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1997-05-15 Work Session NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 983 ASSEMBLY The New Hanover County Board of Commissioners held a joint Work Session with the Hospital Study Committee on Thursday, May 15, 1997, at 10:00 AM. in the Cape Fear Museum Williston Auditorium located at 814 Market Street, Wilmington, North Carolina. Members present were: Commissioners Buzz Birzenieks; Ted Davis, Jr.; Charles R. Howell; Vice-Chairman William A Caster; Chairman Robert G. Greer; County Manager, Allen O'Neal; County Attorney, Wanda M. Copley; and Clerk to the Board, Lucie F. Harrell. Members present from the Hospital Study Committee were: Mr. Derrick R. Anderson, Mr. David B. Benford, Ms. Roberta Clark, Mrs. Joyce Fernando, Mr. Adair M. Graham, Dr. Truman McCasland, Mr. Jim Pierce, Mr. Robert S. Rippy, and Dr. Don Latham, Facilitator. The Chairman ofthe Hospital Study Committee, Claude (Buck) 0' Shields, Jr. was on vacation and could not attend the Work Session. Chairman Greer called the meeting to order. He reported last year the New Hanover Regional Medical Center Board of Trustees requested the Board of County Commissioners to consider transferring the Medical Center to a Community General Hospital. After months of debating the issue, the former Board decided to defer action until the new members of the Board were elected and sworn into office on December 2, 1996. The new members felt that a Hospital Study Committee should be appointed to thoroughly study this issue and prepare a recommendation and report to be presented to the Board. The nine-member Hospital Study Committee was appointed on January 21, 1997, and the recommendation was made to the Board of County Commissioners on May 5, 1997. At that time the final report had not been completed. Chairman Greer advised the purpose of the Work Session was to discuss the final report and hear comments from the members of the Hospital Study Committee. Mrs. Joyce Fernando, Vice-Chairperson of the Hospital Study Committee, reported on April 2, 1997, five of the nine members unanimously agreed they could not recommend for New Hanover Regional Medical Center to become a Community General Hospital under current statutory provisions. The Committee proposed that New Hanover Regional Medical Center maintain its current status as a public hospital if Senate Bill 247 was approved by the North Carolina General Assembly. If this legislation is not enacted within twelve months, the Committee recommends permitting New Hanover Regional Medical Center to become a Community General Hospital with the following caveats: (1) The Board of County Commissioners will be able to appoint and remove all members ofthe Board of Trustees except medical staff representatives: The Committee was aware that the Board of County Commissioners had already insisted on this stipulation. This action was an indication that the Commissioners were willing to place controls on the transfer. (2) The Board of County Commissioners will approve changes to the Articles of Incorporation and Bylaws: The Committee felt this restriction was necessary to ensure the County's appointment of trustees. There was concern that changes in the Bylaws or Articles of Incorporation could negate the appointing authority of the Board of County Commissioners. (3) Allow private negotiation of managed care contracts but not for the purchase of medical practices: The Committee was unanimous about the need to negotiate contracts for managed care confidentially. It was felt the purchase of physician practices was another issue. Most of the discussion centered around potential conflicts of interest. (4) The Hospital must provide indigent care: This issue dealt with establishing controls to assure an adequate level of care to all County residents who could not pay. The Committee was aware that this condition had been stipulated in the past by the Commissioners. NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 984 (5) The Hospital must continue bidding under N. C. Public Bidding Laws: Some Committee members felt a need to continue opportunities which allow minority and women business enterprises to participate in contracting activities. According to the Institute of Government surveys, there was no substantial increase in the cost of awarding multi-prime contracts versus single-prime contracts. (6) The Hospital will agree to continue paying property taxes or a specified amount to the County each year for medical practices purchased: The concerns were based on losing a significant portion of the County's property tax base if the hospital purchased physician practices. There was also concern under the existing status as to when the property would become part of the non-profit hospital. (7) The Hospital will not unreasonably exclude physicians or medical practitioners from use of hospital facilities: As the managed care concept escalates, there is considerable concern the system could evolve to a point where only physicians, whose practices were purchased by the hospital, would receive hospital privileges. The other health providers would be excluded. (8) Investments will not be allowed beyond what is allowed under a public hospital status: The Committee discussed two issues associated with investment criteria: (1) if the hospital must rely on investment income because patient care is decreasing, it raises questions about survival goals versus patient care goals; and (2) the recent swing in the market supports the sensibility of conservatism when dealing with public funds. The Committee discussed the possible limitation of risk investments to a percentage of total investments which invoked a sense of even more control, but the Committee opted for the caveat as written. The