Local leaders considering cashing in New Hanover Regional Medical Center
Photo by Andrew Sherman
By Mike MacMillan
New Hanover County has a chance to land a $1 billion check or, alternatively, avoid having to borrow hundreds of millions of dollars to support the anticipated growth needs of its biggest employer. It’s an unusual opportunity only possible because New Hanover Regional Medical Center is the third-largest county-owned health care system in the United States.
But selling the hospital and affiliated operations could eliminate local control and, some experts say, lead to higher medical costs in a monopoly market. It’s a momentous decision given the system’s payroll of 7,500 and annual revenue of about $1.5 billion. It’s the issue that Wilmington’s civic leadership is grappling with amid much public consternation. A decision on how to proceed is expected in the next few months.
How to structure governance of the local hospital system was decided years ago by many N.C. communities, most of which opted to form not-for-profit systems that are loosely affiliated with local governments and elected officials. Last year, Asheville’s Mission Health chose a sale to for-profit HCA Healthcare, creating a $1.5 billion foundation to help boost public health efforts. Some cities, such as Asheboro, are being forced to pass on control because their hospitals are unprofitable. Greensboro-based Cone Health, one of the state’s largest health care systems, has said it is working to succeed struggling Randolph Health as Asheboro’s main hospital operator.
But in Wilmington, New Hanover County government has retained control of its lucrative health care network. Aided by a good location, stable management and a growing community, the medical center represents a valuable asset that has nine bigger rivals licking their chops in anticipation of a change of control.
Debate over the future of the center kicked off in July when the county and NHRMC announced that county commissioners would vote on a “Resolution of Intent to Sell” item in September. The topic was raised by County Manager Chris Coudriet and health system CEO John Gizdic, both quoted in a press release announcing the measure. The release didn’t cite any elected officials or private-sector leaders, and no one has stepped forward to take credit for starting the process.
By Sept. 16, the initiative had morphed into a less specific “exploring options for a potential new model” for the hospital. That’s the night that the commission voted to create an advisory group to oversee the process of changing the hospital’s ownership and governance structure and consider “strategic alternatives.”
“We can’t keep kicking the can down the road,” County Commissioner Patricia Kusek said at the meeting before voting to approve a 21-member Partnership Advisory Group. It is made up of nine community members, five physicians, five hospital trustees, Gizdic and Coudriet. Co-chairs are former Mayor Spence Broadhurst and Barbara Biehner, a veteran hospital administrator who works for a nonprofit health care alliance supported by New Hanover Regional. That kicked can Kusek is referring to is the potential financial drag facing the county from operating a big health system in a consolidating industry increasingly dominated by much larger companies and not-for-profits.
“While [the medical center] started as a county hospital more than 50 years ago, it is now much more than that, serving the entire region of southeastern North Carolina through a network of hospitals, outpatient centers, emergency services and physician practices,” Gizdic said. “But it is a challenge to grow as quickly as our region is growing, while also making the shifts in our business and care models that are required as the health care industry moves from fee-for-service reimbursements to value-based care.”
The medical center expects $1.9 billion in capital investments over the next decade, Gizdic says, most likely doubling long-term debt. Its market area includes six counties to the north and west, which tend to be less affluent. Expecting New Hanover to bear the risk of potentially hefty borrowing is a key issue facing county officials; its total annual budget is about $400 million. The current structure limits the county’s borrowing authority to facilities only in New Hanover.
“If we look to the future, the scale has changed. How many more billions can we fund?” the CEO asks.
Gizdic and Broadhurst insist that no final decision on the hospital’s future has been made. “Sale or merger is only one possible scenario,” Gizdic says. “All options are being explored.”
Broadhurst adds, “This can’t be answered in a sound bite. There are a hundred options between ‘sale’ and ‘no sale.’” He expects the request for proposals from interested potential buyers or partners, which are due in mid-March, will provide some clarity. “What would it look like to stay totally independent [among other outcomes]? We’ll know better then.”
Hospitals are prized community institutions and the potential change of control immediately caused sparks that have burned hotter since last summer. “It’s kind of like Custer’s Last Stand in North Carolina,” says Gene Merritt, a local real estate developer who started an interest group to lobby against a possible sale. He’s referring to the disappearance of locally controlled, independent hospitals across the state. One example was last February’s sale of Asheville’s Mission Health to Nashville, Tenn.-based HCA Healthcare.
