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1981-06-08 Cont Mtg Exhibits ~ /li.]!llIJ p:,r~ (!(!. !JJ-c- ---r~ ~~9'~/ I am F. P. Fensel, Chairman of the New Hanover Memorial Hospital Board of Trustees. It is our understanding that the County Commission is' inte:rested in the Hospital paying to the County an amount of money equal to the bond indebtedness of the County on bonds related to the construction and d" expansion of New Hanover Memorial Hospital. This would be over . ~ , $1,100,600. for one year. Although the county is responsible for the payments on the bonds, the County would use Hospital funds for other County purposes. Let me say here that our depreciation funds are put there for a purpose: to meet the future needs of the hospital for equipment and facilities. There is no "surplus". - Hospital legal counsel te~ls us that it would be illegal for the Hospital to make such a gift to the county; and for this reason, we cannot give consideration to the request. The commission seem~ to feel that New Hanover Memorial Hospital has surplus funds in the depreciation account which we can give away to the County. We would be most happy to sit down with you or your agent to examine the facts about the depreciation account. I am going tq ask our Treasurer, Mr. Hunter, to further explain the purpose of the depreciation fund. We received from you a'letter dated May 20, 1981, requesting that the Board of Trus'tees' o'f the Hospital not enter into any contracts with any persons for anything past the term of the lease between the ... ~ ",., ' ~ '.. County and the Hospital which expires irJ. June, ,of ~ i9 82'. Respectfully, , , we would like to ask what is your purpos~ in writing this letter to us? .,.; "'. t .~ s: , Coopers & Lybrand ce'rt~ied public aCXXluntants 1920 Flfsl Union Piaza Charlotte. North Cart\hna 28282 In principal areas of the world telephone (704) 375-8414 Resident Partners R. Stanley Vaughan LBrry M. Caldwell George W. Rohe Robert G. Sanford June 1, 1981 Mr., F. P. Fensel, Sr., Chairman New Hanover Memorial Hospital, I~c. 2431 South 17th Street ':, Wilmington, N. C. 28401 Dear Mr.'Ff?nsel: , "This is in respons.e to the inquiry concerning the hospitall{'funded depreciation reserve. As stated in Medicare guidelines (Provider Reimburse- ment Manual, HIM-IS, Section 226), "funding of depreciation is th~ practice of setting aside cash or other liquid assets, in a fund separate from the general funds of the provider to be used for replacement' of the ,assets depreciated, or for other capital purposes. The deposits ..to the fund are generally ,in' an am<;:mnt equal to the depreciation expense charged into costs each year, and are in effect made from the cash generated in excess of cash e~enses by: the non-cash, expense depreciation". The'funding of depreciation is not required, but the Medicare program strongly recommends it as a means of conserving funds for replacement of depreciable assets. The Medicare program has established incentives to encourage the funding of deprecia- tion. To benefit from these Medicare incentives, the ,funded , depreciation funds must be used'for the replacernent of the assets depreciated, 'or for other capital purposes related to the delivery of patient care. Beyond the Medicare incentives, the funding of deprecia- tion is a sound business decision. ' With the ever increasing cost of capital assets, due not only to'inflation but also obsoles- cence and technological advances, it is increasingly difficult to respond to the ever expanding need for new and replacement assets, without the availability of funded depreciation. In an economy with double dig?-t interest rates, the savings in reduced interest costs 'aqcruing:to the hospital from. the availability of funded depreciation funds can be substantial. In addition, the budget reductions proposed by the Reagan Administration and other regulatory and legislative changes affecting ~e Medicare and Medicaid programs. will make it more difficult to fund deprecia- tion at present levels. 7; -,....., '" " .; P! .' Mr. F. P. Fensel, Sr. -2- June 1, 1981 ; It would be'difficult to specify the most appropriate level of funding of depreciation. To be fully funded for Medicare, the ba1ance'in t~e funded dep~eciation accoUnt would equal total , accumulates depreciation. , ,Your funded depreciation balance at '. ' September 30;, ,1980 was :'$3;676,945 compared to accumulated depreci'- a'tion of,$7,618,490 (approximately $2,900,000 for equipment). . . Even if your account '-1ere fully funded by the Medicare defini ti011, it ,would still not be adequate to totally cover future capital needs due to the increasing cost~of new, and replacement assets. .This can be illustrated with an example. An asset is purchased in- 1980 for $100,000 with an estimated useful life of 10 years. If inflation is estimated at 10 p~rcent,per year, it would cost approximately $260,000 to replace this same asset. This does not consider increases in cost associated with obsolescence or tech- nological' ~dvances. A" . ~ Over the last five years, the balance in your funded depreciation account has risen from $2,570,000 to $3,676,945 (a cOl!lPounded annual rate, of approximately 7.5 percent). In addition, for this same period, of time, depreciation expense has been less than expenditures for capital assets. ive understand YOll have projected capital, expenditures for the next