Committee felt the hospital was on a sound financial base and was a quality medical institution. The Board of Trustees and administration of the hospital should be commended on these accomplishments. Before a change occurs, it is important for the Board of Trustees to address the concerns of the community, explain the importance of the change, and inform the citizens of future issues facing the hospital. The options oflease and sale were not fully explored. The Board of County Commissioners may be interested in fully exploring these options. The hospital authority option was rejected by the Committee. In closing, Mrs. Fernando expressed appreciation to the Board for the opportunity to serve on the Hospital Study Committee. Mr. Jim Pierce expressed appreciation for allowing him to serve on the Committee. He advised when beginning the study process, he was very opposed to changing the structure of the hospital. The hospital was managed and operated successfully with revenues in excess of$20 million. As the study progressed, his opinion totally changed. Even though the Committee did not recommend changing to a Community General Hospital, all members felt that change was needed for the hospital to continue to provide quality medical care. The Committee could not agree on how much change should occur. Some members believed that allowing the contracts to remain confidential was sufficient. Other members believed more changes were needed to allow the hospital to remain competitive and successful in the future. After completely analyzing the need for change, he felt the hospital needed more flexibility in order to compete. Under a community general status, this flexibility would be provided. In closing, Mr. Pierce advised he tried to remain unbiased during the study with information used outside of the County in determining that the hospital structure should be changed. Mr. Derrick R. Anderson expressed appreciation to the Board for appointing him to serve on the Hospital Study Committee. He advised his recommendation was to allow New Hanover Regional Medical Center to be transferred to a Community General Hospital. This decision was NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 985 based on hearing factual information and discussion with several former hospital trustees, doctors, and persons who had been involved with the hospital for 30 years. A majority of these persons felt the change was absolutely necessary. In closing, Mr. Anderson advised he began the study feeling that no change should occur; however, after objectively listening and studying the facts, he felt the hospital should be changed to a Community General Hospital in order to remain competitive. Mr. Adair M. Graham advised when considering a structural change to a community general status, he felt he would have to be convinced that it was necessary to make the change. Frequently, changes occur throughout the country for the sake of change without the change being necessary. In studying the issue, one basic discovery was the difference between a private "not-for-profit" and private "for-profit" hospital. This difference can be defined in two words, local control. When delivering the title of the property, which would occur under the community general status, he felt the Committee should have spent more time determining the actual value of the hospital because it might be better for the taxpayers of New Hanover County to know the value of the asset being given away. The potential revenue from this asset could eliminate future tax increases and pay for many unmet County needs. Mr. Graham advised on two different occasions, he asked the Chairman of the Hospital Board of Trustees to define the difference between private not-for-profit and private for-profit hospitals. The Chairman responded that local control was the major difference. This definition explains why the caveats were needed under a community general status. For example, under the current Bylaws, the Hospital Board of Trustees would have the right to appoint all of the trustees, if so desired. Therefore, from a local control point of view, the Commissioners would need the proposed caveat. Also, requiring the Hospital to continue to pay property taxes, or a specified amount on medical practices purchased, was needed to cover the possible loss of property tax revenue. Forsyth County has experienced a considerable loss of property tax revenue from its Community General Hospital purchasing medical practices. As the managed care concept escalates, the system could evolve to a point where only physicians whose practices were purchased by the hospital would be granted hospital privileges. This would exclude other health care providers from using the hospital as well as keep highly qualified physicians from moving into town. Mr. Graham advised from an investment aspect, he had major concerns because the revenue projections were based on a mixed portfolio with 45% in the equity market, 5% in the money market; and 50% in the bond market. Projections were based on interest rates on long-term bonds in excess of8% and an equity growth performance at 15%. The figures were based on the Forsyth County mix with 45% committed to equity. Public companies have a maximum of 15% exposed to the equity market; therefore, he felt it would not be prudent for the hospital to take its surplus reserves and invest this percentage in the equity market. In closing, Mr. Graham expressed appreciation to the Board for being given an opportunity to serve on the Hospital Study Committee. Ms. Roberta Clark expressed appreciation to the Board for being appointed to serve on the Hospital Study Committee, and she thanked Ms. Pat Melvin, Assistant to the County Manager, for the astute manner in which she assisted