Selling the Hospital Building

The new year began with the lines clearly drawn. At a meeting of the county board on January 5, 1998, Winterville real estate developer Sam Wright, who had earlier written a letter to the editor opposing privatization of the hospital, spoke to Pitt County commissioners. He urged them to think long and hard before deciding the issue. Wright had compiled a 12-page report, “The Future of Pitt County: a Grand Vision vs. a Privatizing Giveaway,” warning that privatization would benefit only the hospital’s administration, including its board of trustees. He said, “As I looked at this, I have found little or nothing that will benefit the county or the hospital by the action that the administration is pursuing. What I’m suggesting is that the administrators of the hospital is a special interest group separate from the hospital itself and separate from the county itself.”

A letter from Wright had appeared in the January 4 , in which he said that $23 million of Pitt County’s money had gone into leasing Roanoke-Chowan Hospital, hospice, and medical practices in Ahoskie. He said that putting county money into a competing hospital outside the county was a $161 million loss for taxpayers, because every dollar spent in a local economy turned over seven times in that economy. He also said in his letter that PCMH’s administration wanted to privatize so that it could borrow millions more against the hospital for regional expansion.

Tom Fortner, the director of the medical center’s Office of News and Information, distributed information meant to clarify some of the statements Wright had made. The release stated that Roanoke-Chowan was a referring hospital, not a competing one, giving PCMH a regional affiliation for referrals for high-level services. The lease payments, $1 million a year on a 23-year lease, were returned at the end of each year for capital expenditures at Roanoke-Chowan. At the end of the lease term, PCMH had the right to purchase the Ahoskie facility for $100,000.

PCMH trustees chairman Lawrence Davenport said Wright presented misleading information. “It’s unfortunate to say that he chose to take the facts that were freely given to him by the hospital and anyone else and rearrange them so that they are giving very misleading innuendoes. The trustees don’t have anything to gain from this personally, and I don’t think the administration does either.”

The commissioners met on January 7 to discuss PCMH’s second privatization proposal offering the county $20 million up front in place of the earlier $18 million offer.

A publicity campaign by the hospital supporting privatization came under fire at the board’s meeting when Commissioner Savage made a motion which failed 4-5 to ask the hospital to quit spending money on publicity. He said that the commissioners could not spend taxpayers’ money to advertise the people’s position, so PCMH had an unfair advantage. “It is wrong, it is irresponsible, and it is unfair, and—to coin a phrase—it puts us at a competitive disadvantage.”

At the meeting, commissioners voted unanimously to reject the financial considerations proposed in the hospital’s second privatization offer. They called a special meeting on January 20 to review the rest of the offer.

The board of commissioners rejected the 25-year annual payment offer in favor of a requirement that the hospital pay in perpetuity at the normal tax-assessed value in lieu of taxes. They also added a requirement that the hospital should reimburse the county annually for 100 percent of the payments that the county made for indigent Pitt County citizens. They inserted a clause stipulating that the hospital would revert to the county in the event the hospital was more than 90 days late in making payments.

McRae said that some of the hospital trustees believed that no exchange of money would be allowed because the county was retaining, through the governance terms, control of the hospital.

The commissioners voted 6-3 to change the portion of the board that was being appointed by the county from a simple majority to 60 percent. The board voted 7-2, with Savage and James dissenting, to accept in principle the financial covenants that were meant to ensure PCMH’s continuing financial strength. Also, all the commissioners except for Savage voted to accept in principle the section of the proposal dealing with indigent care, which included the condition that PCMH would accept all residents of Pitt County without regard to ability to pay. A formula for calculating the number of indigent care patients had been included in the consultants’ terms.

The hospital’s chief financial officer, Jack Holsten, had said that no patient would ever be refused treatment because of not being able to pay for it. He said, “Even if there was a natural disaster, we would care for the people irrespective of what their financial situation was. There’s no need for a number or an index. We’re just making a simple commitment that we’re going to accept all people without regard to ability to pay.”
The hospital board met on January 10. Several trustees were worried whether PCMH could afford, without being placed in an unfavorable financial position, to pay the county the money the commissioners wanted. The danger was that it would hinder the hospital’s mission or force it to pass the cost on to patients.

