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1996-05-16 Work Session NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 373 ASSEMBLY The New Hanover County Board of Commissioners held a Work Session on Thursday, May 16, 1996, at 10:15 A.M. in the Conference Room of the New Hanover County Administration Building, 320 Chestnut Street, Wilmington, North Carolina. Members present were: Commissioners Sandra Barone; William A. Caster; William E. Sisson, Jr.; Vice-Chairman E. L. Mathews, Jr.; Chairman Robert G. Greer; County Manager, Allen O'Neal; County Attorney, Wanda M. Copley; and Deputy Clerk to the Board, Teresa P. Elmore. Chairman Greer called the meeting to order and reported the purpose of the Work Session was to hear a presentation on the Revenue Bond Financing Project for New Hanover Regional Medical Center. Mr. Jim Hobbs, President of New Hanover Regional Medical Center, presented an update on the Master Space and Site Plan, which was developed to insure a well-designed and well-developed building program for the Medical Center. He explained the commitments of the Hospital Board were to continue to address the quality and access concerns of the Medical Center and development of the Cancer Center. He stressed the importance of remaining as the leading provider of health care in this community and region of the state by maintaining and enhancing their financial strengths. The Medical Center will need to continue reducing cost in an efficient and methodical way and improving the health status of the community as assessed in the recent regional health assessment survey. Mr. Hobbs updated the Commissioners on the Master Space and Site Plan. The concept of using revenue bond financing for Phase II of the project was approved by the Commissioners in January 1995. The Coastal Rehabilitation Hospital, which was part of the 1993 Revenue Bond Issue, was opened in September 1994. It has surpassed all budget projections for service volumes by serving citizens from every county in Southeastern North Carolina. The parking deck project, also a part of the 1993 Bond Issue, was completed at the same time. The utilities upgrade for Phase I will be completed within the next 3-5 months. The proposed revenue bond financing project consists of: Asbestos Removal of Kitchen Area $1,650,000 Asbestos Removal of Other Renovated Areas 350,000 Phase II of the Master Space and Site Plan 49,000,000 East Parking Lot 1,160,000 Cardiac Surgery Recovery Care Unit 3,000,000 Utilities Upgrade 2,900,000 The total cost of these improvements is estimated at $58 million. The Cancer Center is proposed to meet the growing demand for cancer medical services and to improve the Medical Center's marketing position. This community and region have higher incidents of cancer than other parts of the state and nation; yet local citizens are leaving the community to seek medical services at other hospitals. Currently, radiation therapy treatment for cancer patients is provided at an off-site location, which requires the cancer patient to be driven by medical transport ambulance to the out-patient center. The Cancer Center will provide easily assessable medical treatment to both in-patient and out-patient clients. It will restore radiation therapy at NHRMC and allow other methods of cancer care through the clinical trials program. NHRMC is affiliated with UNC Chapel Hill's cancer clinical trials program and will become a part of protocol therapy provided at Duke and other major research centers with the development of the Cancer NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 374 Center. The second major component of the project is the Pediatrics Unit. The plan allows the vacant space on the tenth floor of the Medical Center for a modern, efficient, and flexible space to accommodate the pediatric population. Cardiac Surgery Recovery Unit expansion is needed for the rapidly growing program of more than 600 cardiac surgical procedures per year. The plan consolidates the functions, which are currently on two floors, into a single unit that is easily accessible from the operating rooms. It will eliminate duplications of services and staffing requirements. The Master Space and Site Plan doubles the size of the Emergency Department and improves the hospital's ability to handle and deliver trauma care. It will separate the true emergency care trauma patient or the urgently ill patient from the minor illness type clinic patient. The Emergency Department receives fifty percent of the hospital's admissions. The Out-Patient Clinics of obstetrics-gynecology, surgery, and medicine, as well as thirty-two specialty clinics, handle 45,000 patients per year. The current clinics, staffed by the physicians of the community and Chapel Hill, have poor patient flow and significant overcrowding. The clinic will be located on the first level of the new south building and will provide a more cost effective way of treating the clinic population. The Laboratory is another major component of the project. The functions of the lab will be consolidated onto one floor. New technology will provide a more efficient and flexible environment, while improving turn-around times of reporting results. The front entrance will be modified to make a new front access to the Medical Center. The major corridor, designed in 1966 for a 300-bed community hospital, handles traffic of medical staff, patients, visitors, and movement of supplies for a 628-bed hospital. Mr. Ron Smidt, Director of Facility Services, presented the architectural plans of the project showing the new construction and renovation areas. The project will address ADA issues dealing with the accessibility of the facility. The proposed front concourse will allow handicapped individuals to access the Medical Center from grade parking and have complete access to the facility. The lower level corridor will free some of the congestion of the first floor. The south entrance will align with the critical care units of the