Vidant’s CEO and North Carolina’s treasurer bicker over cost cuts
When Michael Waldrum became CEO of Vidant Health in 2015, he knew it would be tough. The Greenville-based health care system’s 29-county market struggles with unusually high levels of obesity, diabetes and poverty. If the large region was a state, its median income level would rank second-lowest in the U.S., ahead of Mississippi. While the system dominates its region’s medical business, about 75% of revenue comes from government-led Medicare and Medicaid programs that Waldrum insists provide slim or no profit. “The bottom line is that we make a pretty skinny margin and, at times, none at all.”
It’s no wonder, then, that the new CEO faced a community fearful that his recent experience overseeing the sale of a big hospital system in Arizona would be repeated in Greenville. “There was a lot of fear that Mike Waldrum is coming to eastern North Carolina to sell Vidant,” he says, which he calls
absolutely untrue. “My job is to do what I need to do to make this company successful.”
What Waldrum didn’t anticipate was that an elected official with a zealous desire to drive down health care costs would make his job much more challenging, while unnerving the entire N.C. hospital industry. A historically cozy relationship between North Carolina politicians and the state’s hospitals loosened after Dale Folwell became state treasurer in 2017. Echoing comments made during his election campaign, Folwell vows to cut health care costs for the state and its 720,000 employees and retirees by pushing down prices that he considers excessive. Resulting savings would enable highway patrollers, teachers, prison guards and other public employees to spend less on health care, while putting a dent in the state’s $32 billion of unfunded retiree health liabilities, he says.
Whether fearless or foolhardy, the treasurer is taking aim at one of the state’s most powerful industries. Hospitals are the biggest employers in many N.C. cities and led by boards of civic leaders, giving them significant influence with state lawmakers. Two decades of consolidation have left North Carolina dominated by nine not-for-profit hospital systems, each posting annual revenue topping $1 billion. There were 10 until Feb. 1, when Nashville, Tenn.-based HCA Healthcare bought Mission Health for $1.5 billion, marking the biggest investment by a publicly traded hospital company in state history. Outgoing Mission Health CEO Ron Paulus, who is joining HCA as a strategic adviser, concluded that annual revenue of $1.8 billion and operating profit of $64 million in 2018 wasn’t sufficient to be competitive over the long term.
While Paulus’ grow-or-die attitude isn’t shared by Waldrum and some other N.C. hospital CEOs, the appetite for expansion is accelerating. Reflecting its ambitions, Atrium Health changed its name last year from Carolinas HealthCare System and bought Macon, Ga.-based Navicent Health. Atrium’s proposed combination with UNC Health Care fell through last year after state leaders, including Folwell, criticized the plan for being anti-competitive and disadvantageous to UNC. But the pressures prompting Atrium CEO Gene Woods and former UNC CEO Bill Roper — and their boards — to favor a collaboration aren’t going away.
Ravenous competitors anxious to grab others’ turf isn’t farfetched. “It’s only a matter of time before HCA starts looking for expansions elsewhere in North Carolina,” says state Rep. Donny Lambeth, a Winston-Salem Republican who is a former Wake Forest Baptist Health executive. HCA’s annual revenue of about $47 billion dwarfs the combined total of the 10 largest N.C. systems. While Waldrum says Vidant hasn’t talked with HCA about a potential merger, he predicts that out-of-state investment in N.C. hospitals will accelerate in the next decade.
Some hospital systems enter battle in stronger shape. The financial stars in North Carolina are Duke University Health System, which draws an international clientele, and Novant Health, which has growing market shares in Charlotte and Winston-Salem. Neither has what Waldrum calls a skinny margin: Industry publication Becker’s Hospital Review included both companies on a February list of 14 unusually strong U.S. hospital systems. Over the last two years, Duke reported operating profit of $560 million, or nearly 8% of total revenue.
Atrium, UNC, Cone Health, WakeMed Health & Hospitals and New Hanover Regional Medical Center have also recorded impressive earnings. Revenue growth in the most recently reported fiscal year was 10% at UNC and 11% at WakeMed, reflecting price increases, well-regarded management and strong population growth in the Raleigh-Durham area. Atrium is more than twice the size of any other N.C. hospital, but its operating margin trails Duke, Novant, UNC and WakeMed. Still, its financial condition improved enough last year that CEO Woods received total compensation of $6.1 million, a 12% increase from the previous year.
The laggards, according to Lambeth and other industry officials, are Winston-Salem-based Wake Forest Baptist Health and Vidant. Both remain strong financially with excellent reputations for quality care. But they face some difficult challenges. For one, population is growing slowly in their markets. Second, they are connected to medical schools, which provide prestige at a relatively high cost. Academic-related centers have traditionally received higher reimbursements, but pressure to reduce costs is trimming that benefit.
