Loading...
HomeMy WebLinkAbout2020-01-23 PAG FinalPARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING ASSEMBLY PAGE 1 The Partnership Advisory Group met for a meeting on Thursday, January 23, 2020, at 5:30 p.m. in the Andre' Mallette Training Rooms at the New Hanover County Government Center, 230 Government Center Drive, Wilmington, North Carolina. Members present: Co -Chair Barbara Biehner; Co -Chair Spence Broadhurst; Vice Co -Chair Bill Cameron; Vice Co -Chair Dr. Joseph Pino; Members: Dr. Virginia Adams; Chris Coudriet; Cedric Dickerson; Brian Eckel; Jack Fuller; Hannah Gage; John Gizdic; Dr. Sandra Hall; Meade Horton Van Pelt; Tony McGhee; Dr. Michael Papagikos; Dr. Mary Rudyk; Dr. Rob Shakar; Jason Thompson. Members participating via telephone: Evelyn Bryant. Members absent: Robert Campbell and David Williams. Staff present: County Attorney Wanda Copley; Clerk to the Board Kymberleigh G. Crowell; Assistant County Manager Tufanna Bradley; Chief Financial Officer Lisa Wurtzbacher; Chief Communications Officer Jessica Loeper; Budget Officer Sheryl Kelly; New Hanover Regional Medical Center (NHRMC) Director of Marketing and Public Relations Carolyn Fisher; NHRMC Chief Legal Officer Lynn Gordon; NHRMC Chief Strategy Officer Kristy Hubard; NHRMC Media Relations Coordinator Julian March; NHRMC Executive Vice -President and Chief Financial Officer Ed 011ie; Joseph Kahn, Shareholder with Hall Render and outside counsel for NHRMC; Ryal W. Tayloe, Attorney with Ward and Smith and outside counsel for NHRMC; Bryan Burgett, Director with Navigant; and Eb LeMaster, Managing Director with Ponder & Company. Co -Chair Biehner called the meeting to order and thanked everyone for being present. APPROVAL OF MINUTES AND NEW PARTNERSHIP ADVISORY GROUP (PAG) MEMBER INTRODUCTION PAG Vice Co -Chair Pino MOVED, SECONDED by PAG Member Adams to approve the January 9, 2020 minutes as presented. Upon vote, the MOTION CARRIED UNANIMOUSLY. Co -Chair Biehner asked Vice Co -Chair Pino to introduce the new PAG member. Vice Co -Chair Pino introduced Dr. Robert Shakar and provided a brief overview of his experience within NHRMC and the community. REQUEST FOR PROPOSAL (RFP) NON -DISCLOSURE AGREEMENT LOG (SLIDE 5) Co -Chair Biehner stated when the responses are received it will take a couple of weeks to gather all the information as there will be discussions held with the respondents, primarily by the support staff, to make sure all questions are answered, and to work through what information the respondent has asked be redacted, etc. Co -Chair Biehner reiterated that the respondents have to decide what information will be confidential as it relates to their respective businesses. Co -Chair Biehner reviewed slide 5 of the PowerPoint presentation noting that the RFP went out to the entire distribution list as reviewed during the last meeting. Of the 28 that were sent the RFP, seven organizations have indicated a potential interest, five organizations have requested the non -disclosure agreement (NDA), and six organizations have executed the NDA. The NDA has to be signed in order to access the data room. In response to questions, Mr. Burgett stated that approximately five organizations have decided not to respond to the RFP. The organizations that decided not to respond are Mayo, Geisinger, Virginia Mason Medical Center, Haven Healthcare, and Carilion Clinic. The main "tell" that he would look for next is to see who starts asking questions. It will indicate who is definitely intending to respond. In response to questions, Mr. Kahn stated that the amount of time a respondent spends in the data room cannot be tracked. What can be tracked is how many times a respondent enters and leaves the data room and what files have been accessed. ROAD MAP TOWARD SORTING AND RANKING PROPOSALS - KEY PROPOSAL ELEMENTS DEVELOPMENT (SLIDE 6) Co -Chair Biehner reviewed slide 6 of the PowerPoint noting that the group will start looking at key proposal elements (KPEs) to guide and focus the entire evaluation process. This meeting will focus on governance and organizational models. In response to questions, she stated that if the group agrees to hold additional meetings or for items to be added to another agenda in order to cover areas that it deems needs to be reviewed, that can be done. NHRMC COUNTY OWNERSHIP AND CURRENT GOVERNANCE OVERVIEW (SLIDES 8 —11) NHRMC Chief Legal Officer Lynn Gordon provided an overview of slide 8 stating that the key item to know is that there is one corporation, NHRMC. Everything sits under that one corporation and it is county affiliated, public, and a 501(c)(3) which means NHRMC is a tax exempt non-profit. In terms of the structure, PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 2 everything sits under the hospital corporation. It is a little different than some of the models that will be reviewed because there has been more of an evolution from the NHRMC model. Member Gizdic stated the current structure has essentially been the same structure for the 52 years the organization has existed. County Attorney Wanda Copley provided an overview of slide 9 stating that NHRMC and all of its assets are owned by New Hanover County (County). The County has an operating lease with the hospital for it to operate the healthcare system. The County appoints Trustees and owns the hospital and the hospital's financials are part of the County's financial statements. The County has never put any tax dollars into NHRMC and borrows money on behalf of NHRMC for bonds. NHRMC does not sell bonds, but does pledge its revenue when the County borrows money on behalf of NHRMC so anything NHRMC purchases or builds will be paid for by NHRMC. In response to questions, Ms. Copley confirmed there are other things the hospital has acquired or built with cash on hand, such as the emergency department in the northern part of the County, that are considered to be assets owned by the County. The lease runs through October 2, 2047. In response to questions regarding Pender Memorial Hospital (PMH), Ms. Copley stated when NHRMC entered into a partnership with PMH a lease was executed. Member Gizdic stated that technically PMH is a Pender County owned asset. NHRMC entered into an operating lease with Pender County and PMH in 1999. It was a 20 -year lease with an expiration of last summer, but the lease was extended for two years to make sure NHRMC continued its relationship with Pender County and PMH throughout this process. Pender County technically still owns those assets with NHRMC having an operating lease to run PMH and make investments in the facility. In response to questions about the orthopedic hospital, Member Gizdic stated the facility is an asset that is part of NHRMC. It is owned by the County and has the same tax identification number and provider identification number with Medicare as the main campus on 17th Street. Medicare considers it to be one license even though it is in two locations versus PMH being a separate facility and has a separate provider identification number with Medicare, etc. In response to questions regarding bond issuance, Member Gizdic stated while the bonds are issued by the County, the collateral is NHRMC pledging its revenues. All of NHRMC's business gets pledged to the County to cover the bonds. Ms. Copley stated whatever financing the County does on behalf of NHRMC, NHRMC pays for all of the financing and bonds themselves that are in the County's name. She also confirmed that if NHRMC is unable to make the payments, the County is responsible to make the payments. Member Coudriet stated that while the County is the backstop, there is no obligation to pledge the full faith and credit of the County to raise the revenue via the ad valorem tax. Those are not pledged by bond or by the law to pay the debt. It would ultimately be a default in the name of the County. Ms. Copley stated that the County, being the issuer of the debt and the owner of hospital and the assets, would honor the debt. In response to questions about limitations on bond levels or borrowing specifically for NHRMC or the County, Member Coudriet confirmed there were in terms of general obligation bonds (GOs) and limited obligation bonds (LOBS) by statute allowance and what is allowed by the Local Government Commission (LGC). He thinks by state law, up to eight percent of the general value of the tax base can be issued. The LGC is going to set a much lower standard and debt cannot be issued without LGC approval. There is also the County's debt policy to preserve its triple A bond rating that has a maximum amount of debt that is based on the size of the general fund budget, debt per capita, and overall debt of 1.6% against the tax base. That is to keep the bond rating high and rates low. As it relates to the hospital, it gets its own rating as those bonds are rated differently and has its own covenants on debt. If the County began to pledge its own revenues and resources, which it is not doing, then it comes under the LGC framework for the County, the debt policy for the County, etc. Member Gizdic stated for NHRMC to maintain its current bond rating, there is currently approximately $365 million of debt on the books with a maximum of an additional $150 million debt capacity left. In response to questions, NHRMC Chief Financial Officer Ed 011ie stated that NHRMC has 245 days of cash on hand. The bond rating agencies want the hospital to have 324 days of cash on hand. In response to questions, Member Coudriet explained that the County does not use the hospital's bond rating. The County is triple A rated and NHRMC is rated A+/A1. The County borrows less money, but at a much better rate. The change in structure of NHRMC absolutely could have an effect on the County. If the County began to bring in and took away pledging the revenues of the hospital to satisfy the debt, then it would have an effect on the County's bond rating in negative way. It would lower the County's bond rating but may in turn elevate what has been historically known as the hospital's bond rating. Member Thompson explained that the LGC has oversight over county government and check balances, ratios, etc. In response to questions, Member Coudriet stated that if the County had