hospital and the north entrance will be primarily used for admissions and discharges of patients. These access routes will segregate the patient population to allow more privacy for the patients. The Cancer Center will have its own separate entrance. Ms. Susan Devore, a partner of Ernst and Young, presented an overview of the financial feasibility study for the construction and renovation projects based on payment of revenue bonds from the revenues of the Medical Center. Financial and operational concerns for the public hospital are providing for higher indigent care, no- pay charity care, and the medicare populations while competing with Columbia, the new for-profit hospital chain at Cape Fear Hospital. NHRMC can continue to provide the fullest continuum of care, but will have pressure on pricing to get the patient released from the hospital with the least cost. NHRMC provides acute care services for the surrounding seven counties and primary services for Pender, Brunswick and New Hanover Counties. Currently, the hospital facility handles 80% of the market share in New Hanover County and 60% of the market share in the primary service area counties. Columbia's acquisition of Cape NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 375 Fear may result in some loss of the market share as Columbia aggressively pursues the market. Ms. Devore reported there has been significant growth in managed care and HMOs into the market place. Although there are only two HMOs in the area, twenty-six HMOs are licensed in North Carolina and twelve more are anticipated. Major competition among the managed care companies will develop networks of hospitals and will impose aggressive pricing. The medical staff, composed of three hundred physicians, has a very strong mix of services. Significant growth in medical staff will drive the utilization of the hospital and the ability to cover the fixed cost of the facilities. Discharge use rates will decrease from six days to 5.6 days because managed care providers will force hospitals to shorten the lengths of stay. Contractual agreements will be a major risk point for public hospitals because of being dependent on medicare and medicaid and having a heavy indigent population. With the Medicare Preservation Act, the Medical Center will give increasing discounts to manage care companies in order to compete for that business. The introduction of Columbia into the market place will probably cause managed care contracting to be more competitive. The recent operational assessment of the Medical Center placed staffing ratio levels at 5.3. With the proposed initiatives, the 1998 level is projected to be 4.9 FTEs per adjusted occupied bed (AOB). Columbia's hospitals tend to run more efficiently at the 3.5 to 3.1 range. The hospital will need to change their delivery of patient care to be more cost effective and efficient as opposed to cutting every department by 10% or such similar techniques. Commissioner Sisson objected to changing the delivery of service by sacrificing quality of care. He had heard that Columbia cross-trains their housekeeping staff to draw blood from patients, which as a health care professional, he found totally unacceptable. Ms. Devore surmised the Medical Center has a mission to serve the indigent and to provide care as effectively as possible, while a proprietary chain or private hospital does not have the same goal. The 3.1 level of FTEs per AOBs would place any hospital at risk for the delivery of quality care. In order to survive in the industry, NHRMC will need to continue to improve its operational efficiency while investing in the facility. The historical and projected income statements show strong operating margins, which indicate a good revenue source. The balance sheet position is very strong in growth and in Board designated assets, which means there is a good safety net for the future. The Board of Trustee's goal is to maintain at least the A+ S&P rating. Cash reserves will need to be increased in order to better position themselves for the future. Debt levels are within normal ranges and the hospital is able to handle existing and proposed debts. A strong operating margin will be needed by 1997- 98, in anticipation of paying for the bonds beginning in 1999. Commissioner Sisson asked if the development of the Northside Community Health Center will decrease the number of patients having to use the expensive care of the Emergency Department at the Medical Center. Mr. Hobbs replied that the Community Health Center will effect the usage of the Emergency Department, which will also result in a reduction of in-patient use at the Medical Center. The operation has already given some primary care access to that basic population. The health center will promote a healthier population in that area and also reduce the long-term cost of those operations at the Medical Center. NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 376 Ms. Devore stated NHRMC is providing 6.5% of its revenue stream for charity care and bad debt; however, one outside clinic cannot absorb the magnitude of the indigent care. Chairman Greer asked how the Medical Center will increase revenues if managed care companies will be paying less for services. Ms. Devore explained as the intensity of services increase due to severity of illnesses in the hospital, the revenues will need to be offset by increasing prices and out-patient volumes. Chairman Greer asked if the salary reductions will be in place by 1998. Ms. Devore replied the proposed initiatives will have begun, but the Medical Center will need to continue implementing staff reductions and other operation assessments to remain competitive with comparable FTE levels in the industry. Commissioner Sisson reflected the Medical Center will need to balance high tech employment with a reduction in the lower tech jobs in order to offset the high cost of highly trained personnel. Ms. Devore explained although technology is expensive, the renovation