Turning around community hospitals is what MedWest’s prospective buyer does best

WNC hospitals search for a lifeline

Turning around community hospitals is what MedWest’s prospective buyer does best

cover When a “for sale” sign went up on the hospitals in Haywood, Jackson and Swain counties earlier this year, it was chalked up as inevitable, a sad but unavoidable trajectory faced by small, independent hospitals everywhere.

At best, the safe harbor of a big hospital network would bring practical perks — be it regulatory expertise, doctor recruiting prowess, leverage haggling with insurance companies or buying power for medical supplies.

At worst, the hospitals needed a bailout. They were losing money and patients.

Hospitals leaders had tried everything: cost-cutting layoffs — a few rounds of them no less, consolidating overhead, a heavy marketing campaign, and even hiring an expensive, outside hospital management company.

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They even tried expansion — gambling that more doctors, more state-of-the-art equipment and more medical offices would translate to more revenue.

But the bottom-line wasn’t budging. Any gains were quickly offset by more hits — like the growing number of charity cases, shrinking Medicare reimbursements and ramped up competition from Mission in Asheville.

Meanwhile, the fledging MedWest alliance aimed at strengthening Haywood Regional Medical Center and WestCare’s hospitals in Sylva and Bryson City was on the skids.

The wheels were set in motion in March to find a buyer for the hospitals, a move once considered a last resort. As the hospitals propositioned suitors, a MedWest parting of ways — each going with different buyers — was a possibility.

In the end, although MedWest will indeed dissolve, they’ve settled on the same savior.

At least that’s how MedWest board members are talking about Duke LifePoint Healthcare, the buyer poised to acquire the hospitals. And for its part, Duke LifePoint claims it can turn things around.

“We want them to be everything they can be,” LifePoint CEO and Chairman Bill Carpenter said of the hospitals here. “We want them to reach their full potential. We think there are things Duke LifePoint Health Care can bring to the table to help them reach their full potential.”

The image of Duke LifePoint portrayed by MedWest hospital trustees and administrators is a flawless one.

Duke LifePoint will invest tens of millions of dollars to make the hospitals bigger and better, expand medical service lines, add new equipment, bring in more specialists and improve clinical expertise.

Yet the community tenor of the hospitals won’t be lost in the acquisition. Despite the megalithic size of the LifePoint hospital network — 60 hospitals in 20 states, $3.4 billion in annual revenue and 29,000 employees — local input will still have a place. Doctors’ opinions will still be valued.

Too good to be true? Maybe, but maybe not.

Carpenter described a sound business model behind LifePoint’s ability to improve health care while growing its community-based hospitals.

“We believe, and it has been proven, that if we do those things, if we focus on quality and service, if we focus on partnering with physicians in a good way and are a good employer in our communities, then our hospitals are going to be financially successful,” Carpenter said.

And despite being a large, publicly-traded, for-profit corporation, LifePoint puts stock in being a local community partner.

“We want to be a good community citizen and to be actively and vitally involved in the community,” Carpenter said.

Squaring the for-profit model

As a well-paid CEO over a large, for-profit hospital system, Carpenter has grown accustomed to critics questioning LifePoint’s motives. Is their priority profits, or providing quality community health care?

But those aren’t mutually exclusive, according to Carpenter. In fact, it can be just the opposite.

“I have often heard my nonprofit colleagues say, ‘No money, no mission.’ We all need to make a return on an investment to be able to continue to support the mission we have,” Carpenter said.

Obviously, as for any hospital, high-quality patient care is LifePoint’s top concern. To accomplish that, LifePoint values its relationship with doctors and staff.

“In a small community, word of mouth is really important. We want to be a good employer, and we want people who work at the hospital to be absolute advocates for the hospital and that to shine through in the community,” Carpenter said.

There’s nearly 1,900 employees currently working at MedWest’s three hospitals, urgent care centers and hospital-owned doctors’ practices in Haywood, Jackson and Swain counties.

When the pending sale to Duke LifePoint was announced two weeks ago, Mission Hospital in Asheville issued a statement expressing “disappointment” that it had not been chosen.

Mission had been in the running for WestCare, although it hadn’t made a proposal for Haywood. Anti-trust regulations aimed at capping Mission’s dominance in the region would have been a hurdle in acquiring Haywood, according to a statement by Mission.

Mission hospital officials disparaged the for-profit healthcare model of LifePoint.

“At a time when so many are struggling to receive the care that they need, the incremental burden on residents and communities to not only pay for care but also ensure returns to shareholders on Wall Street and around the globe is troubling,” said Jon Yeatman, Mission’s vice president of strategic development, in a statement.