“Novant has a huge advantage in Winston-Salem because they don’t have the academic side like Wake Forest, which involves a lot of research costs,” Lambeth says. Novant CEO Carl Armato’s steady leadership and heavy marketing spending have also propelled the company, he says. Over the two most recently reported years, Novant reported operating profit of $445 million versus $79 million at Wake Forest Baptist.
Fortunately, Wake Forest Baptist’s acquisition of High Point Regional last year “is a huge move for them because they have added a nice community hospital with a strong physician practice,” Lambeth says. CEO Judith Freischlag, who joined Wake Forest Baptist in May 2017, is repositioning the system to be more competitive, he adds.
Still, there’s little debate that Waldrum faces a significant challenge in setting Vidant’s course. Certified in critical care and pulmonology, he spent more than 20 years as a student, clinician and administrator at the University of Alabama at Birmingham’s hospital system, then worked for two years at the University of Arizona’s system in Tucson. In 2014, he helped arrange the Arizona institution’s sale to Banner Health, a Phoenix-based not-for-profit that was twice as large. Rather than stick with his new employer, Waldrum sought a new opportunity.
His first visit to Greenville to meet with Vidant’s search committee wasn’t promising. “I got in my car and called my wife, and she asked how it went. I said, ‘I thought it went very well, but there is no way in hell we’re moving to Greenville, North Carolina.’ It was a rainy, dreary day and my first impression wasn’t strong. I said if it’s not at the end of the world, it’s damn close.”
Susan Waldrum told her husband to keep an open mind, and on his second visit, the stars aligned. “I learned that the people here were really smart, good people with an incredible compassion for their communities. It’s a large geography, but the sense of community is powerful.” Waldrum, who is paid more than $1 million annually, now says he and his wife love Greenville, noting its medical complex and East Carolina University make it more cosmopolitan than Rochester, Minn., where he lived for six years as a youth and later was an internal medicine resident at the famous Mayo Clinic.
Now, he has to make the numbers work. In his three-plus years at Vidant, the system has reported average operating income of about $65 million for a profit margin of about 3%. Last year’s $52 million profit was the lowest in the last five years. To be sure, operating profit for hospitals can be misleading because the institutions don’t break out their capital expenses, which can reduce earnings.
“[Vidant] has had to be extraordinarily good at what they do,” says Steve Lawler, president of the N.C. Healthcare Association, the industry trade group. “They are exceptional at running small hospitals, and they care for the most challenging part of the state geographically.” Sixty-five percent of revenue comes from its main medical center, which props up seven regional hospitals, some of which operate in the red. Lawler worked for Vidant for 16 years, including eight years in charge of the main hospital, before taking his current post in July 2017.
Vidant’s board is pleased with Waldrum, says Chairman Bryant Kittrell, a real-estate developer in Greenville. “Vidant is here to stay. We have issues, but we sincerely believe we have a bright future. Mike is doing everything in his power to save money, and he’s squeezing our costs hard.”
But two things clearly get under Waldrum’s skin, based on a lengthy interview at his Greenville office: Dale Folwell’s stridency, and how the deck tends to be stacked against eastern North Carolina and Vidant.
Unlike many U.S. state treasurers, Folwell has the sway to make hospital executives sweat. He’s chairman of the State Health Plan, the biggest health care payer in North Carolina by a wide margin. Folwell has particular clout in Greenville and other cities where the state is the major employer.
Folwell is pressing N.C. providers to tie their charges for State Health Plan members to, on average, about 1.8 times what the Medicare federal insurance program pays. Hypothetically, and there are many nuances, if Medicare pays $100 for a surgery, state workers and retirees would be charged no more than $180. Sounds sensible, but the hospitals say it would cut their combined revenue by $300 million annually and force higher costs for other private payers. It’s enough to spur a multimillion-dollar marketing campaign, paid for by both health care systems and other businesses, attacking Folwell for spreading misinformation.
“The treasurer has one tool in his toolbox, and it’s a hammer, so everything becomes a nail,” Lawler says. In addition to the advertising campaign, hospital officials want lawmakers to restrict the treasurer’s powers. In mid-February, Senate President Pro Tem Phil Berger, the state’s most powerful legislator, said he didn’t want Folwell to be micromanaged because of the tiff. Berger is still studying the issue, however.
“Dale keeps saying he is helping rural North Carolina, but I say taking $300 million out of rural North Carolina is irresponsible,” Waldrum says. “We’re trying to transform, and we don’t need to be shot in the head while we’re doing it.”
Folwell says North Carolina’s increasingly consolidated health care landscape benefits large hospitals and their top executives while gouging companies and groups that pay for their employees’ care. The cost shifting causes heftier charges for the state’s plan, which spends about $3.3 billion annually in a program administered by Blue Cross and Blue Shield of North Carolina.
Folwell’s solutions: Stop the cross subsidies, force hospitals and physicians to disclose their costs in a way that is understandable for every consumer, and encourage more private investment and competition. He says the result would be lower costs and plenty of profit for providers, who he contends have little incentive now to drive down costs.