to pay a deficit of $20 or $30 million it would have to be paid through property taxes. It is the only way for the County to generate that amount of cash investment. The County has approximately $80 to $90 million in cash on hand which is PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 3 approximately 18% of fund balance, but it would not be able to meet its obligations in deficiencies on the hospital with the amount of cash on hand. It would have to raise property taxes and the sensitivity analysis would come on the tax rate. As to if the County's bond rating would improve if it divested itself of the hospital, Member Coudriet stated the bond rating cannot get any better and is not a burden for the County. If the County had to pledge the revenues from the County or use the government center or courthouse as the collateral versus the revenues or assets of the hospital, the County's creditworthiness and bond rating would decline. Ms. Copley provided an overview of slide 10 stating the NHRMC Board of Trustees (BOT) has 17 members. Of the 17 members, 12 are appointed by the Commissioners and there are five ex -officio members. The Commissioners may only appoint residents of New Hanover County to serve on the BOT and there is no authority beyond the County borders to appoint out of county residents. Only the Commissioners can remove or replace a Trustee, there is no BOT discretion on it. If the BOT had an issue with someone for something such as non-attendance, conflict of interest, etc., the BOT would report back to the Commissioners and request that the Trustee be removed. It is ultimately the decision of the Commissioners to remove a Trustee. The County does look at what the needs are for the BOT. Member Thompson stated the BOT works through its own evaluation process, obtains the applications that have been submitted to the County, a committee is formed, and in groups of two or three Trustees interview each individual applicant to determine who best fits the needs of the BOT. If there is no one that fits a specific needed expertise, the best choice of candidates is recommended to the Commissioners. Co -Chair Broadhurst stated that while that is the process of the BOT, the Commissioners can appoint whoever they choose and there are no legal criteria of who is appointed. Member Thompson stated as an example, during a recent appointment the BOT submitted four names for appointment consideration and three of the four appointments made by the Commissioners were people not on the BOT recommended list. In response to questions, Ms. Copley stated that the bylaws prevent the Commissioners from appointing non -county residents. The corporation has its own bylaws and it can amend its bylaws just as any corporation could, but even if there was an amendment to allow non -county residents to be appointed on the BOT the Commissioners can say they will not appoint someone from another county. It is a bylaw change if the corporation wanted five of the 12 appointed by the Commissioners to be appointed by the hospital. Member Coudriet stated that ultimately any bylaw change has to be approved by the Commissioners. Ms. Copley stated that in the past when there has been a need to amend the bylaws, the hospital has spoken with the Commissioners and the amendment(s) has been approved. Mr. 011ie provided an overview of slide 11 stating that the obligated unit is the group of assets that are responsible for the debt of the organization. The hospital stands on its own relative to its debt and the obligated unit that services that debt. There are restrictive covenants and the hospital is looked at by several different standards. The restrictive covenants are the lowest hurdles that one has to get through to be okay. It takes approximately $3.2 million per day to run the organization and as such what is desired to be seen is approximately $270 million in cash which is from the covenant of the bonds. If you slide below a covenant, a resolution has to be put in place stating how it will be addressed. In looking at the hospital's Al rating with Standard and Poor's (S&P), S&P wants the hospital to have 324 days of cash on hand which is a lot different than the 90 days' cash on hand under the liquidity covenant. In measuring benchmarks against the hospital, there are multiple benchmarks to look at to understand the real health of the organization versus the obligations under the covenant. The cushion ratio under the liquidity covenant is 1.75 and is the hospital's total unrestricted cash investment divided by the hospital's maximum annual debt service. Capitalization covenant is related to the long term debt to capitalization ratio and is not to exceed .65. That means debt is not wanted as a percentage of the value to be greater than 65%. The rate covenant is the long term debt service coverage ratio and is to be no less than 1.10. The hospital is currently at 4.99 and the S&P ratio is 5.6. There are additional operating restrictions and covenants on asset transfers. Basically, when the obligated growth and sell bonds are looked at, bondholders buy them based on the official statement the organization releases and they anticipate whose and what assets are going to be available to cover the bonds theyjust invested in from a debt perspective. The hospital cannot take assets and move them around for something else because they are pledged and obligated to pay that debt on behalf of the bondholders that purchased those bonds. As to whether this would change if NHRMC was a not-for-profit entity but not related or attached to the County, Mr. 011ie stated it could change slightly but at the end of the day there are still the same assets to cover the same level of debt and whoever is financing the debt/purchasing is going to be expecting those assets to be in place to do it. The real answer to the question is no. To put it into context as to where NHRMC fits in relation to hospitals that meet the S&P standards, Mr. 011ie stated that earlier it was being explained that the County is triple A rated which is the highest rating an organization can have and then it drops down from there. An organization's credit rating changes up or down. In comparison to the County's triple A, the hospital is Al/A+. In looking at what an organization's credit rating is, a multitude of ratios are looked at such as asset, debt, and covenant ratios. If you were to read the hospital's analysis put out by S&P and Moody's, they talk about how good the hospital is in some categories such as its debt ratio. However, they have said that in terms of the cash on hand the balance sheet is light, the hospital does not have enough cash on hand for its rating and the facility size. The hospital has 224 days of cash on PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 4 hand which means if there is a storm that shuts the hospital down, it has 224 days before it runs out of cash. Again, the rating agencies want the hospital to have 324 days' cash on hand to have almost a year to recover. Member Gizdic stated in healthcare it is not possible to receive a triple A rating because of the volatility in healthcare. The rating agencies have said it will not happen and double A is the highest that can be achieved in healthcare. NHRMC is Al/A+ and that is in the top 25% of bond ratings of healthcare entities in the country. From that perspective, NHRMC's bond rating is in the top quartile. The rating score is still achieved because of the strengths even though there are some weaknesses. The important part is if one of those strengths change, such as having less market share because a competitor comes in, NHRMC becomes less profitable because of the challenges it is facing in healthcare. NHRMC will immediately get downgraded on its bond rating which will cause the interest rate to go up and that starts the spiral of costs being more, less profitability, etc. While NHRMC is doing very well and is in a strong position, it has been told by the rating agencies it is fragile because if something changes, the downgrade will occur. In response to questions, Mr. 011ie stated if a downgrade were to occur it would apply to any new debt issued. For it to apply to existing debt, it would depend on the status of the prior debt. If it is a variable rate debt, yes; if it was a fixed rate debt, no as it is already determined and the rate would not change. Almost all of the hospital's debt is fixed with an average of about 4.34%. Member Eckel stated it is important to note that about five years ago there was only about 180 to 190 days' cash on hand. It is only recently that the number moved over 200 days. As to what was the amount lost due to Hurricane Florence, Member Gizdic stated it was $30 million in just the month of September with about $90 million worth of total damages. There is insurance and FEMA reimbursement but payments have not been received yet. In the meantime, cash has to be spent to make the repairs and expenses dealt with. Hospital staff is actively working with its insurance carrier and FEMA to try to obtain reimbursements. GOVERNANCE BEST PRACTICES (SLIDES 13 —19) Bryan Burgett, Director with Navigant, provided an overview of slide 13 stating the information is to facilitate a discussion about what might be in the hospital's future as an independent healthcare system, if that is the decision. He is using the word independent rather than status quo because he thinks after the next three meetings it is going to be seen that there is a need to make changes to be successful in the future. All of the industry pressures to be discussed during the second meeting are effecting governance. Mr. Burgett then provided an overview of his experience of working in acquisitions and mergers of healthcare providers for 26 years and explained how boards of directors and boards of trustees have had to transition and evolve as the industry has evolved. Mr. Burgett reviewed slide 14 of the current barriers or limitations as identified by the NHRMC BOT. Member Gizdic stated as to the restrictions to participate in merger and acquisition activity outside the County, one of the questions he has heard is why not become a system former/creator instead of potentially joining another