and building project will be a more efficient operation with a better flow of patients and work. The Board of Trustees will need to remain committed to maintaining financial accountability by sustaining their operating, liability and cash reserves and focusing on cost reductions. Vice-Chairman Mathews asked why the incidents of cancer were higher in Southeastern North Carolina than in other parts of the state and country. Mr. Hobbs reported the Regional Health Assessment Survey recently completed by New Hanover Regional Medical Center, Cape Fear Memorial Hospital, and Coastal Carolina Alliance determined that the lifestyles of people in the area attributed to higher incidents of cancer. Some factors include: more sun exposure, which is a leading cause of skin cancer, and more people who smoke cigarettes. Since the State is a leading producer of agricultural products, there is a higher intake of pork and beef products. In the surrounding rural areas, there is less access to medical care. In addition to cancer, there are high incidents of diabetes and cardiovascular disorders, which are also associated with lifestyle issues of diet and access to medical care. One of the goals of the Cancer Center will be to educate the younger generations on how to have a healthy lifestyle. Mr. David Ertel, of Painewebber, the underwriter of the 1993 Hospital Bond Issue and the lead underwriter for the proposed 1996 Bond Issue, reported market conditions are good for lower interest rates at the present time. Another client, Stanley Memorial Hospital, recently received the low bond rate of 5.85% on a 30-year maturity bond, which is comparable to the rate New Hanover Regional Medical Center received on the 1993 Bond Issue. At this time, the upside risk of increased rates is much greater than the opportunity for decreased rates. Mr. Ertel explained the Medical Center will want to use municipal bond insurance to access the market place. A premium is paid to a municipal bond insurer, which will add credit enhancements to the hospital's underlying credit and receive the AAA rating by both Moody's Investors Service and the Standard's and Poor. The hospital bond will entice institutional and individual investors with the AAA rated product, which is the same credit risk as a U.S. Treasury Security. The Medical Center will be able to get the lowest cost of capital in the market place for payment of NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 377 the premium. In further discussion, Mr. Ertel explained that the hospital is financially strong enough on its own to get a good bond rating; however, the bond insurance market is very competitive. The hospital has a very strong A+ credit rating. Many individual investors in North Carolina find this type of bond attractive because of the state tax exemption; and they are more comfortable buying a AAA rated security even with unknown changes developing in health care. If it is not economically feasible, the underwriters will not insure the bond. Mr. Dumay Gorham, the Medical Center's attorney, reported the bond counsel is requiring some technical amendments to the existing lease agreement between the County and the Medical Center. The five-year lease agreement must include both the 1993 and 1996 Bond Issues; and it must be effective on the closing date of the sale for the 1996 Bond Issue. In discussion of the time schedule, Mr. Hobbs stated that two certificate of needs have been approved by the State Department of Human Resources, Division of Facility Services for the proposed Cancer Center and one for the remaining portion of the project. It is anticipated the project will move forward with approval and sale of bonds by the Local Government Commission during the month of June. Mr. Bill Mead, partner with Shepley, Bulfinch, Richardson and Abbott, architects of the project, reported there are alternate plans in the project in case the bids come in larger than anticipated. A 12% contingency is allocated in anticipation of needing some flexibility in the renovation and construction of the project. The project is complex because of the phasing aspect. Commissioner Barone asked how the hospital will serve the public during construction and renovation of the project. Mr. Mead responded the project is phased specifically to accommodate the public. The center portion (the main entrance) will stay open as the project begins; visitors or patients will not be impeded from getting into the hospital. Construction of the new facilities will occur in a manner that will allow people to funnel between the construction sites. After twelve months, the north entrance will become the main entrance into the hospital and the center section and the southern entrance will be under construction. Commissioner Barone asked if the construction work will effect the number of patients the hospital will be able to handle. Mr. Mead answered his experiences in the past have been with more complex projects, and he felt this project could be accomplished very smoothly. Commissioner Barone asked if releasing information on insurance contracts with the managed care companies would place the Medical Center at a competitive disadvantage. Ms. Devore replied the Medical Center will have to deal with meeting competition whether or not the information is public; however, it will be a disadvantage when information is released while negotiations are occurring. NHRMC is at a strategic advantage because of offering a full continuum of medical care and services, whereas other community hospitals do not offer the same type care. Commissioner Barone asked if the private-not-for-profit concept was considered to allow better competition for the hospital. NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 378 Ms. Devore explained it would be a very strategic advantage for the hospital to be a private-not-for-profit hospital; however, it has not restricted the public hospital because of the lower level of competition in the region. The