LifePoint quickly countered.

“A lot has been made of the differences between for-profit and nonprofit hospitals, but much of what has been said is incorrect,” according to a subsequent statement put out by Duke LifePoint. “The notion that communities are required to ensure returns to shareholders is false and unfounded.”

Profits made at LifePoint’s hospitals are mostly re-invested in those hospitals.

“In fact, for-profit hospitals often have more resources and flexibility to invest in new initiatives,” according to a statement by Duke LifePoint.

For-profit hospitals have just as much incentive to ensure there’s a broad spectrum of high-quality medical care being provided in their communities.

“We are trying to grow the hospital. If we grow the hospitals, the value of our company increases,” Carpenter said.

Acquisitions, like those of Haywood Regional and WestCare, play a significant role in LifePoint’s business model.

“LifePoint is committed to growing and establishing our footprint of community-based hospitals around the country,” Carpenter said.

Head to head

While Duke LifePoint is in the business of buying hospitals, it wouldn’t be interested in Haywood or WestCare if it didn’t see potential.

“Where we see a hospital that has community support and a strong medical staff to begin with, a good administrative team to begin with, where we think the resources our organization can bring to the table can help them achieve their full potential, those are the opportunities we are very excited about,” Carpenter said.

WestCare and Haywood’s survival for this long as small, independent hospitals — among the last of their breed in the state — is a formidable feat in and of itself.

“We are very happy we are being considered as a potential partner by these hospitals. These are great hospitals; there’s no doubt,” Carpenter said. “We are very impressed by the great platform and base they have developed.”

Still, they are losing money and market share. More patients from Jackson and Haywood counties are traveling to Mission in Asheville for in-patient care than they were six years ago.

Oddly, that’s something LifePoint actually looks for when buying a hospital. Recapturing lost market share is the bread-and-butter of LifePoint.

LifePoint strives to “reduce the migration of patients to larger hospitals in more distant towns and cities,” according to its 2012 annual shareholder report.

The CEOs of both Haywood and WestCare have routinely cited the slow trickle of patients to Mission as their Achilles’ heel.

LifePoint has dialed in a winning formula to help struggling community hospitals win back those patients.

“The reason many community hospitals lose market share is because the services aren’t being provided there. Many times it is because they can’t recruit the physicians and provide them,” Carpenter said. “Our focus is on growing and developing service lines that can and should be provided in the local community.”

Of course, it’s more complicated than that. The battle for patients depends on the caliber of doctors, caliber of nurses, condition of facilities, equipment and technology, reputation, convenience — even its parking situation, according to a list of competitive factors cited in LifePoint’s 2012 shareholder report.

Track record

If you tick down a top 10 list of the challenges faced by community hospitals nationwide, LifePoint can point to places where it fixed that very problem upon taking them over.

It’s biggest selling point is turning around a losing bottom-line.

It bailed the hospital in Logan, W.V., out of bankruptcy. And in Versailles, Ky., it resuscitated a closed hospital that had shut down. It often makes financially struggling hospitals profitable within a year or two.

LifePoint healed rifts and smoothed tensions between physicians and administrators — and between rival medical staffs at competing hospitals that had merged — at the hospital in Lake Havasu City, Ariz.

Another common problem: hospitals barely breaking even don’t have the money to build or renovate. Enter LifePoint. Nearly all of its deals come with a pledge of capital investment. It has built new emergency rooms, new labor and delivery wings, new surgery suites — even a whole new hospital in Ennis, Texas.

And it tackles the relentless struggle to recruit doctors to small communities, adding new subspecialties while beefing up the core medical fields.

In Conyers, Ga., the community hospital was losing patients to nearby Atlanta — not unlike Haywood and Jackson losing patients to Asheville — but LifePoint helped it regain market share.

All these challenges, in fact, are familiar territory for Haywood Regional and WestCare.

When asked how Duke LifePoint could succeed where MedWest had failed, Carpenter said it’s all about resources.

“Standing alone, the community hospital has to deal with all the things we deal with as a large organization. We bring not only financial resources but also resources of our hospital support center,” Carpenter said.

There’s economies of scale, better buying power, and LifePoint can also deploy best practices from other hospitals in its system.

“We can improve processes, and that results in better clinical outcomes as well as reduced costs of care,” Carpenter said. “We learn from our peer hospitals across the country and region.”

One thing that could help the bottom line — but something that Carpenter didn’t actually mention — is outsourcing some back-of-house administrative jobs.