two years to be approximately $3,600,000. Although it would be difficult to determine the most appropriate level of funding, it would certainly appear that your present level is not excessive. If you have any questions, or if you would like to discuss 1;-his further, please let us know. Very truly yours, ~'v- ..' ~, .. . Mr. Hunter: NHMH Board Treasurer We understand that you have been informed that the hospital has a 3.5 million dollar surplus in depreciation funds. To label these !unds "surp1us" is totally incorrect and in support of the facts, we submit herewith a letter from Coopers and Lybrand, a nationally prominent auditing firm. In short, the funds referred f ~ to are depreciation funds accumulated by New Hanover Memorial Hospital from patient revenues. The purpose of the fund is to permit the scheduled replacement of hospital equipment and the purchase of new equipment and facilities. The replacement of worn out and obsolete equipment and the acquisition of new tech- nology at higher and higher costs each year are necessary in order to maintain a modern health care institution. The Coopers and Lybrand letter indicates that our depreciation funds for this purpose do not represent a surplus in view of purchases made ln the past years and in view of anticipated needs in the years immediately ahead. In the next three years, we face requests for nearly $8,000,000 in new and replacement equipment, in new tech- nology as well as repairs to facilities. It is imperative that we spend at least $4,000,000 in the next three years just to main- tain our current position. Looking to the next two or three years, we expect the computerized tomography unit to be replaced at a cost of $950,000, the roof of the base of the hospital must be replaced soon for approximately $160,000, ten anesthesia gas machines will require replacement at $10,000 each, the original boiler will have to be retubed at a cost of $75,000, several rooms of x-ray equipment are reaching the end of their useful lives and will cost between $250,000 and - 2 - $350,000 each to replace, some of the original mechanical equlp- ment built into the hospital will be replaced at a cost approach- 1ng $200,000, etc., etc. It is absolutely necessary that a viable hospital accumulate t ~ capital to meet the legitimate needs of the institution and the '" community. New Hanover Memorial Hospital contributed $3,000,000 to the recently completed expansion of the hospital. We recently completed a radiation therapy (or cancer treatment) center at a cost of over $I,OOO,OOO without outside contributions. Three years ago, we installed the latest in diagnostic technology by purchasing a computerized tomography unit at a cost of $566,000. Over the years, we have.purchased several hundred pieces of equip- ment to assure that our patients and physicians have the best in diagnostic and therapeutic equipment. The staff quarters building was constructed with hospital funds in the amount of $385,000 and the hospital, without New Hanover County participation, obtained $850,000 for the construction of the Cameron Education Center. All in all, New Hanover Memorial Hospital has expended $8,624,212 in capital expenditures and has obtained $3,813,000 in grants and gifts. It is noted that the radiation therapy building, the staff quarters building and the Cameron Education Center have become the property of the County of New Hanover without any costs to the County for their construction and maintenance. - 3 - It is my understanding that the citizens of the County have voted on two occasions to tax themselves to pay for bonds associated with hQspital construction in the mid 1960's and hospital expansio: in the 1970's. Thus, from the beginning, the County retained for itself responsibility for the debt service on the bonds. f On the other hand, however, the County gave the responsibility for fundin '" health care for the medically indigent patients totally to the hospital. We have never asked the County to assist in the cost of providing this care. It has been shouldered by our paYlng patient: Free care provided by the hospital, including Hill-Burton Uncom- pen sated Care, bad debts and charity amounted to $3,562,000 last year. Since the Medicare and Medicaid programs will not partici- pate in the cost of this care, all of this burden is currently placed upon our patients who have Blue Cross, commercial insurance or who have to pay cash. This results in approximately 53% of our patients carrying the entire charity load of the hospital. This translates into the equivalent of $298 per patient stay or approximately 20% of the patient's hospital bill. Should hospital depreciation funds be turned over to the County, as requested, the only way to replace these funds (for purposes previously stated) is to raise more money from the 53% of our patients. We believe this would be quite unfair and that it would cause a substantial reaction from the public as well as the industries and businesses that pay health care insurance premiums for their employees. .. , ." '" 4 - New Hanover Memorial Hospital is financially sound but by no means is it fat. Obviously, we are uneasy about the future since it lS apparent that current congressional acti.on will reduce support for federal health care programs. We expect a substantial increase ln the free care that must be financed by t the hospital. Alsor we are C'oncerned that