memorandum of understanding for a joint venture with Duke LifePoint.

A definitive agreement has since been reached.

The implementation of the Affordable Care Act approved by Congress and signed by President Barack ObamaMarch 23, 2010, is driving the movement, along with cutbacks in medical reimbursements.

Members of the joint venture board for Maria Parham Medical Center, the first hospital in Duke LifePoint, weighed in via a letter to The Wilson Times.

Bob Fleming and Dave Carver served on the board that selected Duke LifePoint as a partner. They said the partnership exceeded expectations.

"Becoming part of a larger health system was a choice our board weighed carefully," Fleming and Carver said. "We saw the health care environment changing, with rising costs, declining reimbursements and diminishing access to capital. Yet we were being required to make significant investments in our technology and infrastructure."

They said there were ways for "us to survive on our own, but most of those involved cutting services or staff -- compromises we were unwilling to make," Fleming and Carver said. "Our board wanted MPMC not simply to survive, but to thrive and grow. A partnership was the only way we could accomplish that."

They contend Duke LifePoint has lived up to its pledges of support and investments in quality, operational excellence and technology. The joint venture has invested $3.8 million in the Henderson hospital's cancer center since 2012, including a new radiation oncology project that will begin in February, they said.

"We've also seen improvements in our ER operations, patient satisfaction and physician satisfaction," Fleming and Carver said.

"MPMC's relationship has not been about losing an 80 percent stake in our hospital, as some community citizens have suggested about Wilson Medical Center's joint venture with Duke LifePoint," Fleming and Carver said. "Rather, it has been about gaining a partner dedicated to helping us create a wonderful future for our hospital and community."

The MPMC board of directors could not be more pleased to be part of Duke LifePoint, they said.

"We wish the Wilson Medical Center team the best and hope the individuals questioning the transaction will consider how positive this partnership could be for your community," Fleming and Carver said.

NEGOTIATIONS

Thomas S. Stukes, the hospital's attorney with Womble Carlyle Sandridge & Rice, has noted certain things that were negotiated.

"It was negotiated that they would run the entire operation like a tax-exempt operation, the joint venture as if it were tax-exempt,"

Stukes previously said. "That's a pretty nice concession. We're a 20 percent partner and saying you have to operate the entire operation as we've operated."

Stukes points out that the county is getting an equal voice in voting with only a 20 percent ownership interest.

Hospital officials and trustees say they did their due diligence.

The operation of the hospital and its subsidiaries would fall under compliance rules of the county's "subsequent reverter" as well as certain community and tax-exempt entity standards, including standards under Internal Revenue Service codes 501(c)(3) and 501(r).

In addition, the contribution agreement states the joint venture will operate under public interest covenants for the benefit of the local community. It includes a provision for indigent care, maintaining certain services in accordance with the public hospital transfer statute, maintaining an emergency department, participation in Medicare and Medicaid programs and maintaining non-discrimination policies in patient care.

Phillips, of Duke, believes Duke LifePoint eventually will win over those opposed to the joint venture when they get a chance to see the results.

Phillips, a cardiologist serving as associate director of the Duke Heart Center and chief medical officer of Duke Heart Network, attended the last public hearing.

"There was a medical staff advisory board that put countless hours into this," Phillips has said. "I thought the comments made by a very unified medical staff, several articulate physicians, spoke in favor of Duke LifePoint and 25, 30 all standing up with the speakers, arm in arm, was not only a powerful statement but a powerful image. It speaks to their enthusiasm for strengthening their hospital and what they've said to a man is they want to practice the very best heath care possible in this region. We want to be sure we put the patient first and deliver the highest quality that is possible."

ASSESSING VALUES

Russell believes the valuation doesn't come close to the value of the hospital and doesn't even reach tax value or include the tens of millions in assets.

Denise Stingale, interim county manager, said the county has a value for all buildings in Wilson County and that includes the nonprofit buildings such as the hospital or churches. She said the actual value of the property could be higher or lower, but there is always an amount assigned to each.

Values in place now include Wilson Medical Center at $70.3 million, WilMed HealthCare at $8.8 million, Wilson Medical Group at about $462,400 and WilMed Generations at $4.7 million.

Hospital officials said several factors affect the purchase price for a hospital, including the quality of earnings, returns on reserves and investments that are excluded from a sale, the market position of the hospital, the degree to which the tax-exempt seller of the hospital being acquired will retain a voice in governance, and the need for the acquiring entity to make future investments in the facility.

Officials noted the hospital is in a competitive marketplace and located in an aging facility in need of significant upgrades. WilMed faces millions in so-called charity care and bad debt each year and is located in a region with significant poverty.

The $70 million valuation of the hospital by Duke LifePoint is more than nine times earnings ($9.2 million), which is significantly higher than the industry average ($7.3 million). Officials believe it's consistent with fair market value.

Part of the attorney general's office review of Wilson Medical Center's proposed joint venture with Duke LifePoint HealthCare will include the price tag attached to the deal, state officials told The Wilson Times.

The office, which must make a regulatory ruling before the deal can close, has requested a wide range of documents, Talley said.

Glover notes the valuation released was fully three months after the first public hearing by county commissioners.

"The valuation by CBIZ was done after pressure from the hearings and knowing the first thing the AG would probably ask for is a valuation or a hard-asset appraisal," Glover said.

Russell points out the hospital's attorney did not receive the valuation until on or after Nov. 25, 2013, according to dated cover letter accompanying it. The appraisal was as of Oct. 1, and used financial and activity data through Sept. 30, 2013.

"The hospital administration, the trustees, the Physician Advisory Committee, the Community Advisory Committee, legal counsel and Duke LifePoint all indicated a decision was made in July as a result of deliberations based on an appraisal done or obtained by Stroudwater prior to the decision," Russell said. "No one, including the county commissioners, was apparently ever allowed to see the appraisal.

"Certainly, I never found anyone admitting to me they had actually seen an appraisal, but all attested to its existence."

LifePoint has been a past client of CBIZ, according to a company's brochure. That's not comforting to Russell or Glover.

But as a large business services company, it's likely it has worked with most large health providers over the years -- for-profit and not-for-profit. The company claims 1,500 health-care related assignments over a number of years.

The company said it has no business interest in Wilson Medical Center.

"When you analyze the methodologies employed by CBIZ to come up with the valuations, they used the lowest multiples of revenue and EBITA," Russell contends. "Land, buildings and equipment were valued at their depreciated value. Market value and depreciated value are not the same."

EBITA is a business acronym that stands for earnings before interest, taxes and amortization.

Russell believes the document was hastily thrown together. There's even a mistaken reference to the state of "Alabama" rather than "North Carolina" on page 33.

Russell and Glover are involved in collecting names for a petition seeking an independent appraisal.

They declined to release any names on the petition to The Wilson Times, just saying they had several hundred names consisting of a broad cross-section of Wilson County residents.

They plan to take the petition to the attorney general's office, Russell said.

A specific date for state regulatory ruling remains unknown.

[email protected] -- 265-7813

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