health system. The structure of NHRMC keeps it from being able to do that. For example, it is not able to purchase PMH and instead had to sign a lease. Some of those restrictions with the current structure keep it from forming a system outside of this County as has been seen with systems such as Vidant, Cone, etc. Under the current restrictions, there are limitations, challenges, and gaps NHRMC is facing and there is need to look at how to address those gaps while remaining independent. As to whether the hospital could separate from the County and the legal process behind it, Member Coudriet explained that there are limitations in effect through the bylaws of the corporation and the bylaws have to be approved by the County Commissioners. The bylaws are really the County Commissioners' bylaws and state how to do business. There are also state limitations where some of this comes into effect. Statutory changes can be made, but needs the consent of the County Commissioners because the County owns the hospital. The hospital, Member Gizdic, the team, and the BOT could not go out and advance a legislative agenda to change the ownership and authorities without the County's consent to do so. Mr. Burgett continued the review of slide 14 noting the issues on financing opportunity, investment limitations, and scale limitations. Member Gizdic stated originally NHRMC was restricted to invest in only the same investments the County invests in because of being a county entity, which are extremely conservative. Former Representative Danny McComas sponsored a legislative change on behalf on of NHRMC to allow more flexibility and NHRMC is now allowed to now invest in the state equities fund. If not restricted by being a governmental asset, NHRMC could invest freely in the market. Currently, the investments are in low risk investments, which typically means low return. For example, if NHRMC was allowed to diversify and get a bit higher return, the funds could have been reached to have the full 324 days of cash on hand. Member Coudriet noted that the financing aspect are restricted by state statute, not by the corporation bylaws. Mr. Burgett stated what he thinks over the next few meetings what will be seen is a need to bridge certain strategic gaps. If NHRMC stays an independent organization, that is going to require more investment. It is more than just financial investment. It is investment in people, expertise, information systems, etc. As those investments are made, as the NHRMC system is built out, the idea would be to apply that expertise to the biggest base of healthcare operations as possible. That is how the benefits of scale are obtained. There has really been an evolution of health systems and there are about 600 health systems in the country. When the PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 5 systems started in the late 80s into the 90s, they were essentially just clubs of hospitals and mostly what they did was governance, oversee the mission, and do financing. They were the bank for the other hospitals. As time has gone on, health systems are actually doing a lot more to benefit the component parts of the health system. He suspects if NHRMC remains independent, it will have to go through the same sort of decisions and issues. The main thing is to get a return on investment and make some changes to enable NHRMC to truly be a regional health system. In response to questions, Mr. Burgett stated that a community and county hospital are essentially the same. Member Gizdic agreed and in terms of the IRS definition of a not-for-profit 501(c)(3), almost all not-for- profit health systems are 501(c)(3) and is just a difference between public and private. Private does not mean for profit; it just means it is not owned by a governmental entity. Both function the same way, under the same set of rules at state and federal levels and is literally just who owns it. In a public not-for-profit like NHRMC, it is owned by a governmental entity. Private not-for-profit is not privately owned as it is still owned by the community, it is just not owned by a governmental entity. Most health systems in this state are on the private 501(c)(3) structure, but it does not mean they are privately owned as they are owned by the community. If that type of hospital were to close or be sold, the assets are the community's. It was noted that Mission Hospital was a different political structure as it was not controlled by a county commission. Member Coudriet stated while they are similar, the process is very different for not-for-profit hospitals where the parent is the county versus not-for-profit hospitals where the parent is a 501(c)(3) community foundation. There are two different statutes. One statute is for a 501(c)(3) that does not require public transparency (i.e. the Mission Hospital process) and the other statute concerns government owned hospitals, which is the statute being followed in this case. The issue is there are only a handful of governmentally owned hospitals left, which is why transactions taking place across the state are not being played out in a public setting. Mr. Burgett stated the private 501(c)(3) hospitals own themselves and the boards are self-perpetuating. Member Coudriet stated he wants to be clear that as to slide 14, he does not want anyone on the PAG to think the NHRMC BOT identified the six things since this process started, that is not the case. These are the things that have been discussed between the NHRMC BOT and the County Commissioners for years. He has been with the County 12 years and in his current role for eight of those years, and has been involved in almost every meeting between County Commissioners, not the board gathered but individual Commissioners, and the NHRMC BOT, not the board gathered but individual Trustees. These are the things that were being discussed in 2008, which partly led to the management agreement and are the issues that have continued to be discussed. These are not new issues. When Member Gizdic stated during the January 21" Commissioners meetings this has been discussed for 52 years, this information is what he was talking about. Member Thompson confirmed this is exactly what was discussed when he was a County Commissioner. Mr. Burgett reviewed slide 15 about the typical operating company organizational structure and is similar to what NHRMC has now. A health system is generally going to be organized in that it has a board of directors that sets the direction with its management team and there will be different management and governance at each level of the organization. However, the more contemporary design of governance is really that everyone is growing in the same direction. The board and the management team are really setting the direction. There will still be local foundations, there might be some for-profit joint ventures, but the structure of these are very similar to NHRMC now. He thinks the difference is that the more contemporary health systems have streamlined their governance a lot more to get everyone moving in same direction given the industry challenges. Mr. Burgett reviewed slide 16 about board composition. The slide is not meant to be a critique of what NHRMC is currently doing but when looking ahead it helps in thinking about what needs to be looked at. The private 501(c)(3) system is generally going to have a governance committee. The governance committee looks at the board and cultivates the membership of the board. Boards typically have term limits, with staggered terms. As compared to when Mr. Burgett started his career, the ideal size now is between 11 and 17 members, keeping it under 20. Boards get a bit more unwieldy when it has 20 -plus members. More work is probably now done through committees and the committees report out to the board. The actual board of trustees or board of directors is spending most of its time on the biggest strategic issues as those are the more important issues. The more routine matters are left to the committees. Every board has to reflect its community, in addition to reflecting the population it serves, but there is also a want to have the skill set necessary so as decisions are made there is a real diversity of opinion and experience. Mr. Burgett reviewed slides 17 and 18 about key competencies for healthcare boards. The information on the slides is not meant to be a checklist. The idea is to have diversity of professional background, life background, etc. One thing he has seen is the idea of having a national expert on the board, someone outside of the service area to offer a perspective and provide more diversity on the board. Member Gizdic stated in a lot of ways NHRMC is still thought of as the local county hospital and everyone still calls it the hospital board, yet NHRMC is approaching being a $1.5 billion health system. It would essentially be considered a Fortune 1,000 company. When starting to put the local hospital and hospital board in the context of a Fortune 1,000 company, it starts to take on a different feel in terms of structure, how the governance function of that type of company looks like, the level it functions at, and how is it ensured there are these type of competencies on PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 6 those boards. This information is to help work through the process on the type and scale of organization being discussed. Mr. Burgett reviewed slide 19 about self -governance and accountability. As to accountability, as the board gets smaller more is asked of the members. The organizations that have a contemporary governance practice have less tolerance for directors who miss meetings. A lot of training happens so board education is very big (i.e. retreats), meetings are not as frequent (i.e. four to six a year), and there are longer meetings with larger time commitments. There is a process for accountability, which is another item the governance committee will look at. EVALUATION OF GOVERNANCE STRUCTURES AND ORGANIZATIONAL MODELS (SLIDES 21— 28) Joe Kahn, with Hall Render and outside counsel for NHRMC, reviewed slides 21 through 28 explaining the presentation will be an overview of standalone options and partnership options, noting that the lists