Merritt’s is not a lonely voice: A Democratic Party poll of 600 New Hanover County residents in November found that 82% opposed a sale to a for-profit company, with 5% in favor. Selling the hospital to a not-for-profit was opposed by 53%, with 25% supportive.
At the time of the September county commission vote, N.C. Sen. Harper Peterson, a former Wilmington mayor and Democrat, filed a formal complaint. “The government process in this matter has been corrupted, the public confidence has been violated, and a vote of ‘no confidence’ in this matter going forward is in order,” he wrote.
The county won’t have any problems seeking an interested buyer should it put the hospital on the block. By early February, nine hospital systems had signed nondisclosure agreements that indicated they may submit proposals showing possible interest in an acquisition or partnership by mid-March. This includes four thriving N.C. systems: Charlotte-based Atrium Health, Chapel Hill-based UNC Health; Winston-Salem-based Novant Health; and Durham-based Duke Health. Other interested parties included HCA, which is the nation’s biggest hospital operator; LifePoint Health, another Nashville hospital company that has a joint venture with Duke that owns nine N.C. facilities; Bon Secours Mercy Health Systems, a Catholic-controlled system based in Marriottsville, Md.; Trinity Health, another Catholic-controlled health system with $19 billion in revenue that is based in Livonia, Mich.; and Eden Prairie, Minn.-based insurance giant UnitedHealth Group’s Optum subsidiary, which provides a wide variety of health care services.
New Hanover Regional is a compelling target for several reasons. It has reported annual operating profit of $63 million to $110 million in recent years, earning a solid profit margin by industry standards. Beds are more than 90% occupied, on average, and the hospital’s unrestricted reserve fund totaled $825 million as of Sept. 30. Long-term debt, mostly revenue bonds supported by the hospital’s cash flow, totaled $362 million as of Sept. 30. That success has enabled the center to operate without a subsidy from county government, which is rare among U.S. public hospitals.
It also is a monopoly hospital in a relatively affluent, growing market that is about 120 miles from the nearest major medical centers in Raleigh and Greenville. Wilmington is a popular tourist destination with a peppy downtown area and nearby beaches. “Our community is growing very rapidly,” Gizdic says. “Our population is expected to double in the next 15 years.”
New Hanover County was home to about 233,000 people as of 2018, a 30,000 increase from 2010, according to U.S. Census Bureau estimates. The Wilmington metro area, which includes New Hanover and Pender counties, grew 15.5% from 2010 to 2018, ranking 49th in the nation. Median household income is slightly above the state average, while about 18% of residents are 65 or older compared with 16% statewide.
While agreeing that the hospital is performing well, Broadhurst points to what he describes as “holes” in the strategic plan: increasing capital project costs and the hard-to-quantify impact of changes to reimbursement by government and private insurers. He emphasizes that it’s smart for New Hanover to review its alternatives while it is financially robust, with an underlying assumption that it may not remain that way because of trends driving the $3.6 trillion U.S. health care market. About 900 hospital and health care system mergers occurred between 2008-17 as labor and technology costs soar and the federal government pushes for tighter spending in its Medicare and Medicaid health insurance programs. The move to valued-based payments, which aims to manage costs by providing incentives for improved quality of care, also may prompt more consolidation. Payers face pressure to slow health care inflation, which could pressure hospital profit margins. Now is the time to consider the best options for the hospital, Broadhurst says.
“We are exploring all options because it is a proactive step to ensure [New Hanover] is able to meet the needs of our region well into the future,” Gizdic says. “That is why it is important that we, as a community, carefully consider those challenges and decide if our current structure is the right one or if some changes should be made.”
Merritt doubts that change will spark benefits and says the process has been rushed and is less transparent than advertised. “It’s been a railroad job from the beginning,” he says. “With the public backlash, they’re now trying to create the appearance of transparency.”
Everyone agrees that the hospital is a treasured resource and that its essential character needs to be preserved. The disagreement is about how that is achieved. “There’s been a tin ear on the part of the [hospital] administration,” says County Commissioner Rob Zapple, a general contractor who voted against the motion to study alternatives. “They’ve tried to adjust but they lost credibility early on. It will be hard to get that back.”