Trustee Ervin Hardee said, “We’re providing the best services for the lowest cost, but people haven’t grasped that concept. I have a real problem with the money issue. It’s counterproductive when we give $50 million to the county. I really do think the county should get back what it put (into the hospital) plus interest. But after that, I have a real problem.”

The commissioners had voted January 7 to require annual payments not limited to 25 years, but in perpetuity, based on the commercial tax rate, which could exceed $1 million in some years. Also, the commissioners would require PCMH to reimburse the county annually for all Medicaid costs resulting from services provided by the hospital, estimated at about $1.2 million a year.

Holsten said that if the only payments required were those in lieu of yearly taxes and Medicaid reimbursement, then the two positions would not be too different. Using a formula assuming a 6 percent devaluation of money over time, the hospital’s proposal would be worth $35.3 million, and the county’s would be about $39.9 million—assuming in either case that no money would be paid up front.

“Up-front money is a least consideration. What we need to concentrate on is not hurting that hospital’s financial position at all,” said Charles Gaskins, the county’s representative on the PCMH board.
On January 20, the published a letter from Sam Wright pointing out that the county commission’s privatization workshops deceived the public. They were not, he said, assessing all options for PCMH’s future, but had considered only the three covered in their consultants’ report. The consultants were instructed to limit their reporting to these three options: keeping the status quo, changing the statutes, and going private, nonprofit. They evaluated no other options.

Wright convinced the commissioners to give him 45 minutes on the agenda of their January 29 meeting to address them about his report criticizing privatization. He spoke to the county board as scheduled for almost an hour, including time for discussion with commissioners. He maintained that the commissioners should consider the merits of leasing the hospital to a private medical organization or selling it to a private, for-profit medical group. He asked for a committee of citizens to be appointed to evaluate all options and choose one that met the interests of hospital administration, the hospital, and the county. He urged commissioners to “stop the hospital giveaway.”

Gaskins wrote in a letter to the editor of the on February 7 that county residents should trust the hospital administrators and trustees to do their job properly and well. If the hospital governing bodies wanted to fatten their pockets, making the hospital private would make it no more likely than keeping it public. Their duties and responsibilities would not change with privatization.

He had been an honorary trustee for a number of years, and it took a lot of planning, forethought and money to keep up-do-date and maintain the facility. He urged positive thinking.

Dr. Monroe, a PCMH trustee, wrote a letter to the editor on February 12 supporting privatization. He concluded, “Change is always emotional, but this change carries with it more than sufficient safeguards and covenants to reassure anyone willing to look at the facts.”

The Consultants Weigh In

The county commissioners heard from their consultants at a workshop on February 13, 1998. Ken Kaufman of Kaufman, Hall and Associates spoke to advise the commissioners that it would be in the best interest of Pitt County residents to allow PCMH to change its status to private, not-for-profit. Presentations were also made by the county’s other consultant, Steve Kite of Gardner, Carton and Douglas, and by Henry Klaiman, a representative of Brown and Wood, the county’s bond counsel. All spoke in favor of privatization.
Kaufman suggested that the commissioners should consider the following payments to Pitt County by PCMH:
1. Payment up front of $30 million, to be paid in three installments: $15 million at closing, $7.5 million after one year, and $7.5 million after two years.

2. Provision by the hospital of indigent care at the current level of $8.2 million annually, with an incremental increase in perpetuity.

3. An initial increase from $750,000 per year to $1 million per year in PCMH’s contribution to the county for Medicaid funding. In addition, there would be an incremental annual increase to perpetuity in the Medicaid contribution.

4. Refund by the hospital of its existing debt, estimated at about $125 million, and assumption of full responsibility for this liability.