for either option is not just what is shown on the slides. This is to help frame it into context while moving forward and when the responses come back, to give some frame of reference for the different types of structures that the PAG might be considering and that the NHRMC BOT and County Commissioners have been considering. In review of slides 21 through 23, Mr. Kahn reiterated that the information shown on the potential independent, standalone structures is not an exhaustive list and each has its own variations/permutations. As noted earlier, NHRMC cannot convert into any of the structures or unilaterally restructure without the County's consent. One option would be SystemCo which is creating more of a system wide network of operations as opposed to a silo vertical operation, similar to the current NHRMC structure. Currently, NHRMC as a public non-profit is essentially an owner -operator, meaning it is the operator of the hospital facilities but it is also the owner of a number of other entities that serve their own various purposes. SystemCo would create an umbrella parent and then the hospital would be just one component of the systems. This has different implications both legally and from an operations standpoint. As the hospital is more vertical, a lot of the conditions of participation under Medicare and the accreditation requirements apply not just to the facility itself, but to a number of its drop down operations. Whereas at the SystemCo level with the hospital being a subunit of SystemCo, a lot of the impact of those issues are mitigated because at that point they apply only to the hospital and not necessarily to all of the other affiliates within the system. Another option is a hospital authority which is a creature of statute in North Carolina (NC). There are a number of them around the state. Examples are Johnston County, Beaufort County, Albemarle County, and even Atrium is technically a hospital authority. It has to be created in conjunction with the statute and would still be subject to a lot of the statutes that the hospital is subject to now including the 131E statute that is requiring the process that is being followed right now. However, under NC statute the hospital authority is invested with a great deal of additional authority that NHRMC does not have now. It can issue its own bonds and a number of other things that NHRMC arguably cannot do now. There would be a hospital authority board which would be appointed by the County with a slight twist to how it currently works. In this model because of the population size of New Hanover County, the County would have to choose from the nominees that were recommended by the hospital authority board unlike now, where the County does not have to follow the nominations and can appoint whoever it wants. As to the referendum that occurred back in the 1980s that was voted down to restructure the hospital, Member Gizdic thinks it might have been one of these types of models being discussed. Member Coudriet stated he is not certain that was put out to a vote of the community because the statute would not have allowed that. It may have come before a vote of the commissioners who turned it down because the same thing was studied in 1987, 1996-97, and in 2010 with the management agreement. He has never found anything in the archives or the Clerk to the Board's records that demonstrate some sort of vote on this. Member Cameron thought it was a vote inside the hospital board on what it was trying to do and is not sure it came to the commissioners. As to the earlier question about the appointments to the Airport Authority, Member Coudriet stated the Airport Authority is not self -appointing and the rule, similar to the hospital authority, that it must be from a nominated slate of candidates does not apply to the Airport Authority. The rule to do so is specific to the hospital authority statute. As to the benefits of this structure over NHRMC's current structure, Mr. Kahn stated a full analysis has not been done of the benefits, pros, and cons of it. He would say at a high level the hospital authority model offers a greater degree of autonomy and flexibility as compared to the current model. Examples of this are that the hospital authority can issue bonds and can operate outside the county borders. To the earlier question of the pros and cons of these options, Member Thompson said the NHRMC BOT has looked at all of these options and they solved some problems but not one option solves all of the problems. The thought was SystemCo made the most sense, but it is just a theory. As to whether any of the options solved the issue with investment ability, Member Coudriet stated they may limitedly on the investment part, but do not solve the access to capital or the debt capacity of the PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 7 institution which is very limiting. Mr. Kahn stated the hospital authority model would still have a number of restrictions on the bonds including being subject to the LGC. The third option is the 501(c)(3) community hospital model, similar to a Novant or a Mission before they sold to HCA. Mr. Kahn stated while it would be subject to a large extent by virtue of the requirements of the bond market, to the earlier point the 501(c)(3) community hospital would have fewer restrictions on the way it can invest its money. The bond and borrowing restrictions might be somewhat similar, but the investment opportunities for a system like Novant, for example, are much different than the investment opportunities for NHRMC. In response to questions, Member Gizdic stated yes, a cheat sheet of the pros and cons of the three options can be provided. However, the purpose of this discussion tonight is not about picking one, it is the educational information on the options and getting a sense of where NHRMC currently stands. Deeper analysis will be done moving forward of all three options. Member Coudriet stated that is what the next two months are about because these all are within the vein of remaining standalone/unaffiliated/independent, but there are a finite number of options. This overview is to show statutorily in NC what is possible and no one is ready to offer an opinion yet. SystemCo has been referenced and that is what Member Gizdic and he have spoken about since July when the Commissioners and Trustees said to work from because of the list of things that have been discussed for 52 years, and bring together a model around SystemCo. But as the work was being done, it did not address scale, did not address very clearly the different forms of debt outside the county, and it absolutely did nothing to open up access to more capital. Mr. Kahn continued the overview stating examples of a community nonprofit corporation are Novant, WakeMed, etc. In response to questions, Mission Hospital was this structure. This option could be structured as a SystemCo if that was desired. Member Gizdic stated there are pros and cons for the community nonprofit model, but it probably has the most flexibility of all that has been discussed during the meeting. In response to questions, Mr. Kahn stated in this model the board would otherwise be self-perpetuating. It could also be a hybrid where commissioners appoint a certain number of the members. Mr. Kahn provided an overview of slide 25 regarding the governance perspective and control impact. The slide shows a version of the spectrum of affiliation. For the purposes of this overview, it will be approached a little differently to focus on the models in the form of governance as it is important to recognize the implications of each of the structures. He is a healthcare corporate and transactional attorney. The corporate part is pretty straightforward in that like any corporate attorney, he forms LLCs, puts together bylaws and operating agreements. The transactional part can cover everything on the slide and can include mergers and acquisitions but as can be seen on the slide, that is probably one-tenth of the spectrum. The rest includes contract and joint ventures of all types and sizes. When starting to talk about the options for a partnership, they are somewhat innumerable and because of everything that has been heard about the dynamic state of the healthcare industry, some version of all of these are playing out around the country including in NC. This is in a response to the challenges that the healthcare systems and industry are facing and people are trying out all sorts of different affiliation options to see what fits for their organization and within the industry. The far left hand side of the slide is the lower degree of integration with a partner where the far right side is the higher degree of integration with a partner, including all the way up a sale to a partner. It will be broken out into three buckets of specific purpose contractual relationships, specific purpose joint ventures, and enterprise -wide transaction structures. Mr. Kahn stated that slide 26 is intended to show the potential governance implications of primarily arm's length contractual arrangements with a partner. This would be where NHRMC stays fully independent and is now just a party to a contract with a partner. Those contracts can take a number of different forms and can cover a number of different things from just a straight -forward clinical services agreement to a service line co -management arrangement all the way up to whole hospital management services agreement. Member Gizdic stated that NHRMC currently has a strategic services agreement with Atrium. It is on the far left side of the range so essentially NHRMC has contracted with Atrium to get access to their purchasing, capital purchasing to do some clinical benchmarking, service line benchmarking, etc. There is absolutely zero implication in governance. They have no say. In response to questions, Member Gizdic stated the management agreement that was proposed in 2010 was a full management agreement of all operations and confirmed it was something that did require county commissioner consent. While it can fall anywhere on the spectrum, in this example and in many management agreement examples, there is still no governance implication. Even in the