Saturday, October 26, 2013 12:00 AM
Detailing the deal: Duke LifePoint offers $56 million for majority ownership of hospital
$120 million pledged for capital
By Jon Jimison | Times Editor
Duke LifePoint Healthcare is essentially offering $56 million for an 80 percent majority ownership interest in Wilson Medical Center, according to documents obtained this week.
In its due diligence of the deal, Duke LifePoint valued Wilson Medical Center at $70 million and the $56 million represents 80 percent of that value, Rick Hudson, president and CEO of the Wilson hospital, said in an interview earlier this week.
There are also working capital numbers at play and an equation that factors in separately, but that could largely be a wash at the end of the day. Duke LifePoint will take on all the hospital’s obligations, including payroll, immediately upon close of the deal, which could happen by Dec. 31.
"They are taking on the operating expenditures,” Hudson said. "They have to make payroll in the first two weeks. They aren’t taking on bond debt.”
All the working capital goes to the partnership but all the bills do as well.
The specific deal on the table calls for an 80/20 joint venture with Duke LifePoint Healthcare securing majority ownership interest, local hospital officials said. There would be a 50/50 governance board composition.
Wilson County government ultimately has to give up its interest in the hospital.
A public hearing is planned on Nov. 4 in front of Wilson County commissioners. Commissioners have to vote on what’s known as a reverter clause Dec. 2 for the deal to be able to proceed.
The hospital provided potential partners’ financial information such as bonds, income streams and services for their due diligence work, Hudson said. Various people ran an appraisal.
RESERVE, DEBT MONEY
Wilson Medical Center also has $100 million in reserves. In addition, the hospital has $34 million in debt.
"We have to defease the bonds as part of the process,” Hudson said.
There is also $15 million in a defined benefit plan the hospital will pay off and close out, Hudson said.
Duke LifePoint does not get the $100 million in this deal. They money stays with the 20 percent minority partner, what’s known as the Wilson Medical Center legacy board.
"Our reserves are not part of this,” Hudson said. "That money in the bank is money the hospital saved and invested. If we wanted to borrow and build a new tower or new hospital you could go to the marketplace and borrow against it. Just like when you go to the bank, they want to know your credit and what equity you have to pledge against what you are borrowing.”
It reflects in the debt, equity ratio.
"All hospitals have to have very strong reserves,” Hudson said. "We have to borrow money for capital. We don’t have stockholders. The stronger your balance sheet the better rating you get. You have to have good operating cash flow and good reserves. We are in a strong financial position right now.”
Of the Duke LifePoint contribution, $34 million goes toward bond defeasance, according to Hudson. More money goes toward closing out the employee plan, which was frozen a couple years ago.
"No one is doing that anymore,” Hudson said of the plan.
The agreement struck between Wilson Medical Center and Duke LifePoint basically says they need to operate for indigent care services the way it’s operated now.
The eventual minority shareholder, Wilson Medical Center, would be protected as a nonprofit 501(c)3 even though the overall entity becomes a tax-paying, for profit organization.
According to documents filed with Wilson County government, Duke LifePoint or its affiliate would offer employment to all people who are active employees of WilMed in connection with the business or operation of the medical center.
The agreement obligates the joint venture to spend a minimum of $120 million in connection with capital improvements at the hospital during the next 10 years.
A master facility plan will be developed.
The process of strategic planning is similar to what the hospital does now, Hudson said.
"Having them guarantee we will have that level to spend every year helps us make sure we are going to be up to date with our technology and equipment,” Hudson said.
However, this money will be going toward things like maintenance, IT, equipment, the existing facility and technology needs, many that are called for by the meaningful use requirements of the government.
All of this would be paid for along the 80/20 partnership split.
Medical equipment updates are costly with things such as MRI machines, CT scan equipment or even just new lights in the operating rooms.
"We do have expensive technology and it costs money to stay up with the times,” Hudson said.
It will be up to trustees and the governance board to determine whether they would take up larger projects like a planned but tabled patient tower, which could cost upward of $100 million by itself.
A single floor renovation, for instance, could take $10 to $12 million a floor, said Hudson, who points out Wilson’s aging 50-year-old facility.