Functions like payroll, accounts payable, supply chain and billing are rarely performed by individual LifePoint hospitals, but instead are contracted out to a national firm that handles those operations for hospitals nationwide.

MedWest dissolution

If the sale to Duke LifePoint goes through, the MedWest partnership would be dissolved. WestCare had made known its desire to pull out of MedWest last year following dissatisfaction in the Jackson County medical community over perceived preferential treatment of Haywood.

Specifically, Jackson doctors felt their hospital had lost local control and that its best interests weren’t being looked out for by MedWest.

Duke LifePoint is treating the acquisition of WestCare and Haywood as two separate deals, with two separate proposals.

WestCare CEO Steve Heatherly has emphasized that WestCare will be operated independently from Haywood despite being owned by the same parent company.

“The focus will be on our community and how it can be best served by the WestCare hospitals,” Heatherly said. “Each hospital is unique because each community is unique. Hospital services must be tailored to meet the need of the local community.”

But LifePoint would likely be on the lookout for synergies between WestCare and Haywood. In last year’s shareholder report, LifePoint commented on its strategy to “build regional networks” of hospitals in geographic proximity. Along those lines, it cited the acquisition of a hospital in Etowah, Tenn., near an existing LifePoint hospital as a smart strategic move to “expand our regional presence and build a stronger, local continuum of care in collaboration.”

Acquiring hospitals is a core component of LifePoint’s business strategy.

“Our pipeline remains very active, and we are selectively acquiring the right hospitals in the right markets,” according to its 2012 shareholder report.

WestCare and Haywood could be exactly the jumping off point LifePoint needs for even more forays into Western North Carolina, complimenting its hospitals in East Tennessee.

While LifePoint might think like a corporation on the acquisition side, when it comes to management, it thinks like a community hospital.

“At the very base line of Duke LifePoint, we truly believe that quality care delivered close to home is best for the patient, their families and the community,” Carpenter said.

Duke LifePoint has pledged that local input is valued at its hospitals. WestCare and Haywood would have their own hospital boards comprised of doctors and community leaders. The local hospital boards, however, would merely play an advisory role, not call the shots as they do now.

Pegging a value

Duke LifePoint offered $26.25 million cash for Haywood Regional Medical Center. For now, its offer to WestCare isn’t known.

Haywood Regional was required to disclose the terms of Duke LifePoint’s offer. Haywood is a public hospital authority, a status that stems from the county acting as a co-signor on a construction bond for the hospital in the 1970s. State statute dictates that public hospitals follow a public process when being sold.

WestCare, however, is a private nonprofit entity. It doesn’t have to disclose anything and has declined to make the offer from Duke LifePoint public. Eventually, the sale price for WestCare will come out in its nonprofit tax filings, which are public record.

It’s possible to look at the sale price offered for Haywood and speculate what that price might be for WestCare.

On the surface, they are similarly sized. They have about the same number of employees — 915 at WestCare and 950 at Haywood. They have a similar annual operating budget, about $110 million for Haywood, and $100 million for WestCare. And they have similarly valued facilities.

Both own about the same number of physician practices.

Money in the bank

So what happens to the money Duke LifePoint pays for the hospitals?

First, any outstanding debt on the hospitals’ books would be paid off.

For Haywood, the hospital owes about $8.6 million on a line of credit used for operating capital and another $2 million left on construction debt of its fitness center. Cash from the purchase will also be used to clear out accounts payable, which could be another few million, although hospital officials have not shared that figure.

Presumably, between $8 million and $10 million could be left over from the sale of Haywood Regional. The money would go to the county, since it is a county hospital authority.

Commissioners are already talking about the idea of putting the money in a trust fund earmarked for health care initiatives.

“We would seek a lot of public input on the best ways to address challenges of health care,” said Haywood County Commissioner Mark Swanger.

Commissioners tossed out a few examples, like supporting the Good Samaritan Clinic, which provides medical care to the poor and needy, or expanding the nursing program at Haywood Community College.

Haywood County Commissioner Mike Sorrells said the county would likely protect the principal in perpetuity and only spend the annual interest.

For WestCare, there’s slightly more debt to be paid off. WestCare owes about $15 million on outstanding loans for past hospital renovations and expansions.

Cash from the sale would be used to pay that off, along with the requisite outstanding bills and accounts payable.

What happens to the money left over from WestCare’s sale isn’t as clearcut, but it’s likely that it, too, would be put into a trust fund of some sort. It would be managed by a locally-controlled foundation and could also go to support health care initiatives.