proposal, it was with Atrium (Carolinas Healthcare System at the time), it had no implications on governance. Services can vary in these type of agreements as can the implications on governance depending on what is negotiated. Mr. Kahn stated that slide 27 covers the specific purpose joint venture models and noted they also can take a number of different forms. An organization can joint venture on specific and discreet elements of a hospital system operation. For example, an ambulatory surgical center (ASC) is often setup as a joint venture between a hospital and a national ASC operator, and/or a hospital and an operator and physicians. That would only be for that specific ASC or a group of ASCs. A joint venture can also be done on service lines or a hospital. PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 8 Examples of this can be seen in the state and across the country where partners have come together and formed joint ventures to own and operate a hospital or a health system on a SystemCo type level. In the latter from a governance standpoint, it probably has an implication further to the right side of the slide but in the more discreet joint ventures, the governance is still much further to the left because at that point the hospital is a co-owner of the discreet joint venture and is still fully independent in its own right. Member Gizdic stated that NHRMC currently has several joint ventures for several services and those are their own standalone entities that they share governance of that particular LLC, but do not impact in anyway the overall governance of NHRMC. Mr. Kahn stated it is important to remember that joint ventures are essentially a contractual arrangement on steroids. A negotiation with a partner has been done on how to partner and what rights each partner has within that partnership. For example, even a full hospital system joint venture could result in NHRMC still having a great deal of say and voice in the operation, governance, and ownership of the joint venture if that is what is negotiated with the partner. Mr. Kahn stated that slide 28 covers the enterprise -wide transactions and would be further on the right hand side of the larger spectrum. It is more of an enterprising changing partnership and can take a number of different forms. The first is a joint operating company which is a more formal version of a joint venture. It still has the look and feel of a joint venture, but it operates a bit differently. It can operate as it relates to a service line and to a whole hospital, but it usually is not a merger of any kind so the two owners still maintain full independence and full ownership of their assets. What is really contributed to in a joint operating company is the balance sheet and the P&L. The economics work very much like a joint venture but the ownership of the assets remains independent. The net effect is similar to a joint venture. The ownership implications allow for a bit more independence and the retention of those specific assets. Member Gizdic stated recent examples of this type of model would be UNC Healthcare, Rex Hospital, Johnston Memorial Hospital/Johnston County Hospital where they did something similar to this in that they all maintain their own assets, but Johnston and Rex have formed a joint operating company to jointly operate those facilities with help from UNC Healthcare. One of the components of that was a commitment by UNC Healthcare, he thinks, was to invest approximately $50 million in the Johnston County market to help with it. Mr. Kahn stated the merger or consolidation into another nonprofit system from a governance standpoint can take a number of different forms. Again, it would be negotiated. For example, it could be assets are merged with another nonprofit but the local system gets to control the local assets. In that case, the governance implications could be further on the left hand side of the spectrum because it could still lead to a good deal of local governance and control even though it is now part of it and merged into a larger health system. Finally, there is the full sale model which as referenced in the slide could be to a for profit, but it could be to a not-for-profit. Either way it would be an outright sale of the assets where all control is given up. There may be certain reversion rights or certain obligations and commitments that the purchaser has agreed to, but from an ongoing governance standpoint it is about as far to the right of the spectrum that an organization could go. Member Coudriet stated for the record that what he is about to say is a point of fact, not an editorial comment, that everything that has been talked about tonight including some portions of SystemCo require us to do what we are doing right now. NC General Statue 131E -13(d) sets out how a hospital owned by the county can go about addressing objectively, fairly, to evaluate all proposals, has to first go through the process that the county commission approved, directed, told of us in September 2019. We would be here on any of these choices, we were going to have to go through this process to evaluate any change to include elements on how far we went with SystemCo. Member Gizdic and he have been trying to say that for six months. He hopes these facts begin to bear that out for the benefit of the PAG. Any change, because it is owned by the County, has a public process. We could not, would not have come out and announced "SystemCo is the brand of the day and everybody get used to it." There are pieces we would have gone through to evaluate the community hospital, that is what the analysis at a staff level had suggested we recommend, the board would have said go do that. The resolution it adopted is the one that gives the most flexibility for this organization to explore what the best model is going forward. PRELIMINARY IDENTIFICATION OF STRATEGIC STEPS Co -Chair Biehner reviewed what has been covered during the meeting and noted that there will still be homework on the information. She asked the members to provide any initial takeaways, getting towards the discussion about what the qualification is with the key proposal elements based on the information discussed during this meeting. The key for her is it may not be just one of the things that were seen tonight. It may be a combination of things and while she knew that, she thinks she saw even greater tonight the potential of what is out there. Member Eckel stated he thinks absolutely there is a need to go down one or three or some type of hybrid path. What he is wrangling with is if the PAG is going to be making a recommendation for those in conjunction with, which he thinks is what will be done once receiving all the proposals, it does not address scalability and that needs to change. To him, it isjust the timing of how it coincides with receiving the proposals. PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 9 Co -Chair Broadhurst stated he sees it as working in tandem, but does feel the same way. He is looking forward to reading the proposals for what other partners could eventually bring to us. It seems to him that even though the decision has not been made, that would be kind of in tandem as the responses are evaluated for the next two months. Member Dickerson stated as he goes through the process he knows all the members are doing a lot of outside reading and getting input to make a great decision just as he is. As some of the areas were discussed tonight he wanted to jump ahead and he is trying to make himself trust the process that things happen in the correct order, and not to jump ahead. He is just trying to keep himself in the lane and let the process lead where it leads. As far as takeaways from today's meeting, he thinks the information has been presented quite well and there has been a lot of input from people like Member Thompson and others that have different perspectives that have helped him because he does not have a high level of expertise in this. He is doing a lot of research to be able to learn more to feel he can render a competent decision and is good with what he has seen today. Member Gizdic stated he thinks Member Dickerson said it well during the last meeting that the number one success factor in any organization, especially this one, is governance. He thinks that has become even more clear tonight. Member Thompson stated one takeaway that was not discussed was if all those different pros and cons lists are looked at, he hopes everyone understands the strategic disadvantage that is currently faced compared to every other system in NC and the systems in other states is the flexibility to move across state lines. As the PAG moves forward, maybe there should be a 10 or 15 -minute session on the strategic disadvantages of the current state of doing nothing. The strategic disadvantages are so great and not discussed, but he wants everyone to understand that is one of the impotencies of why this discussion is being held. NHRMC cannot compete if it is stuck in the geography of this county. He asked Member Gizdic if what he stated was accurate. Member Gizdic responded in the affirmative and stated a lot of the restrictions that have been discussed, NHRMC's competitor's do not have those same restrictions. While it is thought NHRMC is a local county hospital, it is also competing throughout the region, at a statewide level, and there is a need to think about how to best position the organization. Vice Co -Chair Pino stated this has been helpful but wants to know in continuing through this process will it eventually be known what the preferred option is for the governance issue by the time the group gets to the proposals, as it is in everyone's minds what the preferred options are. For him, it would be helpful in moving through this to recognize there are many different options but an option that is not so good for "x" reasons and the preference is "x" because when trying to figure out what the top choices are, it is going to be difficult to parse things out. Member Coudriet asked Vice Co -Chair Pino if he is saying as to the governance piece, whether there is a change or not, does a modification to the governance element need to be addressed. He noted it is for