inflation continues to drive up the cost of health care. It is important that we pay reasonable salaries to our dedicated employees and give them the ap~ropriate supplies and tools with which to provide excellent patient care. I hope this statement will enable the County Conunissioners to understand why the transfer of patient care revenues from the hospital to the County is not in the best interest of the public. The County is obligated to pay the construction bonds, and the hospital is obligated to finance, through patient revenues, care for the poor and the replacement of equipment and the acquisition of new technology. If hospital funds are transferred to the County, they will be used for nonhospital purposes and this is an inappropriate use of funds received from patients. , gr. Kingoff: In a separate action, the County Commission recently dispatched Vice chairman of NHMH Board to us a letter via Dr. Armistead requesting that the Trustees sign po contracts that would obligate the hospital to anything past the renewal date of our lease with the County. Obviously, this could be viewed as a threat not to renew the five-year , lease, as ha.s been done in'the past, as pressure upon the present '" hospital Board to force compliance to use over a million dollars of patient revenues for nonhospital purposes. There is one other happening which ties all this together. Some weeks ago, some New Hanover County Commissioners held a meeting out of town with senior officials of American Medical Interna.tional--otherwise known as A.M. I. The apparent purpose of the meeting was to investigate the possibilities of contractin with A.M.I. (instead of the Board of Trustees) for operating New Hanover Memorial Hospital. There is an apparent connection between the conversations with A.M.I. and the previously describe letter to the hospital requesting no contracts be entered into by the hospital beyond the lease termination date. If the County Commission has been thinking about turning over the control of the hospital to a for-profit corporation, there must be reasons for these considerations. One would expect that in a good spirit of cooperation, the Commissioners would have found it appropriate to share with the Board of Trustees their reasons and their objectives in thinking about a transfer of hospital control. Now, why would the County Commission be interested In A.M.l. - 2 - or any other for-profit hospital management firm? A.M.l., in offering to purchase or lease New Hanover Memorial Hospital, would provide funds to the County. This might look good until the public realizes the nature of an A.M.l. operation as com- pared to our present operation. '" There are several indications of hospital performance that are generally accepted and widely used. The most recent Duke Endowment Survey of 16 large hospitals having more than 400 beds in North and South Carolina indicates that New Hanover Memorial Hospital: .has the fifth highest occupancy rate. The higher the rate of occupancy the more efficient the operation. New Hanover Memorial Hospital averaged 86.3% occupancy. Average occupancy of A.M.l. hospitals was only 60.6% last fiscal year. .has the fifth lowest cost per patient stay and the fifth lowest charges per patient stay and .has the third highest nursing manhours per patient day indicating a high intensity of nursing care provided New Hanover Memorial Hospital patients. The most recent Monitrend Report comparing New Hanover Memorial Hospital to 175 hospitals across the nation of 400 beds and larger indicates that: .the typical New Hanover Memorial Hospital patient stay is IO% less or almost one day less than the national average. - 3 - .charges to New Hanover Memorial Hospital patients are $73 per day less or 23% less than the national average. Mr. George Hider, Vice President in charge of group claims of Pilot Life Insurance Company, stated itA for-profit hospital , is going to make sure it's going to get its profit and that . ~ \ is going to make its rates higher." .Hospita1 expenses at New Hanover Memorial Hospital are $59 per day less or 22% less than the national average. .As a result of the shorter average length of stay and lower daily charges, the average New Hanover Memorial Hospital patient pays $767 per hospitalization less than the national average. All of the above are indicators of the efficiency of operation of New Hanover Memorial Hospital and the resulting savings realized by NHMH patients. If you take a hospital such as New Hanover Memorial Hospital that is already efficiently operated and you wish to turn out profits for som~ external purpose such as paying stockholders or paying to the County, it is inevitable that one of three things must happen. Either the quality of the operation goes down or the services which are not profitable are eliminated or charges to the patients are increased. American Medical International has experience in these options. Maurice Lewitt, Chairman of Hyatt Medical Management Services, a subsidiary of American Medical ,International, told a meeting - 4 - of security analysts in April, 1981, that Hyatt is seeking contracts with big hospitals "that can afford to pay" the firm'..s fees. Charles Reilly, a vice president of American Medical, Inter- national, in a recent article in Modern Healthcare magazine said 614 hospitals are potential acquisitions for A.M.I. His company, he said, wa~ not interested in 1,000 very small hosp,i'tals nor another 2,000 that are in depressed or no-growth areas. As Mr. Lewitt noted above, A.M.I. is in~erested in acquiring large hospitals who can afford to pay A.M.l.'s price. Interesting"iif A. M. I. were to purchase New Hanover Memorial Hospital, our hospital would be the largest owned hospital in A.Iv1.I. Their most recent annual report stated that A.M.I. 