Bill Graham, a retired IBM executive who leads the nonprofit Renaissance Wilmington Foundation, has accused the hospital of trading on “uncertainty, change and fear.” He has urged the advisory group to proceed cautiously. “We think this is the time to continue to concentrate on making our hospital better, not bigger,” he says.
A key issue overhanging a change of control is the prospect of higher costs, which is a typical result of hospital takeovers, according to Barak Richman, a Duke University law professor who studies health policy. “If you look at the last 30 years of consolidation, evidence shows that following a merger prices have gone up and quality has gone down,” he says. Common-sense economics suggests a new operator that pays a premium to acquire New Hanover would have to recoup the merger expense by either increasing prices or reducing costs. That’s the apparent story in Asheville, where Mayor Esther Manheimer and other local elected officials blasted HCA in February for cutting staffing at Mission in the year since its sale.
Atrium, the state’s biggest and most acquisitive not-for-profit authority, knows a lot about Wilmington. It had a partnership advising New Hanover on its physician practices, while Gizdic worked for Atrium for 14 years before joining the Wilmington system as vice president of strategic planning in 2005. He became its CEO in 2017. Atrium’s expansion relies on promising big investments in capital projects at its new partner’s campuses and assuming debt. For example, Atrium agreed to take control of Rome, Ga.-based Floyd Health Care by promising a total of $650 million in investments in buildings and equipment and contributions to the institution’s foundation. In return, Atrium says it can operate the Georgia system more efficiently because of its larger size and greater expertise. Regulatory approval is pending.
Suspicions that Atrium has an upper hand are inaccurate, Gizdic says. When deliberations were announced, he told Business North Carolina, “I’ve had absolutely no conversations with anybody about a potential deal.”
Other potential bidders have strengths, also. HCA and Trinity Health rank among the nation’s 10 largest health care systems; UNC Health already has a big stake in eastern North Carolina, owning or having affiliations with hospitals in Goldsboro, Jacksonville, Kinston and Rocky Mount. Bon Secours has major market share in the Hampton Roads and Richmond, Va., and Greenville, S.C., markets, while Barb Biehner, who chairs the Wilmington advisory group, is a former CEO of a Bon Secours hospital in Altoona, Pa.
Gizdic and other hospital industry officials say neither private nor public insurers will pay higher prices to hospitals, but instead will continue demanding stricter cost controls tied to improved health care. “Increasing requirements for price transparency will mean consumers can choose based on price,” he says. “The best path forward will be to offer lower-cost options for care and more effectively manage the health of the population we serve so their overall cost of care is lower.”
N.C. State Treasurer Dale Folwell also promotes lower-cost care but has become a pariah among the state’s hospital administrators, arguing vehemently against consolidations. He calls the industry a cartel that uses its clout to restrict competition. Hospital industry officials respond that the treasurer’s push for cost cutting penalizes rural hospitals and delays strategies that can improve public health.
But Folwell has proven formidable as head of the biggest N.C. health care buying group, the N.C. State Health Plan for 720,000 state employees and retirees, including 41,000 in New Hanover and surrounding counties. He helped block Atrium Health’s failed effort to partner with UNC Health and has criticized Atrium’s pending collaboration with Winston-Salem-based Wake Forest Baptist Health.
He has also inserted himself in the New Hanover debate, attacking change-of-control measures at a Jan. 21 event sponsored by Merritt’s group that attracted about 250 people. The Wilmington meeting focused on prospects that the entry of a larger organization would lead to higher costs.
Folwell urges New Hanover County commissioners to maintain the hospital’s high quality, limit borrowing and avoid handing over the keys to another party. Staying independent, he contends, could enable the center to offer competitively priced health care services and potentially attract hordes of cost-conscious consumers to the coastal market in a wave of medical tourism. “Instead of nine outside counties, why not nine states?” he asks, citing New Hanover’s reputation and the region’s tourism charm.
One of Folwell’s key support groups, the State Employees Association of North Carolina, also is engaged in the debate. It ran about $245,000 of ads in Wilmington media earlier this year contending New Hanover Regional is earning excessive profits and warned against a sale to a for-profit buyer. The campaign prompted a response from the health care system with its own $200,000 ad buy, urging viewers to trust that the advisory group process will lead to the best outcome for the region.
“We’ve beaten the odds for many years,” Gizdic noted last summer. “We should be very proud of that. Nobody has admitted defeat. But we have to be prudent about how much longer we can beat the odds.”