the PAG to recommend and not really a County staff function to recommend. Then define a range of governance options thought to be reasonable for any of the options this body thinks are appropriate or what the maximum governance it expects to receive. Begin with that, what the model of governance looks like because it can be any number of things in almost all of those setups for some form of governance defined by this group. Vice Co -Chair Pino agreed and stated the maximum of where you do not want to tread. Member Coudriet stated the maximum now is the County Commissioners make 100% of the appointments except where there are the bylaws that allow for ex -officio members from the hospital and Pender because of the lease arrangement. That is the maximum end. There are different theories on what that governance should be and is part of what the Board of Commissioners and the NHRMC BOT has charged this group to look at: What is the right form of governance that leads to the most optionality. Ms. Gordon reviewed the intended road map for the upcoming meetings. This meeting is covering structure and governance and key proposal elements, the next meeting is proposed to cover strategic gaps and the one after that will be focused on the long range financial plan. Those are the three key buckets. More may be identified and will be added to the agenda but this gives more of the whole picture and then there will be a more robust discussion around all of the pieces. The PAG will start to prioritize and come up with lists to narrow down, which then becomes the tool to work with the prospective proposals that are received. Member Fuller stated he thinks that even though the group may come up with a preferential form of governance, needs, and continuum, maybe it should be flexible enough that if someone presents what is considered a spot-on idea that fits well, to change its position which is, he thinks going to be coincided with each other. There will have to be two recommendations together after seeing the responses. Vice Co -Chair Cameron stated he thinks he now has a clearer picture of the work the NHRMC BOT has done on the governance/organizational structure. It is very encouraging to him to hear that Member Coudriet and the County and the NHRMC have been discussing this because what he is hoping is that there is an openness by the ultimate decision makers who are not in this room that there may be a need to have some organizational change that shifts some things. It is the right thing to do to position NHRMC to treat health in PARTNERSHIP ADVISORY GROUP JANUARY 23, 2020 MEETING PAGE 10 this area. Again, he was really encouraged to hear how much work and discussion has occurred on this and finds it very positive. Member Eckel stated during the PAG update at the Commissioners meeting, what he heard from the Commissioners is that all were at least on the same page that the governance of the hospital needed some change. Member McGhee departed the meeting at 7:35 p.m. OPEN DISCUSSION: INDUSTRY CONCERNS (SLIDE 32) Mr. Burgett provided a brief overview of slide 32 stating there have been a number of articles circulating about the benefits and disadvantages of hospital mergers and acquisitions. The PAG leadership asked for it to be discussed. In an effort to be cognizant of the time, this item may have to be pushed to the next meeting. He thinks the discussions this evening have been very productive. Understanding what the risks are have helped to structure the RFP and will help to look at the proposals that are received. From the standpoint of again NHRMC as an independent organization, who might be in the position of doing the mergers and acquisitions and acquiring hospitals, he thinks there might be some learning there as well. He thinks the desire was to have an open forum for this discussion and if everyone can start thinking about those issues, it can be picked up again in the next meeting. Co -Chair Biehner stated feedback from members on this slide would be much appreciated. CLOSING REMARKS AND ADJOURNMENT There being no further business, Co -Chair Biehner adjourned the meeting at 7:39 p.m. Respectfully submitted, Kymberleigh G. Crowell Clerk to the Board Please note that the above minutes are not a verbatim record of the Partnership Advisory Group meeting. Meeting materials associated with the January 23rd meeting are included as attachments to these minutes for reference. G0 k3N�Y N New Hanover � �1 Regional Medical Center 3y 7.46CIS77 Section Page Number 1. Approval of Minutes, New PAG Member Introduction 3 2. RFP Non -Disclosure Agreement Log 4 3. Road Map Toward Sorting & Ranking Proposals (KPE Development) 6 4. NHRMC County Ownership and Current Governance Overview 7 5. Governance Best Practices 12 6. Evaluation of Governance Structures and Organizational Models 20 7. Preliminary Identification of Key Proposal Elements 29 8. Open Discussion: Industry Concerns 9. Closing Remarks New Hanover 11 Regional Medical Center 31 M ROVAL OF MINUTES / NEW BER INTRODUCTION 1' N New Hanover �1 Regional Medical Center NNew Hanover �1 Regional Medical Center NON -DISCLOSURE AGREEMENT 7 Organizations Ascension Health BlueCross BlueShield of North Carolina Citi on behalf of Vidant Health Cone Health Flagstone Heritage Hospital Acquisition Services Pontus Capital 5 5 Organizations € HCA Healthcare LifePoint Health Sentara Healthcare Trinity Health Universal Health Services (UHS) 6 Organizations € Atrium Health Bon Secours Mercy Health Duke Health Novant Health Optum UNC Health Care New Hanover Regional Medical Center Proposed steps for PAG identification of Key Proposal Elements (KPEs) to guide and focus the Proposal evaluation process during this and upcoming meetings: Meeting #7; 1/23/2020 Meeting #8; 2/6/2020 Meeting #9; 2/20/2020 Meeting #10; 3/5/2020 Meeting Topics Meeting Topics Meeting Topics Meeting Topics 1. NHRMC County Ownership 1. Strategic Direction Recap 1. NHRMC Long -Range 1. NHRMC Strategic Outlook and Current Governance 2. Gap Analysis to Strategic Financial Plan and Capital a) Vision for an Independent Overview Plan and Prospects of Needs NHRMC 2. Governance Best Practices Closing Gaps through 2. Sources for Financing b) Major Gaps to Address 3. Evaluation of Potential 10 Strategic Options Future Capital Needs 2. Expected Impact of Governance Structures and 3. Preliminary Identification (bonds, taxation, Partnership Organizational Models of Key Proposal Elements innovation, etc.) 3. Identification of Key 4. Preliminary Identification 3. Preliminary Identification Proposal Elements for of Key Proposal Elements of Key Proposal Inclusion in any Go - 5. Open Discussion: Industry Elements Forward Recommendation Concerns Structure and Strategic Gaps Long -Range Governance f Key Proposal f Financial Plan Key Proposal Key Proposal Elements Key Proposal Elements Elements Elements 6 11 New Hanover Regional Medical Center 1' N New Hanover �1 Regional Medical Center MC COUNTY OWNERSHIPAND RENT GOVERNANCE OVERVIEW • NHRMC is a county -affiliated, public, 501(c)(3) corporation. It serves as both a hospital corporation and the parent operating company to its subsidiaries (e.g., Physician Quality Partners, its ACO; its physician group) • Together, NHRMC and its subsidiaries function as a health system, but the organization's legal structure has the hospital as parent New Hanover County, North Carolina (NHC) Primary Government County appoints NHRMC Board of Trustees 12 of 17 Trustees Pender County, NC New Hanover Regional Medical Center (NHRMC) Public Nonprofit Corporation New Hanover Regional Medical NHRMC Hospital Corporation Center Foundation serves as Parent ----------------------- NHRMC Wholly Owned Subsidiaries Pender Memorial and Joint Ventures Hospital, Inc. 8 New Hanover 11 Regional Medical Center • New Hanover County, North Carolina (County) owns the real property and other assets that comprise the health system (including 17th St. Main Campus and the Orthopedic Hospital) which is leased to NHRMC, a public 501(c)(3) Corporation, under Lease Agreement through October 2, 2047, for NHRMC to operate the health system • NHRMC is a component unit of the County and NHRMC financials roll up into the County's financials New Hanover County, North Carolina (NHC) Primary Government 9 Trustee Appointment_ NHRMC Board of Trustees ` CQ 00 NHRMC Public Nonprofit Corporation New Hanover Regional Medical Center NHRMC Board of Trustees Composition • NHRMC Board of Trustees are appointed by the New Hanover County Board of Commissioners • The NHRMC Board is also comprised of five ex -officio members of which one is appointed by the County Commissioners from its members • Commissioners may only appoint residents of New Hanover County to serve on the Board of Trustees • Only Commissioners can remove, replace Trustees (no BOT discretion) NHRMC Board of Trustees 17 members 12 County Commissioner Appointees 5 Ex -Officio Members • NHC Commissioner Representative • Pender BOT Member • NHRMC Medical Staff President • NHRMC Immediate Past Medical Staff President • Pender Medical Staff President 10 New Hanover Regional Medical Center NHRMC OBLIGATED UNIT New Hanover Regional Carolina Healthcare Physician Quality Medical Center (NHRMC) Associates, Inc. (CHA) Partners, LLC (PQP) (including Cape Fear Hospital Site) Liquidity Covenant • Days Cash on Hand equal to at least 90 Days • Cushion Ratio equal to at least 1.75 (Section 4.28 of the Lease Agreement) Capitalization Covenant • Long-term Debt -to - Capitalization Ratio not to exceed .65 (Section 4.29 of the Lease Agreement) Rate Covenant • Long-term Debt Service (LTDS) Coverage Ratio no less than 1.10 (Section 605(a) of the Bond Order) Notes on Capital Structure Debt is issued through County under a Bond Order agreement structured in 1993 Source of capital investment opportunities outside the County are limited to cash or non-recourse debt Additional operational restrictions on the asset transfer and use of the net assets of NHRMC outside the organization 11 New Hanover 11 Regional Medical Center 1' N New Hanover �1 Regional Medical Center ERNANCE BEST PRACTICES In PAG Meeting #2, we reviewed the following key trends and challenges facing health systems today: 0 Hospitals are