's largest owned hospital was 412 beds--50 beds smaller than NHMH. Also, Hyatt manages 34 hospitals averaging only 248 beds in size. American Medical International and Hyatt began managlng Chicago's Cook County Hospital last year. Seven months after they took over, A.M.I. announced that the hospital would no longer accept indigent patients for abortions. One year after taking over, A.M.I. announced 50% rate increases from $4l5 per day up to $630 per day. Special care rates at Cook County were raised by A.M.I. up to $1500 per day. When a for-profit corporation takes over control of an efficient, well run hospital, the public is bound to react negatively since ." ':, - 5 - it is inevitable that the cost of hospital care will r1se 1n order to generate the profits necessary to pay to the corporation stockholders and to the County. The public should also realize that the for-profit corporation , has little interest in keepJing older, long-term employees or in purchasing supplies and services from local firms, or ln ma1n- taining hospital services that are not profitable, or in pro- viding comprehensive clinics and services for those who are less able to pay. ,T-he p.u:lA=l,--_~~~.1~-"2'~f we ~0r Ff-it ~~.-illLc: iRWLe::.L ;~J~lle ,~l .'34.L~ tft.R~~!iii'''m~s-ez:e-f- ~-l;;'piL~l Lv ..Lcw....J..cu;:,"" Lu~hJe~::. awl Ll~ .in~p~r~t3 . For-profit corporations like American Medical International with large amounts of capital could serve a purpose ln replacing an old worn-out hospital or stabilizing a weak, inadequately managed and underfinanced operation. In fact, Maurice Lewitt stated that lack of capital and financial problems are among the primary reasons boards of trustees hire contract management companies to run their institutions. Why then, in light of clear evidence of sound management and adequate capital, are you interested 1n proprietary management firms? \. .:. ,: '.I' Mr. Fensel: Chairman, NHMH Board of Trustees . ~ \ CONCLUSION New Hanover Memorial Hospital lS a true regional referral center serving patients in a 50-mile radius of Wilmington. It is this that has 'enabled New Hanover County citizens to have immediately available to them the modern and comprehensive health care , services that are not ordinarily found in a county hospital. There are savings to New Hanover County citizens who do not have to travel hundreds of miles for specialty examinations and treat- ments. Some citizens receive services that otherwise they would not if they had to go to other medical centers. It is the regional nature of NHMH which has attracted such a magnificent array of medical specialists. Contributing to the hospital's success is the way that it is organized. The Board of Trustees are appointed by the County Cop.~ission. Board members serve staggered five-year terms and cannot be reappointed to succeed themselves. The Board has representation from all parts of the community--Iocal folks being responsible for their own hospital. There is considerable and welcomed input from the citizens. It is an excellent com- bination of checks and balances which would be totally lost to the cOffi.rnunity if hospital control were to pass to a for-profit corporation. It is inconceivable that County Commissioners would consider changing the winning combination that you now have. Turning control of this institution over to a for~profit company is like turning it into a money-making machine for extracting ~ .L~ ~ - 2 - additional funds from the sick public to pay corporate profits and to furnish money for other public projects. If you continue to think in this direction, the beauty of what you have will surely fade and health care services will be oriented more in the direction of those that can afford to pay for it. I think it f would be a terrible mistake. '" It is fortunate that New Hanover Memorial Hospital by charter was established as a nonprofit corporation. As such, every dime of income is devoted to health care and according to our fiduciary responsibility, it must remain this way. Its future is secure through well planned financing. The objectives of the hospital include the provision of quality health care services for all citizens. It is an objective to provide whatever services are truly needed by the patients without primary regard as to the profitability of such services. For the reasons given heretofore, the Board of Trustees of New Hanover Memorial Hospital respectfully requests that the County Commission not pursue patient care revenues for use by the County treasury. We respectfully request that the County Commission no longer pursue the false notion that shifting control of the hospital to a for-profit corporation would be in the interest of the citizens of the County. Nld we further request at this time that the Commission agree to renewal of the existing lease agree- ment between New Hanover County and New Hanover Memorial Hospital. Thank you for allowing us this time. We will be glad to discuss with you any aspects of this presentation.