the Committee. She reported the Committee operated from studying and reviewing all aspects of the proposed change in the hospital structure. The starting point did not begin with a conclusion, and the study process was successful even though there was disagreement among the members. Mr. David B. Benford advised he felt the Medical Center should be transferred to a Community General Hospital. The major reason for a community general status is to provide more flexibility to the hospital so it can effectively operate in a changing environment. He stated the recommendation being presented was too restrictive. NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 986 Mr. Benford expressed disappointment that the Committee did not thoroughly study whether the hospital should be leased or sold, even though he was not in favor of either option. He advised that if no change was made and Senate Bill 247 was enacted, the hospital would not have enough flexibility to remain competitive and successful. Therefore, the value of the hospital is important, and perhaps some consideration should be given to selling this asset while it is at its highest value. There was very little support for these two options because of the strong feeling within the community for local control. In closing, Mr. Benford expressed appreciation to the Board for giving him an opportunity to serve on the Hospital Study Committee and Hospital Board of Trustees. Dr. Truman McCasland advised as a retired hospital administrator he had heard about the need to change the structure of the Medical Center for many years beginning with a request to have a hospital authority. He stated at some point in time, a structure change may be needed; however, the hospital is in a sound financial condition and is operating successfully. If Senate Bill 247 is enacted, the hospital should remain public. If the legislation is not enacted within twelve months, then a general community status should be considered with the proposed caveats. In closing, Dr. McCasland expressed appreciation to the Board for giving him an opportunity to serve on the Hospital Study Committee. Vice-Chairperson Joyce Fernando advised she stood behind the report 100% and expressed appreciation to Assistant to the County Manager, Pat Melvin, and Dr. Don Latham for the excellent support given to the Hospital Study Committee. Chairman Greer expressed appreciation to the members of the Hospital Study Committee for their remarks. He opened the floor to receive questions and comments from the Commissioners. Vice-Chairman Caster agreed with the first caveat allowing the Board of County Commissioners to appoint and remove all members of the Board of Trustees. He asked why the second caveat, regarding Board approval for changes in the hospital's Articles ofIncorporation and Bylaws, was necessary when the Board already had authority to appoint all hospital trustees? County Attorney Copley responded when the Board was originally requested to consider transferring the hospital to a community general status before the Hospital Study Committee was appointed, the Commissioners felt this caveat was necessary. The Bylaws reference how trustees can be appointed and removed. Under the current Bylaws, a trustee is removed upon recommendation by the Hospital Board of Trustees to the Board of County Commissioners with a unanimous vote required by the Board of County Commissioners before the trustee can be removed. There was also concern about the ability of the hospital to increase the number of trustees. For example, there are presently 17 trustees. If the hospital decided to enlarge the membership to 25, this action could remove a majority of the trustees being appointed by the Board of County Commissioners. With the possibility of these changes occurring in the Bylaws and Articles ofIncorporation, the Committee felt the proposed caveat was needed. Vice-Chairman Caster expressed concern for the Board ofCounty Commissioners specifically stating the Board would appoint all trustees except for the medical representatives. He strongly objected to language being placed in any document that would state otherwise and recommended removal of any verbiage that was not consistent with this policy. Mr. Dumay Gorham, the attorney representing New Hanover Regional Medical Center, advised the two issues being discussed were addressed in documents considered by the Commissioners in November 1996. Therefore, from the Medical Center's point of view these items have already been addressed. The Commissioners would continue to appoint all the trustees with the exception of the medical representatives. Also, discussion was held last fall about no regulation being in place to prohibit the Board of Trustees from modifying the number of trustees. He advised when discussing this issue last year, a list of safeguards was established to prohibit the Board of NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 987 Trustees from taking any action that specifically related to the governance of the Medical Center without approval by the Board of County Commissioners. Vice-Chairman Caster requested an explanation of why the hospital should not be allowed to privately negotiate the purchase of medical practices. Mr. Benford responded he was not in favor of the caveat; however, a majority of the Committee was opposed to allowing the hospital to purchase medical practices. If the hospital is to survive, some form of a relationship will have to be created with the primary doctors because these doctors control the bulk of insurance money. Another major concern is that competitors will be able to privately purchase medical practices which will be detrimental to the Medical Center if it remains a public hospital. Commissioner Birzenieks commented