receiving fewer payments for services 0 Hospitals are under increasing regulatory scrutiny 0 Payers driving shift from fee-for-service to value -based care 0 Delivery of care shifting from inpatient to outpatient setting 0 Providers have increased collaboration In response to these challenges, health system organizational and governance models are evolving to achieve economies of scale and skill and operational discipline ➢ The most advanced health systems are functioning as operating companies by standardizing key functions across the organization (i.e. systemness) Regardless of size or model, all management/ governing boards continually assessing and reassessing respective challenges and impact on strategic planning 13 New Hanover Regional Medical Center Category Board appointment process: Diplomatic Considerations outside of core competencies may be focus for selection Hurdles Suggests leadership unreflective of NHRMC's service area • Limits enforcement of accountability Growth Investments are limited to within New Hanover County: Outside the Creates inability to organically grow throughout the entire service area County Restricts participation in merger and acquisition activity outside the County Branding Branding flexibility is limited per current contracts: "Main Inflexibility • Prevents alterations to NHRMC Campus" should economic/strategic rationale exist Limits branding of initiatives outside of the County Financing Borrowing power restricted to County -issued debt or non-recourse debt: Opportunity • Curtails NHRMC access to capital and ability to make future investments Investment Cash investments limited to highly -rated, highly -liquid securities/investment options: Limitations • Prevents investments supporting innovative or higher risk initiatives Reduces ability to effectively respond to newer competition Scale Size and pace of growth is constrained: Limitations • Challenging to keep pace with industry transformation and expertise required Unable to achieve fundamental economies of scale needed 14 New Hanover Regional Medical Center By increasing the scope of standardization (i.e. systemness) through an operating company model, parent health systems seek to achieve efficiencies in scale and skill Foundation MarketA Foundation Market B Health System Health System Hospital Hospital PhysicianHospital Skilled Group Nursing Foundation Market C Urgent Care Health System Ambulatory Hospital Surgery Wholly Owned Subsidiary Center Joint Venture Together, the Board and the Management Team oversee the parent health system, its subsidiary health systems and other wholly owned subsidiaries and joint ventures Subsidiary Health Systems are typically constrained within one geographic region. In an Operating Company Model, the subsidiary system's boards typically comprised of the same members as the parent or of the subsidiary's management team Hospital corporations may have more localized and limited responsibilities (e.g. credentialing), but with wide range of potential local control depending on the system or model 15 New Hanover Regional Medical Center • Typically Boards have a Governance Committee that focuses on board member replacements, interviewing potential nominees, and presenting candidates to the full board. • Most Boards have staggered terms and term limits to ensure fresh perspectives and avoid ossification in governance • The optimal number of Board members is between 11 and 17, with 13 to 15 being the most preferable size. A smaller board size ensures all Board members engage in discussion • Board members should bring key business competencies and experiences to the board. Medical staff and clinical representative is key to effective healthcare governance • Boards should be diverse in composition, with representation across ethnicity, gender and age groups • Board members should be selected based upon competencies, experience and diversity targets. Board members should not be selected on the basis of personal relationships Example Board Structure 1 2 Chair Chair -Elect 3 4 Treasurer Secretary 5 6 Past Chair Director 7 8 Director Director 9 10 Director Director 11 12 Director Director 13 Voting Ex -Officio 16 New Hanover Regional Medical Center Required Board competencies are specific to each organization. The following is an illustrative example of the potential skillsets, experiences, and expertise required: • The board must advocate on behalf of the organization to the community. This includes fundraising, philanthropic activities, • • advocating for underlying political issues, and communicating the organization's purpose and needs in the community • Examples: legislator, public or elected official, media/marketing expert • Understand the planning, development, and construction of healthcare facilities, as well as, the purchase and disposal of real estate assets • Examples: architect, engineer, realty executive or developer • Understand and comply with the core fiduciary duties of care, loyalty, and obedience. Understand the board's role in policy _ setting, decision-making, and oversight including: quality oversight, financial oversight, setting strategic direction, management oversight, board self-assessment (and needs assessment), and development and advocacy to the external constituent community • Examples: attorney, chief executive or consultant • Understand risk-based investment portfolios and the board's fiduciary responsibilities in overseeing such investments • Examples: investment analyst, banker • Understand the drivers of health system financials, as well as, their impact on revenues, expenses, operating margins, and • • cash flows in meeting regulatory requirements • Examples: finance or accounting officer, controller, CPA, auditor, banker, lawyer • • Understand the objectives, delivery mechanisms and impact of healthcare marketing and communication to constituents including governmental, regulatory, citizen, patient, and other interested groups • Examples: retail, marketing, PR executive, media executive • Understand the specific health needs of the community/service area particularly as it relates to the specific populations and overall population health management Examples: social services or public health professional; clergy, media expert Competencies continued on subsequent page New Hanover Regional Medical Center' , - • Understand the wide range of healthcare revenue streams including health insurance (both public and private), private payer, ACO's, HMO's, concierge plans, charity care, and other emerging payment plans • Examples: health insurance payer or foundation executive • Understand the implications of current and prospective changes in healthcare markets (e.g., CVS, Walgreens, and - Walmart), healthcare delivery systems (e.g., internet, telephonic, and other remote communication methods), the dynamics of consumer/patient preferences, the development of new forms of physician networks, and new or changing regulatory requirements • Examples: chief executive, policy or planning expert, regulatory attorney • Understand the implications and requirements associated with rapidly changing technology for patient treatment, treatment delivery mechanisms, associated required changes in information technology hardware, software, and employee skill sets including data analytics, information security, and cyber security • Examples: IT expert, healthcare IT expert • Understand the environmental, regulatory, special healthcare skills and responsibilities, and other special required attributes _ associated with healthcare employees that affect their recruiting, development, management, training, and compensation • Examples: HR professional or consultant of major employer • Credentialing of physicians and other medical staff; granting privileges to practice medicine in the hospital. Overseeing the process of moving to population health and wellness in the community from the traditional focus on acute care triage and - • management • Examples: physician, nurse, other healthcare professional, industry expert • Oversee the quality, utilization, and risk -management systems that comprise a quality program including measures of clinical outcomes, service outcomes, specific quality problems, and comparison of the organization's performance with like organizations across the country • Examples: healthcare professional, quality control manager • Oversee patient safety and regular monitoring of healthcare outcomes including; hospital-acquired infections, surgical wound infections, inpatient mortality, neonatal mortality, cesarean section rate, unplanned hospital re -admissions, unplanned transfers to a special care unit, service outcomes, and level of care • Examples: healthcare professional, safety expert New Hanover 11 Regional Medical Center Boards should maintain the ability to set and enforce participation guidelines If Boards do not have the ability to enforce guidelines through disciplinary action and, if appropriate, removal of members, guidelines may be undermined 19 JOB DESCRIPTIONS Clearly define responsibilities of BOT members; determine what and what not members will be held accountable for when performance is being evaluated MEMBER EDUCATION Participate in annual education sessions such as healthcare industry trends, conflict of interest training, role of board: fiduciary vs. advisory, etc. MEETING ATTENDANCE Set meeting attendance expectations and anticipate meeting preparation and participation FEEDBACK PATHWAYS Allow BOT members to self -assess group engagement and overall meeting productivity in order to help identify improvement areas for future meetings DISCIPLINARY ACTION Ensure BOT maintains the ultimate ability to enforce compliance with guidelines and create accountability New Hanover 11 Regional Medical Center 1' N New Hanover �1 Regional Medical Center .UATION OF GOVERNANCE JCTURES AND ORGANIZATIONAL ELS New Hanover County and NHRMC Board of Trustees are evaluating the following organizational/ legal structure options for NHRMC (the corporation) continuing as an independent, stand-alone organization (PAG reporting and assessment to follow): ➢ Transition NHRMC into regional health system by establishing SystemCo with a parent corporation over each of NHRMC, PMH and other subsidiaries—modernizing its corporate structure so that the various system companies are not operating under a hospital -centric corporation but rather alongside the hospital. County -controlled board at parent level. ➢ Establish NHRMC as a Hospital Authority consistent with North Carolina's Hospital Authority Act (§131 E Part 2)—creating a model similar to the existing County -owned and controlled one. County commissioner chair appoints initial Hospital Authority board members, subsequent appointments based on nominations of Authority. ➢ Convert NHRMC from a County -controlled 501(c)(3) corporation (i.e., a public nonprofit health system) to a private community nonprofit 501(c)(3) corporation—meaning it would be a community asset no longer controlled by the County (i.e., few or no County board appointments) but rather a self-perpetuating community board. 