“My fiduciary responsibility is to be loyal to the participants of this plan who have been cross-subsidizing others for decades,” he says. Hospital-industry lobbying doesn’t faze him. “We’ve got 9 million taxpayers and 720,000 participants in this plan who understand that they aren’t consuming health care, it’s consuming them.”
U.S. hospital prices increased by nearly 6% annually from 2000-18, more than double the overall inflation rate, buttressing Folwell’s views, says Barak Richman, a Duke University law professor who studies health care policy. “The need to shift revenue is a way that hospitals can get around their cost problems,” he says. “It’s saying that I’m going to give price discounts to parties that have market power [like the federal government] and then increase prices on those who don’t have such power. It’s not how you create value.”
Cost shifting has been around for decades and is the reason hospital pricing is so complex, Waldrum says. The practice is no different than the way auto insurers and many other businesses price their services, he says. “Everybody likes to talk about the costs, but the costs are because we are drowning in disease and craziness. We have a 1,000-bed hospital and it’s full, not because we are handing out candy and people are running in.”
It isn’t just the State Health Plan pressure that has Waldrum fuming about Folwell, however. In January, Vidant dropped its $462.5 million bid for ECU Physicians after the treasurer refused to support transferring state-owned facilities to the hospital system. Doing so would threaten the tax-exempt status of the $100 billion state retirement system — which Folwell oversees — because the facilities were built with taxpayer funds, he says. Approving the transaction would have also reduced health care competition in eastern North Carolina, hurting consumers and businesses, he adds.
ECU Physicians is a 400-member practice affiliated with the university’s Brody School of Medicine, which received about $62 million annually in state funding over the last five years. Combining those doctors with Vidant’s 500 would bolster the medical school’s finances, help the hospital system spread administrative costs over a larger network and free up money to improve care, proponents say. “If Vidant is going to survive, they have to form a single organization so they have stronger buyer and contracting power,” Lambeth says.
The merger would have reduced the state’s health insurance and pension liabilities, Waldrum says. “My board, the board of ECU Physicians, the ECU Board of Trustees and the UNC System Board of Governors all signed on because they knew it was the right thing to do for the state of North Carolina. … But [Folwell] refused to do it. It’s totally fair to blame him for this.”
One final challenge for Vidant is increasing competition from a surprising source: Since 2014, UNC Health Care has signed agreements to manage hospitals in Goldsboro, Jacksonville, Kinston and Rocky Mount. All are logical collaborators with Vidant given their regional connections with Greenville. Former UNC CEO Bill Roper has said the strategy reflected the university’s goal of becoming the state’s leading health care system and supporting smaller-city hospitals, many of which are struggling to make a profit and recruit doctors. Sounds nice for UNC Chapel Hill, which controls UNC Health Care. But what about ECU and its medical school, which specializes in teaching North Carolinians to practice family medicine in smaller cities?
“I often say that if we had $100 million sitting around, we’d give it to the medical school because they are so important to us,” Waldrum says. “So for another part of the UNC System to be hurting us in our market, while we’re trying to help Brody, doesn’t make sense to me.”
While UNC has signed management agreements to expand Down East, Vidant takes ownership of its affiliates. “If you go to Kinston, the hospital has a blue sign on it, but UNC doesn’t own it. The difference is when one of our hospitals needs capital improvements, we’ll take money we made in Greenville and drop it in Ahoskie, or wherever. We think to drive value, we need to be together.”
Vidant’s most logical merger partner may be UNC, a topic of discussion among state leaders. Expanding around Vidant could aid UNC’s negotiating ability if pressure for a merger mounts, Lambeth says. “At some point, if Vidant can’t work something out with the ECU medical staff, they may need to turn to another partner like UNC.”
Such a plan would require major cooperation between two entities that aren’t always best friends. ECU oldtimers haven’t forgotten UNC’s opposition to the Greenville medical school before its opening in 1977. Few people east of Interstate 95 think Brody receives a fair shake compared with its larger, more famous Chapel Hill peer. “There is an underdog chip on the shoulder, because [Brody] has been treated as the younger brother for so many years,” says Lawler, a Greenville native.
Waldrum’s current M&A focus is on Halifax Regional Medical Center in Roanoke Rapids, a 204-bed hospital with $100 million in annual revenue, 850 full-time employees and 150 part-timers. “Rural hospitals are facing tough times,” so the Halifax board looked at a sale, says hospital board member Vernon Bryant, who also chairs the county commission. “We think we need to join a system, and Vidant is the right fix for us.” Bryant expects the sale to be completed within a few months.
Picking up another small-town hospital reflects Vidant’s mission to help improve the health and well-being of eastern North Carolina, Waldrum says. “We know how to operate in a highly resource-constrained environment. We’re the Walmart or Dollar General. That’s who we are. We are not Macy’s or Neiman Marcus.”