In a letter that accompanies documents to the county, Paul Hannah, senior vice president of development at LifePoint, said the partnership is uniquely positioned to improve access to services and specialists, enhance marketshare and best position the hospital for sweeping health care reform.
He noted Duke LifePoint will enhance the long-term financial viability of WilMed by debt elimination.
"Our proposal commits to maintain a local role in the governance of WMC through a local board of trustees whose membership would be comprised of local community members, physicians, the hospital CEO and a Duke representative,” Hannah said.
They will develop and support new clinical programs, he said, and support and recruit the right physicians.
Hannah also noted they would enhance the recognition of WilMed clinical programs through branding with Duke LifePoint, providing marketing resources, and at the discretion of the trustees and staff, enter into clinical affiliations with Duke itself.
A LONGER STAY
Hudson, who has announced his intention to resign as CEO, will stay through the end of the year.
The hospital’s top leader has led the process and wants to see it through to its conclusion.
This all-consuming endeavor, he notes, has taken more than a year and a lot of time.
The only thing he would have done differently is perhaps starting the process six months earlier as the national tides shifted.
Wilson Medical Center officials announced their intention late last year to seek a partner for the future.
And a united Wilson Medical Center board of directors later announced it had signed a memorandum of understanding for a joint venture with Duke LifePoint. Hospital officials point to potential benefits, including access to LifePoint’s capital and operational resources to allow WilMed to expand and enhance services and invest in its aging facilities and new technology.
The hospital would also have access to Duke’s clinical, quality and patient-safety programs, hospital officials said.
The implementation of the Affordable Care Act approved by Congress and signed by President Barack Obama March 23, 2010, is driving the movement along with cutbacks in medical reimbursements.
These affiliations and nationwide trends have proponents and some critics who claim the ties could lead to higher patient bills and insurance costs as the organizations gain negotiating clout. On the other side, hospital supporters said smaller facilities can’t survive and operate for their communities under the reform climate, and many of these hospitals face outdated facilities and need multi-million-dollar upgrades.
This deal must be approved by the North Carolina Attorney General.
There is a 60-day review window for Attorney General Roy Cooper, but his office doesn’t have to take the entire two-month period.
The attorney general’s timeline takes it potentially into December. Hudson noted Cooper’s office hasn’t yet received final closing documents but might this week.
The final closing is tentatively set for Dec. 31.
The public process taking place now stems from the charter and bylaws established when the hospital transferred from county ownership to become a tax-exempt organization.
As part of that transfer, the county retained an interest in the hospital in the form of a reverter as required by N.C. General Statutes Section 131E-8. Wilson commissioners have had to request proposals from no fewer than five bidders and hold hearings before they eventually vote on whether to release the reverter. The process must reflect the current work already undertaken by Wilson Medical Center and states no proponent will be considered unless also approved by Wilson Medical Center.
The final commissioners’ vote could be on Dec. 2, according to the updated timeline.
Wilson Medical Center has stood as a largely independent hospital since its inception in 1964.
This deal changes all that and has received a lot of attention because of the hospital’s importance to the community on multiple levels.
The hospital, which has more than 1,300 employees, has emerged as the third-largest private employer in Wilson County. The hospital and its related facilities sustain a $56 million payroll, which provides a significant economic impact to the county.
Although this deal faces review by the attorney general, officials look to avoid review by the Federal Trade Commission due to the choice of partner.
Duke LifePoint is a joint venture of Duke Medical and LifePoint Hospitals formed to build a network of hospitals and health care providers. Duke University Health System calls Durham home. LifePoint Hospitals is headquartered in Brentwood, Tenn.
LifePoint alone plans to be in 60 communities in 20 states by the end of the year. The Duke LifePoint joint venture is in four hospitals.
LifePoint Chairman and CEO William F. Carpenter III and Dr. William J. Fulkerson Jr., executive vice president of Duke University Health System, said they are excited and serious about this partnership formed in January 2011 and see it as combining Duke’s strength in medicine and LifePoint’s strength in operations.
"I think we offer a compelling opportunity,” Fulkerson has said about the Wilson joint venture. "I think you can tell our enthusiasm and our interest to work with leadership and medical staff in Wilson to do something really special there. We are really excited about this and ready to get to work.”
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