N.C. hospitals facing fiscal challenges amid the pandemic
Blocking many of your best customers from showing up isn’t the smartest business strategy, but U.S. hospitals had to take that approach in recent months to clear space for an unexpected surge in coronavirus patients. Not surprisingly, the decision to postpone elective procedures quickly hammered hospital finances, with North Carolina’s 130 health care operators losing as much as $3 billion in combined revenue, says Steve Lawler, president of the N.C. Healthcare Association.
Some of the biggest hits occurred at Winston-Salem-based Wake Forest Baptist Health, Fayetteville-based Cape Fear Valley Health and Greenville-based Vidant Health, which furloughed workers and cut executive compensation by as much as 30%. Necessary but not-urgent procedures such as colonoscopies and orthopedic operations typically make up the bulk of profits for hospitals, but they were postponed because of COVID-19, notes Bradley Staats, director of the Center for the Business of Health at UNC Chapel Hill’s Kenan-Flagler Business School. Emergency department volume at N.C. hospitals declined by as much as 50% as state leaders urged citizens to avoid public settings.
“North Carolina hospitals have responded to this pandemic to make sure [the] people of the state have the best care possible to deal with it,” Lawler says. “But they’ve had to turn on a dime, change their business models, and devote their time and attention to hardening their facilities, preparing their staffs, and increasing their supply levels to ensure North Carolina didn’t turn into another New York or Washington state.”
The pandemic’s timing was a particular hardship for Vidant, which CEO Michael Waldrum capsulized in a virtual town hall meeting in April. “We started in a distressed, underserved region, primarily rural with a high burden of disease, so we’re having to mount our response on that foundation,” he said.
In the previous month, Waldrum announced the layoffs of 191 employees, mostly at the corporate office and flagship Vidant Medical Center in Greenville. The move followed an $18 million budget shortfall in the first quarter of Vidant’s fiscal year. “While beds are full and patient volumes are up, net revenue has declined, and costs associated with serving our mission have increased,” Waldrum wrote in an email to staff.
Vidant declined to release details about its finances, and Waldrum would not comment. The not-for-profit authority reported operating income of $39 million on revenue of nearly $2 billion in 2019, one of the slimmest margins among the state’s big systems. Waldrum is taking a 25% cut in his $1.2 million annual salary, while other employees received smaller pay cuts, and contributions to retirement plans were sliced in half.
The financial picture for N.C. hospitals should rebound with elective surgeries resuming in mid-May and support from federal coronavirus relief funds. “North Carolina has received about $700 million, but our hospitals are losing $1 billion a month,” Lawler says. Vidant says it has received more than $74 million.
Even before the pandemic, many of the state’s rural hospitals were breaking even or losing money, the trade association says. Asheboro’s 145-bed Randolph Health is reorganizing under federal bankruptcy laws, while Plymouth’s 25-bed Washington Regional Medical Center was in bankruptcy court before an April takeover by Dallas-based Affinity Health Partners.
But Vidant is set apart because 1.4 million eastern North Carolinians depend on it for health care and for its role as an economic engine. As the largest nongovernmental employer east of Raleigh, it has about 15,000 employees, 1,700 licensed hospital beds and a roughly $1 billion annual payroll. “It’s the financial hub of the east,” says Melvin McLawhorn, chairman of the Pitt County Board of Commissioners.
The system has been characterized in recent years by a fractious political atmosphere partly centered on Vidant’s origins and governance. Its flagship hospital in Greenville was owned by Pitt County until 1998, when the county transferred control to a not-for-profit authority.
That transaction calls for control of Vidant to revert to the county should its finances weaken significantly. If the system attempted a sale, as some speculate could happen, county commissioners would have to approve, County Manager Scott Elliott says. “If not, the whole thing would come back to us an asset.”
The agreement with Pitt County stipulates that Vidant maintain enough liquidity to cover its long-term debt-service requirements by at least 1.5 times, County Attorney Janis Gallagher says. As of late April, “their current situation does not fall below their maintenance and financial obligations,” she adds.
The Moody’s Investors Service credit-rating agency scores Vidant as an A1 credit, a solid investment grade rating, according to its last report in October 2018. “Longer term, Vidant will be pressured to maintain adequate margins given the organization’s challenging payor mix [which refers to the 70% of Vidant patients who rely on government-paid insurance], low population growth in the service area, and projections of relatively flat inpatient volume,” Moody’s noted. “The debt structure is not overly aggressive” with about $450 million in rated debt.
A governance feud with the state and the University of North Carolina System Board of Governors has hampered Vidant. The crux is whether the Brody School of Medicine, part of East Carolina University and the UNC System, receives adequate financial support from Vidant. Brody students are trained at Vidant.
Last year, the UNC System sued Vidant and Pitt County after the county unveiled a plan to appoint each Vidant board member. Previously, the UNC System had the power to pick a majority of them. It appeared resolved last year with a compromise in which the UNC System would appoint nine members and Vidant seven, and the state released $25 million withheld from Vidant.
But the dispute kicked up again in April when the UNC governors rejected three Vidant nominees, including two current members. One of those nixed, Greenville businessman Phil Hodges, suspects it was “sour grapes.”
Vidant’s financial issues don’t win sympathy from detractors, who point to the multibillion-dollar takeover battle for Wilmington’s New Hanover Regional Medical Center as evidence that big N.C. hospitals remain attractive businesses. “Vidant is poorly run and poorly managed,” says Pitt County businessman Harry Smith, former chairman of the UNC System Board of Governors. He cites last year’s $30 million acquisition of Roanoke Rapids-based Halifax Regional Medical Center and a $174 million cancer center expansion in Greenville for stretching Vidant financially. “Their performance right now shows that.”
But Vidant’s story isn’t unusual. Almost two-thirds of U.S. health systems are in a difficult financial situation, versus 20% before the COVID-19 pandemic, according to an April report by Boston Consulting Group. “[Hospitals] must reimagine how they conduct business in order to operate under new constraints, rebuild consumer confidence, treat patients when they need care and, ultimately, maintain the health of the communities they serve,” according to the report.