Kaufman estimated the compensation to the county (basing the figures on future values discounted 13 percent to put them in terms of current dollars) to be as follows: $24.4 million up front, $118 million for indigent care (assuming 6 percent annual inflation), $14.8 million Medicaid payment (also assuming 6 percent annual inflation), and $125 million existing debt assumption. The estimated consideration would total $282 million. He estimated the fair market value of the hospital at $395 million, well above the total estimated consideration, thus satisfying the consultants’ determination that the financial consideration could not exceed the hospital’s fair market value.

Kaufman also recommended that in addition PCMH should make a payment in lieu of taxes to the county each year. The amount of this figure would be established by usual and customary assessment procedures, and would amount to about $1.2 million in the first year after the transfer.

Public Answers to Public Questions

McRae spoke to the commissioners February 16 in answer to citizen Wright’s questions regarding Carolina Summit HMO, a private, for-profit organization that would establish ties between PCMH and other hospitals and physicians in eastern North Carolina. These goals would be easier for the hospital to accomplish as a private entity than as a public, not-for-profit one. Summit would give eastern North Carolinians an important option—an HMO based in eastern North Carolina.

Wright had objected to the fact that Summit’s president, Randall H. H. Madry, lived in Raleigh and was not directly involved in PCMH meetings. McRae said that the HMO planned to offer shares to hospitals and doctors in eastern North Carolina. PCMH was seeking sole ownership of the organization, and once the final new ownership was determined, Madry would decide where to locate its offices. The hospital might offer shares as the HMO had originally planned, but only after several years.

McRae also spoke to the commissioners about how privatization would improve healthcare in the region. Preventing the hospital from privatizing would hinder its mission. He said, “There will be risk either way. The risk will be greater if we don’t make the conversion.”

Wright continued to assail privatization in yet another letter to the editor. He wrote that PCMH’s administration could legally have started a nonprofit HMO, but had decided instead to put $2 million of Pitt County’s money into a private, for-profit HMO, one whose president lived in Raleigh and not in the east. Wright commented, “Doctors can own the HMO shares. These doctors share in all HMO profits. Taxpayers cannot own shares in, or get profit from, this publicly-funded, private HMO.”

Just before the meeting adjourned, Lawrence Davenport, chairman of the hospital board of trustees, expressed the view that for PCMH to remain a public, not-for-profit organization would not be detrimental to the hospital, but would make it difficult for it to provide the level of care that county residents deserve. He said, “I don’t think any of us have ever said that this hospital will die if we don’t do this.” He asked the commissioners why they had waited until then to ask questions about making the hospital private. “The board of trustees has sat over there and sat over there and sat over there and wondered why you have appointed us and never asked us,” he said.

The Nash-Novant Affiliation

As the commissioners continued to debate the question of PCMH’s request to privatize, on March 6 Nash General Hospital in Rocky Mount had affiliated with Novant, a large healthcare system in the Piedmont, allowing its critical-care patients to be referred to medical centers in Winston-Salem and Charlotte. The action could mean greater competition for PCMH in getting patients referred from the Nash County-Rocky Mount area. At the time, PCMH was receiving 3 percent of its revenue, or $11 million a year, from Nash County. In all, about 70 percent of PCMH’s revenue came from outside Pitt County.

The Nash-Novant agreement was not exclusive, and PCMH could also form an affiliation with Nash. Once Carolina Summit was operational later in the year, PCMH would likely be interested in having Nash as a part of its HMO. Once the HMO was established, PCMH could become one of Novant’s providers. One of the main reasons for forming Summit was to make it unnecessary for patients to travel outside the region for tertiary care.

Kathy Barger, vice president for planning and networking, commented that the agreement between Novant and Nash General was an illustration of how competition among health care providers was increasing as a result of managed care. “This affiliation. . . is a good example of what we’ve been telling the region and people in Pitt County is going to happen,” she said. “. . . Hospitals are joining networks, and we’ve got to be out there in the region forming these relationships. Some of these hospitals look at us and look at some of the limitations we have, and it does hinder some of our relationships.”