21 New Hanover Regional Medical Center Restructure NHRMC as a regional health system (SystemCo) versus current hospital - centric corporation • Create new 501(c)(3) parent corporation • Parent corporation is new sole corporate member of NHRMC (currently no corporate member), creating overall SystemCo • Move PMH and other SystemCo entities under parent to facilitate system function vs. hospital -centric nexus, streamline operations, address liability implications, etc. New Hanover County, North Carolina (NHC) Primary Government SystemCo Parent New Hanover New HanoverCarolina Physician Quality Regional Medical Regional Medical Healthcare Partners, LLC Center Foundation Center (NHRMC) Associates, Inc Accountable Care Organization (ACO) ASC, LLC Ambulatory Surgery Leasing Company Lower Cape Fear Hospice, Inc. (not controlled) Pender County, NC Pender Memorial Hospital, Inc. New Hanover Home Care, Inc. 22 New Hanover Regional Medical Center Conversion to Hospital Authority • County to form new Hospital Authority • New Hanover County -owned hospital assets transferred to hospital authority whose boundaries include at least a portion of the county • County commissioners appoint hospital authority board members to oversee the newly formed New Hanover County Hospital Authority (thereafter, more of a self-perpetuating board based on nominee slates from board but with County commissioner approval) New Hanover County, North Carolina (NHQ Primary Government County -Appointed osaital Authoritv Boar Pender County, NC New Hanover County Hospital Authority/New Hanover County Health System New Hanover New Hanover Carolina Physician Quality ASC, LLCPartners, Lower Cape Fear Regional Medical LLC Regional Medical Healthcare Ambulatory Hospice, Inc. Pender Memorial Center Foundation Center (NHRMC) Associates, Inc Accountable Care Surgery Leasing (not controlled) Hospital, Inc. Organization (ACO) Company New Hanover Home Care, Inc. 23 New Hanover Regional Medical Center Transition to Community Nonprofit Corporation • All of County's hospital/health system property and ownership rights will transferred to NHRMC to become independent non-governmental nonprofit (without County nexus or control) • The privatization involves an obligation to operate the new corporation as a community general hospital open to the public and committed to serving all patients without discrimination including indigent populations • New Hanover County will no longer have a lease agreement in-place with the nonprofit entity, or Board of Trustee appointment rights County appoints none New Hanover County, or a minority of Board North Carolina (NHC) - - - - - - Board New NFP Corporation owns all Pender County, Primary Government assets and operating rights INC F_ Nonprofit Corporation New Hanover New Hanover Carolina Physician Quality ASC, LLCPartners, LLC Ambulatory Lower Cape Fear Pender Memorial Regional Medical Regional Medical Healthcare Hospice, Inc. Center Foundation Center (NHRMC) Associates, Inc Accountable Care Surgery Leasing (not controlled) Hospital, Inc. Organization (ACO) Company New Hanover Home Care, Inc. 24 New Hanover Regional Medical Center opwull rur pvsw Joint Ventures 0 40 40 Service Line Equity JV Collaborative / Joint Venture (Minority Support Services Interest) Organization r-nterprise-mue i ransacuon Structures 0 ruipvac Contractual Relationships 0 0 0 0 Affiliation / Service Line Contracting Management Clinical Co -Management Organization / Services Services Agreement ACO / CIN Agreement Alignment Enterprise opwull rur pvsw Joint Ventures 0 40 40 Service Line Equity JV Collaborative / Joint Venture (Minority Support Services Interest) Organization r-nterprise-mue i ransacuon Structures 0 0 0 0 0 0 Whole Joint Equity JV Change of Merger of Sale of Enterprise Operating (Majority Corporate Legal Assets Lease Agreement Interest) Member / Entities or Sole Member Majority of Substitution Capital Stock Post -Transaction Operatinq Characteristics 25 New Hanover Regional Medical Center F -Willy vi OpUtAllc rUUPUbU %.,UI ILlFdULuai FWldLIUII5111 JJ5 (less investment/integration) Clinical Services Affiliation (no impact) • Regional system provides cardiac specialty services for rural hospital Service Line Co -Management (none or limited impact) • Major orthopedic groups co -manage ortho department with hospital • National/regional center of excellence co -manages oncology services Management Agreement (significantly variable impact) • Shared services, GPO access • Comprehensive including executive employment 26 New Hanover Regional Medical Center F-,dIIJ.0 vi OpUtAlic; rurPvsU JvirIIL VUIILUrU5 (moderate investment/integration) 40 Service Line Joint Venture (no impact / limited impact re service line) • National or regional center of excellence joint ventures with hospital for affiliated oncology program at hospital Diagnostic or Support Services Joint Venture (limited impact) • Unaffiliated hospitals form regional clinical laboratory joint venture • Unaffiliated hospitals jointly capitalize and share risk platform 27 New Hanover Regional Medical Center Range of Enterprise -Wide Transactions (Higher investment/integration) Joint Operating Company (control loss variable based on relative value) • Joint Operating Company financially integrates and operates hospitals unable or unwilling to fully merge or consolidate (e.g., based on govt /non govt status, religious sponsorship implications) Merger with or consolidation into another nonprofit system • Two similar value hospitals merge (control shift negotiated, more even) • Hospital merges into large system; receives extensive capital and service line commitments (duration and value impact level of control shift) • Public entity cedes ownership and control of assets to nfp (monetary consideration impacts level of control shift) IN Sale to For Profit • Private equity firm acquires assets (loss of control; nominal local board appointed by company per state licensure and Medicare requirements) • National for profit system acquires assets (same as above) 28 New Hanover Regional Medical Center NNew Hanover �1 Regional Medical Center _IMINARY IDENTIFICATION OF KEY POSAL ELEMENTS What are the preliminary Key Proposal Elements (KPEs) that you have identified during this discussion? Topic summaries below to guide group discussion. Outlined NHRMC/County current structure Summarized key industry trends/ challenges Presented current barriers/ limitations identified by N H RMC BOT - Diplomatic Hurdles - Investment Outside of County - Branding Inflexibility - Financing Opportunity - Investment Limitations - Scale Limitations Reviewed potential independent, stand-alone restructuring options - SystemCo - Hospital Authority - 501(c)(3) Community General Hospital (public to private nonprofit) 30 Summarized Governance Best Practices - Health System as Operating Company: Most advanced health systems are functioning as operating companies by standardizing key functions - Board Formation and Competencies: Board members should be selected based upon competencies, experience and diversity targets - Board Accountability: Boards should maintain the ability to set and enforce participation guidelines Presented range of partnership options and implications on governance and control - Specific Purpose Contractual Relationships - Specific Purpose Joint Ventures - Enterprise -Wide Transaction Structures New Hanover Regional Medical Center V DISCUSSION: INDUSTRY CERNS NNew Hanover �1 Regional Medical Center Reports on cost and quality metrics at other hospitals that have been acquired or merged provide information that's worth considering in context of the bigger picture, which includes: The specific situation and motivation of any party in entering into a partnership or transaction will likely impact the outcome of the transaction Factors outside of the strategic partnership may be driving the observed outcomes As the industry evolves, outcomes may be different in the future There is a broad spectrum of partnership options Negotiating and establishing strategic partnerships generates mutual value by allowing each organization to achieve their stated goals 32 • An organization approaching a potential partnership from a position of strength may not expect the same outcome as an organization pursuing partnership as a result of financial distress • Given health systems historically operated more as holding companies than operating companies, the organization may not have undergone real change following the acquisition / merger (no systemness) • Shift from fee-for-service to value -based reimbursement means raising costs will not be a viable path to success • Increased dollars at stake for quality measures will increase everyone's focus on quality performance • The PAG is actively seeking proposals that call for full range of partnership models, with varying degrees of integration and investment (the research focuses on only mergers and acquisitions) • Outcomes will be influenced by the degree to which each partner is able to clearly define their goals • RFP issuer can pursue proposals, deal terms, assurances that would support the achievement of defined goals New Hanover 11 Regional Medical Center 33 New Hanover Regional Medical Center SING REMARKS NNew Hanover �1 Regional Medical Center Thank You 35 New Hanover Regional Medical Center