Although no one with WestCare has said as much, that seems to be standard operating procedure when a nonprofit hospital is bought out.

When Duke LifePoint bought the hospital in Marquette, Mich., $23 million from the sale proceeds were put into a trust fund managed by a newly established foundation for local health care initiatives.

The same happened in Danville, Va., where the sale of the hospital to LifePoint in 2005 created a $200 million endowment managed by a newly created community foundation. It’s mission is multi-faceted, but health initiatives are a central cause, including a fitness and healthy eating campaign aimed at reducing the obesity rate.

And just last month when LifePoint bought the hospital in Warrenton, Va., $100 million from that sale went into a charitable community foundation that will support a free health clinic and other projects.

In fact, when a nonprofit sells its charitable assets, it’s legally required to apply the proceeds toward charitable causes. The N.C. Attorney General’s Office will be tasked with oversight, making sure that the sale of WestCare’s charitable assets fetches a fair market value and that the proceeds are properly used.

Duke partnership with LifePoint is two years old

If all goes as planned, the sale of Haywood Regional Medical Center and WestCare to Duke LifePoint Health Care will be finalized by spring.

But until two weeks ago, Duke LifePoint was virtually unheard of here. Outside of medical circles, news of this prospective buyer was met with a universal question: Who’s that?

LifePoint is a for-profit company headquartered in Nashville with 60 community hospitals in 20 states, almost entirely in non-urban areas. But it is a relative newcomer to North Carolina. It owns two hospitals located in counties bordering Virginia in the central part of the state.

While LifePoint has been in the community hospital business since 1999, its partnership with Duke University Medical Center is a new venture.

It was pioneered two years ago after Duke increasingly found itself on the receiving end of propositions by struggling community hospitals looking for a lifeline.

“Duke was receiving inbound calls from community hospitals that were concerned about how they would face the challenges with the way medicine was being delivered today. How are those hospitals going to continue to thrive and survive and be there for their communities?” LifePoint CEO and Chairman Bill Carpenter said.

Duke simply couldn’t help all the hospitals wanting to come under its wing.

But as one of the state’s flagship medical institutions, Duke would be remiss to sit back and watch the erosion of the community healthcare landscape.

“Part of Duke’s original mission was to support community health care in our backyard and across the region,” said Dr. Harry Phillips, a cardiologist and chief medical office of Duke Heart Network who’s been a champion behind the Duke LifePoint venture.

Community hospitals are vitally important. And while it might sound grandiose, Duke believed it could play a role in ensuring high-quality healthcare is accessible at the community level around the state, Phillips said.

But Duke was missing a key part of the equation — one that LifePoint, on the other hand, could bring to the table.

“It was a goal for both of us to combine the expertise of Duke around developing clinical and quality programs with the expertise and proven track record of LifePoint on operating and managing community hospitals,” Phillips said.

The name “Duke” clearly gives LifePoint instant medical esteem and name recognition, particularly in North Carolina and the Southeast. But Duke only has a 3 percent ownership stake in the joint venture, and LifePoint is the clear managing partner.

Carpenter disputed the notion that the Duke name is merely window-dressing, however.

“Duke would have not have put its name on a partnership if it were not actively involved,” Carpenter said.

Phillips agreed.

“From the perspective of a not-for-profit academic health center, Duke is very comfortable with our for-profit partner LifePoint,” Phillips said, citing LifePoint’s unwavering committed to high-quality care.

Still, LifePoint acknowledged in its annual shareholder report last year that it benefits from “the prestige and reputation for excellence associated with the Duke brand.”

The 2012 shareholder report praised the new joint venture with Duke as “an engine that helps propel our acquisition strategy.”

Meanwhile, Duke Medical Center has a tangible interest in the venture with LifePoint as well.

“Duke, which serves as the clinical hub of the network, has benefited by expanding its referral base throughout North Carolina and Virginia,” according to LifePoint’s 2012 shareholder report.

But LifePoint also touted the partnership’s loftier goal.

“It has become a national model for transforming the delivery of care,” according to Carpenter’s opening message in last year’s annual shareholder report. “It is a model that will become increasingly important and valuable given the focus of healthcare reform to improve the quality and reduce the cost of the delivery of care.”

Duke LifePoint’s has four hospitals operated under the partnership. In North Carolina, there’s Maria Parham Medical Center in Henderson in Vance County and Person Memorial Hospital in Roxboro, plus Twin County Regional Healthcare in Galax, Va., and Marquette General Health System in Michigan.

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