Mission Health

The League of Women Voters of Pitt County and North Carolina Nurses Association of District 30 co-sponsored a public meeting on March 24, 1998, to discuss facts surrounding the possible privatization of the hospital. One hour was to be given over to presentations, followed by a period during which the panel would answer written questions from the audience. The panel would be made up of James Bernstein, director of the N.C. Department of Health and Human Services’ Office of Rural Health and Resource Development; Robert Wilson Jr., of Raleigh’s Mauphin, Taylor and Ellis law firm; Graham Pervier, Forsyth County manager; Jack Holsten, PCMH’s chief financial officer; and McRae, president and CEO of PCMH. WNCT Channel 9 news anchor Allan Hoffman would be moderator.

The questions were to be submitted before the meeting for screening by league members and community volunteers. The proceedings were to be videotaped and broadcast over Multimedia TV’s Government Access Channel 9 on the following Sunday and Tuesday.

Before the meeting could be held, however, the issue was confounded further by an out-of-state firm wishing to buy into the hospital’s revenue stream. MissionHealth, a Nashville, TN, limited liability company, had offered PCMH $200-250 million in equity funding for a partnership that would entitle the company to a percentage of the hospital’s annual excess revenues. The offer was made by MissionHealth CEO Joshua Nemzoff, who said that the company would not require an unreasonable level of performance from the hospital. In fact, according to Nemzoff, the hospital would have to be losing money to fail to meet the performance level that the company would expect, and then would be expected only to bring in a financial consultant, as already required under the conditions of its current bond issue.

Nemzoff said, “MissionHealth would have no right to take over control. We would have the same rights as current bondholders.” Also, there would be no threat to the hospital’s relationship with the medical school. “There wouldn’t be any effect at all,” he said. “The whole concept behind MissionHealth is that the local board is in control, and therefore we have no ability to affect that relationship.” The percent that the hospital would pass on to MissionHealth would be equal to the percent of the hospital’s current value that the company invested in the hospital, as determined by the commissioners. The county would continue to control the hospital, naming 75 percent of the partnership’s board of directors. The existing management of PCMH would continue to function, and the partnership created through the investment would be able to raise capital both by borrowing funds and selling shares.

The partnership was not offered as an alternative to privatization, Nemzoff said, and would be feasible even if the hospital should privatize.

MissionHealth had been organized in Nevada, whose laws favored limited liability companies by offering lower taxes and fees. Such companies were not required to list limited partners, whereas those filed in Tennessee had to name them.

The investment company was not organized in Tennessee, but the name MissionHealth had been reserved there. If no one organized the company by March 25, the name would expire.

Nemzoff said that MissionHealth had reportedly raised $2 billion for equity investment by a group of unnamed Wall Street investors. If an agreement was reached, the investors’ names would be revealed to their PCMH partners, he said, but in the meantime they would remain anonymous because of competitive factors.

Dr. Hallock, the dean of the medical school, McRae, and Pitt County Medical Society Board President Robert Turner spoke out in opposition to the hospital’s associating with MissionHealth. Nemzoff’s statement that a partnership between the company and PCMH would pose no threat to the hospital’s relationship with the medical school had not reassured Dr. Hallock, who said, “This relationship has lasted the test of time. I think that a for-profit opportunity threatens that significantly, and I think that if suddenly dollars were taken out of the hospital to somehow reimburse a private entity for dollars put in, that the margin would change drastically.” He also thought that MissionHealth might forfeit educational programs to preserve profitability. “I fear that if there was a need to change course or change programs, then one of the first things they would look at would be education,” he said.

“There is no free lunch,” McRae said, his patience wearing thin. “No one is going to give anyone $300 million without a . . . return on that investment. We believe it is a fundamental threat to our existence or our future as a mission-oriented health care system serving eastern North Carolina. We would like for the county to stop considering outside investors to solve county problems by taking money from the hospital. We very much need the county to move forward on the reorganization by the state statute through (section) 131E-8. That statute deals with all of these issues that need to be addressed for this hospital.”