public debate of hospital issues concerning costs, staffing levels, technology, and service lines can delay the hospital's ability to act promptly. The public bid process, the limitation on investment income, and the types of securities allowed for investments are strategic initiatives that can be impacted by timing. The private-not-for-profit concept would be more flexible for the Medical Center and it has been recommended for the past six years. Chairman Greer asked if the bid process could effect the schedule for the sale of the bonds. He expressed concern that high bids could delay the selling of the bonds. Mr. Hobbs responded the Medical Center is expecting to receive bids for the Emergency Department, Pediatrics, and the concourse in front of the hospital by the end of May and first of June. The only bids that have not gone out are for the CSRUD portion of the project, which is estimated to be about $3 million. Ms. Devore stated the bids will be reviewed in May to prepare for construction pricing and bond sizing. If the bids come in too high, Ernst and Young will review the bids to determine the effects on the financial feasibility of the project. Mr. Ertel explained the Local Government Commission will review the results of the bidding before approving the project. Furthermore, Painewebber and Ernst and Young will not present their final documents of disclosure statements and prospectus before all their concerns are addressed. Mr. Hobbs commented there will be a higher percentage of bids assigned prior to review by the Local Government Commission than in 1993. Currently, the Medical Center does not have an equity contribution into the project, which will allow some flexibility before recommending cutting back on the project. Chairman Greer questioned why almost three million dollars was needed for the utilities project since it was covered in the 1993 Bond Issue. Mr. Hobbs replied the first bond issue covered only a portion of the utilities package because the design had not been completed for the full scope of the project. Chairman Greer asked if doubling the size of the Emergency Department would encourage more use while making it less cost effective. Mr. Hobbs replied the expansion will enable the Emergency Department to handle the current demand in a more efficient way as well as keep up with the growth of the community. In the operation assessment, the major cause of problems in the Emergency Department was not medical staffing, but being able to move patients through the physical space in an efficient manner. Commissioner Sisson commented the Board of Trustees was restructured in 1993 because of leverage the Commissioners had with the bond issue and the need for a revised lease. There have been recent public concerns about the decisions made by the hospital board in regards to Mr. Hobb's salary increase and personal matters. The Commissioners need to reiterate to all members of boards appointed by the Commissioners of the need to understand that their decisions and responsibilities are somewhat political in nature. The need for the new bond issue and amended lease agreement has given the Commissioners an opportunity to resolve some potential problems with the Board of Trustees. As with a NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 25 WORK SESSION, MAY 16, 1996PAGE 379 performance base contract, the Commissioners need a commitment from the Board of Trustees that they will work to resolve some of the concerns. The two boards need to have a good understanding of each other's functions and objectives for the public hospital. The bond issue can be a viable means to ensure that those discussions occur; however, he did not want to inhibit the bond process. Chairman Greer expressed concern that it may be detrimental to the bond process to hold up the lease to resolve these concerns with the Board of Trustees. Mr. Jim Lapenn, the New York bond counsel, would not have required the amendments to the lease if the changes were not an important part to the bond process. Mr. Gorham replied that Commissioner Sisson's concerns were more about relationships than of legal requirements. Mr. Lapenn directed that these changes must be included in the lease in order for the bond issue to go forward. The discussions regarding the composition of the Board of Trustees delayed the 1993 Bond Issue by four or five months. At that time, the concerns of the Commissioners were addressed, which resulted in changes in the by- laws and lease agreement. Chairman Greer suggested Commissioner Sisson and another Commissioner meet with some of the Trustees to discuss his concerns. Commissioner Sisson agreed that Commissioner Caster could join him in these discussions since he was the Commissioners' representative on the Board of Trustees. Commissioner Caster invited the Commissioners to meet with Trustee members whenever they had concerns with the operations of the Medical Center. However, he urged the Board not to renegotiate or make any major changes in the lease which would threaten or hold up the revenue bond. Chairman Greer complimented the Board of Trustees for keeping him abreast of hospital issues and he felt confident that the Trustees would address any concerns the Commissioners may have. Mr. Hobbs expressed appreciation for the opportunity to present the hospital's proposal and requested the Board to approve the $66 million revenue bond issue and the amended lease agreement as recommended by the Hospital Board of Trustees. He reported the Chairman of the Board of Trustees, Dr. Bert Williams, was unable to attend the meeting because of vacationing out of the country. ADJOURNMENT Chairman Greer expressed appreciation to Mr. Hobbs and the consultants for an excellent presentation on the Medical Center's bond proposal. The Board will consider the request at the May 20, 1996 Board of Commissioners Meeting. He adjourned the meeting at 12:30 P.M. Respectfully submitted, Teresa P. Elmore Deputy Clerk to the Board