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Banking & Finance

The Financing Issues Driving NHRMC Talk

By Jenny Callison, posted Jul 3, 2020
While stakeholders and the public in New Hanover County may differ on the best path toward a sustainable future for New Hanover Regional Medical Center, there is broad agreement on the facts of the system’s current situation.
 
One of the basic facts is that New Hanover County and environs is a fast-growing area. New residents will need – and expect – high-quality health care. At the same time, many current residents of Southeastern North Carolina have limited access to health care and may not have insurance or funds to pay for it when they do need medical attention.
 
Another fact is that, as a county- owned system, NHRMC has a debt capacity of only $150 million.
 
“We can issue $150 million in bonds and not deteriorate our credit rating,” Ed Ollie, NHRMC’s chief financial officer, said during a recent interview. “If we incur too much debt, however, our credit rating is lowered, which affects our access to credit.”
 
NHRMC has the distinction of being the largest county-owned system in the country that is not supported by local taxes.
 
A high credit rating enables an institution to borrow money at favorable rates. Maintaining that rating requires it to meet certain standards. For hospitals, one of those standards is having sufficient cash on hand to cover operation costs during emergencies, such as natural disasters. At present, according to Ollie, the NHRMC hospital has about 240 days’ cash on hand. He noted that it costs the hospital $3.2 million per day to operate.
 
“Standard & Poor’s wants us to have 350 days’ cash on hand,” said Brian Eckel, an NHRMC trustee and chair of the board’s finance committee.
 
Eckel also is part of the 21-member Partnership Advisory Group tasked with wading through the process of exploring NHRMC’s future, including purchase offers from outside health systems.
 
It has never been the practice for the hospital to receive taxpayer support, said Eckel, and it would be an unpopular thing to do now, since levying a tax to support the hospital would raise taxpayers’ rates dramatically – a minimum of 21%, according to an assessment done recently by a financial consultant for the Partnership Advisory Group (PAG).
 
A team from NHRMC, representing medical center trustees, physicians and executives, developed a strategic plan for NHRMC. The plan, introduced in 2017, carries a $1.9 billion price tag and focuses on funding the system’s capital needs and enhancing its capabilities, according to Eckel.
 
A major concern reflected in the strategic plan is the need to improve health equity for all county residents, Ollie added.
 
Part of the $1.9 billion would be aimed at increasing access to health care for people living in poverty and addressing underserved populations’ higher-than-average incidence of infant mortality and such conditions as hypertension and diabetes. That initiative would include new programs as well as construction of medical facilities in neighborhoods that currently lack easy access to health care.
 
The central problem officials face is how to fill the gap between a $150 million borrowing capacity and a $1.9 billion plan they see as vital to the future of the region’s health care.
 
Eckeland fellow PAG members have come to believe that acquisition by the right partner would be the best solution.
 
The PAG issued a letter to the public last month explaining how the members arrived at their consensus.
 
“Ed and his team have been working for years to reduce the cost of care [in New Hanover County],” Eckel said. “We believe a partner would give us more opportunities to do that.
 
“Other organizations [the three recently selected as top candidates by the PAG – Duke Health, Atrium Health and Novant Health] would also bring scale to us. They also have staff that have built hospitals before, and we would benefit from that experience as we look at a new hospital location in Scotts Hill, for example.”
 
Eckel said that an essential factor in NHRMC’s ultimate decision on a partner will be its cultural fit.
 
“[The organization] has to align with our strategic goals and culture,” he said.
 
Some county leaders agree on the facts of the case but see possible solutions other than allowing a sale. New Hanover County Commissioner Rob Zapple has been outspoken on the matter.
 
“We agree that the status quo for the current [NHRMC] administration needs to be adjusted,” Zapple said. “John Gizdic [NHRMC CEO] made it clear to me and the other commissioners that there was a need to make structural changes mainly centered around financial [matters]. John was frustrated about not being able to borrow enough.”
 
Zapple and the four other county commissioners have the final say on any deal if one is made, and it also would require approval from the hospital trustees.
 
Zapple pointed out that the county has long realized that the hospital’s financial needs would require better long-term funding.
 
In 2018, it commissioned a study by First Tryon Advisors, the county’s financial adviser, to look at NHRMC’s existing structure and funding limitations and possible alternatives. The study report outlined a possible solution, said New Hanover County Chief Communications Officer Jessica Loeper.
 
The restructure option suggested by the report would “create a parent company for NHRMC and [outline] what the next steps would be to implement that new structure,” Loeper said. “This research was done more than a year-and-a-half ago to provide the hospital and county with information about an alternate corporate structure (called “SystemCo” in the report).”
 
Zapple said that when the county and NHRMC announced last July that they might consider a sale, they promised that any purchase or partnership proposal from an interested health care system would be compared to that SystemCo option. But Zapple said he thinks most discussions since then have largely ignored SystemCo.
 
“SystemCo would have provided a legal and financial way in which the county could justify borrowing money and paying for out-of-county bricks-and-mortar facilities to be able to expand into Brunswick and Pender counties,” Zapple said, explaining that the option would have allowed for an investment by a financial partner but would have left governance in the hands of NHRMC. “The paperwork supporting it was fully vetted and was sitting on the county manager’s desk, ready to be brought up, when this whole issue came up.”
 
Zapple still advocates for the SystemCo plan and wants officials to take a fresh look at the strategic plan to see if all items targeted for funding are still relevant and needed. He said he believes that “some sort of financial investment of $600 million to $900 million from a venture capital firm or other health care system would be enough to take care of critical elements of the strategic plan and place us in a situation where we have enough reserves and could weather another pandemic or other crisis.”
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