MissionHealth was new to the healthcare industry but Nemzoff was not. He had been in the business for many years and had dealt with many mergers and acquisitions. Officials of Baylor University in Waco, TX, had sued to dispute his claim that the university owed him $4.2 million for locating a buyer for their healthcare system. After a struggle between the university and the hospital system, Baylor Health Care decided not to sell. Nemzoff alleged that the university owed him 0.35 percent of the bid they had received because he obtained the offer. The university contended that when it hired Nemzoff for a $100,000 retainer fee, the intention had been for him to consider all options. The suit had been settled quietly out of court.

Some county residents and some commissioners were concerned that none of the scheduled speakers supported the county’s retaining ownership of PCMH. In response, League President Amina Shahid-El called MissionHealth on March 19 and offered an opportunity for the company to make a presentation at the March 24 forum on privatization. The offer was accepted, but the next day Ms. Shahid-El wrote Nemzoff withdrawing the invitation.

Ms. Shahid-El explained, “We decided that it would probably give the wrong impression. After second thoughts, we were concerned it would maybe be perceived as an endorsement. The issue isn’t who’s the pro or con, the issue is what (privatization) is.” The league offered MissionHealth the opportunity to pass out information at the end of the forum, but Nemzoff decided that the organization would not attend.

The scoffed at MissionHealth’s proposal in a March 23 editorial: “Some commissioners may see that as an elixir for county coffers that face pressing needs from growth. But this is no tonic. This is snake oil. Look at the facts.”

At the March 24 meeting, a panel of health care insiders spoke for an hour and a half, answering questions submitted in advance for a half hour. They had few negative comments on privatization. About 170 people attended the meeting.

At the same time, Dr. Hallock asked ECU trustees for help if the county commissioners decided to sell an interest in PCMH to MissionHealth. He said that kind of agreement would undermine the hospital’s relationship with the medical school. It might be necessary for the trustees to call on the UNC Board of Governors for support.

Hallock said, “I’m not being Chicken Little about this. . . . It would mean the demise of the medical school. There is no question in my mind about this.” MissionHealth would demand hospital profits at the expense of education and indigent care. Revenues would be diverted into the pockets of shareholders outside the state rather than being funneled back into the hospital.

Hallock said he would try to get on the agenda to speak at a workshop on March 23, when MissionHealth was scheduled to make a presentation to the commissioners.

The dean had learned about Creighton University medical school’s experience with privatization. The Omaha, NE, school almost lost its accreditation after the university sold its hospital to a for-profit company, which started cutting back the educational program. The university was forced to buy back a portion of the hospital in order to regain sufficient control to meet its educational responsibilities.

On March 23, Nemzoff told the county commissioners that the Nashville, TN, company had been set up “to help nonprofit hospitals gain the financial flexibility they need to compete.” MissionHealth offered Pitt County $193.3 million up front as part of a $533 million deal to purchase 75 percent of PCMH’s annual surplus revenue indefinitely. MissionHealth would require a return between 10 and 11 percent on its investment; the hospital’s current return of 14 percent would make it easy to meet the requirement.
The county commissioners, except for Savage, were against pursuing the offer any further.

At the same workshop, D.J. Pelt and Ken Gerrard, Wayne County commissioners, discussed the mid-1980s privatization of Wayne County Memorial Hospital in Goldsboro. Gerrard said, “There is no question about the quality of care. The quality of care in Wayne County has improved 100 times.” Their hospital had gone from losing money to making money, and the privatization had been well received.

The Pitt commissioners decided that the PCMH deal with MissionHealth was not in the best interest of the county. It would take a lot of money from the county. The consensus was that it was time to go forward with discussions about the hospital’s status.

Doctors and Trustees for Privatization

Support for privatization continued to mount among the medical community. About 80 doctors and nurses called a press conference at PCMH on March 25 to support privatization. Gene Tranbarger, ECU nursing professor and president of District 30 of the N.C. Nurses Association, called on the commissioners to act quickly. He said, “I would say respectfully that we have debated long enough. The facts have been presented, discussed, and reflected upon. Consultants have expressed their opinions. The facts are clear. Pitt County Memorial Hospital needs to reorganize to meet the changing healthcare needs of the region.”