on discussing this issue with hospital administrators and reported they felt the hospital would stay away from purchasing medical practices because of the horror stories told by some hospitals involved in these acquisitions. Mr. Benford agreed and stated this issue has been debated throughout the country. He stressed the importance of everyone understanding that if the competitor can privately purchase medical practices, the Medical Center should have the same privilege. Mr. Graham advised that public funds were at stake and stated, in his opinion, there are potential conflicts of interest with private contracts for purchasing medical practices. He recommended public scrutiny of these types of acquisitions in lieu of private agreements. Further discussion was held on the fact that actions of this type had not occurred at the Medical Center. Mr. Pierce emphasized the importance of providing flexibility to the Medical Center so the hospital can purchase medical practices if necessary to remain competitive. Vice-Chairperson Fernando stressed the importance of providing a safety net with the proposed caveat. Dr. McCasland stated the reduction of hospital beds is certainly an indicator of the need for doctor referrals. If you consider the present competition (Columbia-Cape Fear) with a Certificate of Need which restricts the duplication of available services, the Medical Center does not have a problem and is in excellent financial condition. If the Certificate of Need legislation should be eliminated, the entire medical care system would change and the community general status should be considered. Discussion was held on how the provision of indigent care was measured. Commissioner Birzenieks reported the Board of County Commissioners would be responsible for being sure that indigent care was provided. He stated if one indigent person was denied service, the Commissioners would be faced with a major problem. Vice-Chairman Caster reported when discussing indigent care a year ago, no percentage or measurements were used; however, the law requires the provision of indigent care. Discussion was held on the caveat requiring the hospital to use the public bidding laws. Commissioner Birzenieks advised when attending the School for County Commissioners in New Bern, North Carolina, the Institute of Government felt there was no substantial increase in multi- prime contracts versus single-prime contracts. He advised this was surprising to him; however, he felt that local businesses should have an opportunity to bid, which occurs more frequently when using the public bidding laws. Mr. Jim Hobbs, President/CEO, New Hanover Regional Medical Center, reported when discussing this issue with Carolina Medical Center, which operates as an authority, it was found that time was saved with utilization of a single-prime contract. The hospital administration believes that NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 988 time would be saved as well as costs which would reduce the total project. When considering the development costs that are required for a multi-prime project, such as consulting and engineering fees, the cost of the project is increased. He stressed the importance of providing the necessary flexibility to pre-qualify bidders without the risk of being sued, which in the long-term will protect the tax dollars. Discussion was held on the caveat regarding the exclusion of physicians or medical practitioners from using the hospital facilities. Mr. Hobbs responded that most medical centers have exclusive contracts, such as anesthesiologists and radiologists, and stated these contracts improve the quality of care. If the proposed caveat relates to excluding physicians that may not be purchased by the Medical Center, this would not happen because not enough medical practices could be purchased, nor could the hospital selectively exclude physicians and continue to provide full services. The Medical Center has an open staff policy. Ifa physician meets the qualifications and training criteria, completes the credentials process through the Medical Staff, and is approved by the Board of Trustees, the physician can practice at the hospital. Mr. Graham advised that exclusion of physicians had occurred in other communities; therefore, this was the reason for placing the caveat in the recommendation. The Hospital Study Committee was not addressing current contracts in place for radiologists or anesthesiologists. Vice-Chairman Caster stressed the importance of being sure that language is placed in the agreement that will allow physicians moving into the area to practice at the Medical Center. Mr. Hobbs advised the issue being discussed is an open versus a closed medical staff. Under current regulations, a public hospital has the ability to close certain portions of the medical staff contingent upon a physician needs survey showing there is a sufficient number of quality physicians in a community under a particular speciality. Currently, the Medical Center has an open medical staff policy. Discussion was held on the caveat regarding more flexibility in investments. Vice-Chairman Caster advised that more flexibility in investments was the major reason he was in favor of transferring the Medical Center to a Community General Hospital. He requested Mr. Graham and others to comment on this issue. Mr. Hobbs advised that more investment flexibility was the positive aspect of becoming a Community General Hospital. He reported in order to support patient care in the future, the Medical Center would have earned more money on its investments. Patient care revenue is declining. The Presbyterian Health Care Center in Charlotte earned more revenue from investments than through patient care. The revenue from investments was returned to the Presbyterian Health Care Center to provide patient care. If the hospital continues to rely on patient care income in the future with investments lowered because of public hospital regulations, the Medical Center will experience financial problems. With reference to swings in money markets, prudent policies would be established to avoid risky investments. The investment projections are realistic and after reviewing organizations with additional flexibility, additional investment income has been received through investments that are monitored by the Board of Trustees and ultimately by the Local Government Commission. Mr. Graham commented on the newspaper article and asked if the unrealized gains at the end of the year were listed as profits. If so, the profits realized in excess of operations could have been unrealized gains. If this is the case, there would be more income from investments than from operations. This means the additional unrealized gains were used to improve patient care. If the investments should experience an unrealized loss, would the losses incurred be taken from patient care. If the gains had been realized and brought to the bottom line with actual cash being used to improve patient care, there would be no problem. Mr. Hobbs stated organizations, such as the N. C. Baptist Hospital, have been able to increase investment revenue over the long-term through more flexibility in investments. NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 989 Commissioner Howell stated if the Medical Center needs to continue to increase funds to invest, then patient charges will have to be increased. He stated, in his opinion, the patient charge should be lowered. Mr. Benford reported the Medical Center has $75 million in reserve; therefore, this money can be invested to generate more revenue and eventually reduce patient fees. Mr. Bobby Rippy advised that HMO's would not control the cost of the Medical Center because there was no competition in the area. After spending time discussing the community general status with hospital officials in Winston-Salem, Charlotte, and Raleigh, the battle was over which hospital would be in control because of competing hospitals. This is not the case in New Hanover County. The only chance of receiving competition in this area would be if the Certificate of Need legislation was eliminated. In his opinion, transferring the Medical Center to a community general status at this time is not necessary. In future years, this transfer may have to be made; however, for the Medical Center to charge higher fees to accumulate funds for investments to assist with the provision of patient care is not correct. If investments should suffer a loss, what would happen to patient care. There is a need to have a reserve in place to cushion the hospital and earn money on the reserve. The control of the hospital will be determined by the federal government. If Medicare reimbursements were significantly reduced, this would create a problem; however, this decision does not have to be made for at least eighteen months. Since the hospital is in a sound financial position with no major competition, no change is needed at the present time. He advised that Commissioner Howell was right in the sense that patients are being overcharged to earn more money for investments. Commissioner Birzenieks asked if a community general transfer occurs, how will the taxpayers benefit and what will the County gain or lose? Mr. Rippy responded the taxpayer would not gain or lose; however, if the community general hospital did not make a profit in the future, the taxpayers would have lost the value of the asset. Mr. Benford stated the purpose of recommending a community general status was to preserve the asset and continue to provide quality medical care. Having an adequate reserve is essential to the successful management of a hospital. Mr. Graham stated when transferring the Medical Center to a Community General Hospital, the title is changed. When the title changes, an asset is delivered; therefore, what is the value of this asset to the taxpayers of New Hanover County. Once the title changes, this asset is no longer owned by the taxpayers of New Hanover County. Commissioner Howell stated private hospitals must pay taxes and make a profit to satisfy investors. In his opinion, these are disadvantages compared to being a public hospital. He expressed concern for rates constantly increasing at the Medical Center and stated if this trend continues, clients will drive to Durham or Chapel Hill for medical care. Mr. Rippy stated if rates are not controlled, patients will seek care from other institutions. Commissioner Davis commented on the $75 million reserve and asked who owned the money? Mr. Hobbs responded New Hanover County. Commissioner Davis stated this means the Board of County Commissioners could use a portion of the reserve to fund other obligations. Mr. Jim Eyerman, Executive Vice-President of Finance for New Hanover Regional Medical Center, commented on $89 million in outstanding bonds and stated the hospital tries to set aside a reserve that is equivalent to the money borrowed for construction projects. Also, the cash reserve must be sufficient to maintain a good bond rating. If the County used a portion of the reserve, the NEW HANOVER COUNTY BOARD OF COMMISSIONERS WORK SESSION, MAY 15, 1997 HOSPITAL STUDY COMMITTEE BOOK 25 PAGE 990 County would have to comply with bond covenants, which allow for the reserve to be used as long as it does not jeopardize the ability of the hospital to repay its bond debt. ADJOURNMENT Chairman Greer expressed appreciation to everyone for their interesting comments, and he adjourned the meeting at 12:05 P.M. Respectfully submitted, Lucie F. Harrell Clerk to the Board