The commissioners scheduled another workshop on March 26, 1998, to hear from PCMH officials. MissionHealth representatives were not invited to the meeting. McRae said that the presentation at the commissioners’ earlier meeting had reaffirmed his concern and skepticism. “There is a severe consequence of accepting that money that could well debilitate the hospital’s ability to serve its purpose.”

During a special called meeting, the PCMH board of trustees adopted a resolution supporting privatization and urging immediate action by commissioners. Noting that negotiations had been going on publicly between the hospital board and county commissioners for 14 months, the trustees’ resolution declared that the commissioners’ delay in making a decision had already caused the hospital to lose opportunities.
PCMH’s medical staff soon adopted a similar resolution.

Greenville-Pitt Chamber of Commerce Chairman Jehu Taff characterized the MissionHealth offer as a joke that the commissioners saw through. The chamber had sent a special bulletin to its members during the week before asking them to contact county commissioners and encourage a decision soon. Taff said that for PCMH to remain public would threaten the area’s growth. “We cannot compete in the equity market to finance these acquisitions that we need to finance,” he said. “If the hospital loses revenue, it will have to reduce its staff, so that people will leave the area.”

Both in public and behind the scenes, PCMH board Chairman David Brody was working diligently in favor of privatization, expressing the trustees’ sense of urgency. He said that increased public awareness had led to support of privatization. “The more people study the issue and the more informed they are, the more they realize we’ve been correct in what we’re trying to do all along.”

Counter-Proposal from the County

At their meeting on April 6, 1998, commissioners were scheduled to go point by point through the county staff’s draft proposal to PCMH trustees. The document would be available to the public on the same day, but the commissioners were likely to amend it at their meeting.

At the meeting, county commissioners agreed on a counter proposal. It included a $30 million up-front payment to the county, a 60 percent majority of county appointments to the PCMH board of trustees by the county, an indigent care requirement, and Medicaid reimbursement. It amended the draft proposal to include a provision to allow commissioners access to closed sessions of the PCMH board and payment of $25 million in advance rather than in three installments.

Four commissioners, Jeff Savage, Farney Moore, Charles Gaskins, and Eugene James opposed most of the proposal’s terms.

Once Robinson and Ms. Burgdorff had incorporated the changes in the proposal, it would go to the hospital board, who would review it with legal and bond counsel as well as other experts, and respond to the counter-proposal. PCMH officials took their first look at the county’s proposal on privatization of the hospital on Wednesday, April 8. They were focused on governance and financial compensation. A decision by the board would come no earlier than April 21, the date of its next regular meeting.

The county’s proposal requested that both payments in lieu of taxes and for Medicaid costs be in perpetuity. In lieu payments must also be based on the tax rate, so could change annually. PCMH Attorney Nancy Aycock said, “It’s somewhat problematic for us. Our position is that it needs to be a fixed sum rather than something that can go up or down—probably up. That makes a tremendous actuarial difference in what the total of the cost of the deal is.”

The terms of the county’s proposal that were most critical were:
– The corporation would make annual payments in lieu of taxes based on the same criteria used to    value other businesses in the county.
– The corporation would pay $30 million up-front.
– The corporation would reimburse the county annually for Medicaid payments made to the hospital.
– No mortgage, deed of trust or similar encumbrance on the hospital’s real property would be made    without prior written approval of commissioners, except for a deed of trust to the N.C. Medical Care              Commission for revenue bonds issued by the commission for the hospital.
– The corporation could dispose of hospital assets in accordance with standard hospital financing    practices, but not to exceed 5 percent of the book value of its property in Pitt County in any year. In    addition, the corporation agreed not to dispose of the real property making up the existing hospital    complex without the county’s prior written consent.

– The hospital would be maintained as a not-for-profit, tax-exempt, charitable organization under the    provisions of the Internal Revenue Code.
– The corporation would maintain a “AA” bond rating. If it failed, ownership would revert to the    county.
– Before the corporation took over the hospital, all outstanding county revenue bonds issued for              construction, renovation, or support of the hospital must be redeemed.
– The corporation would maintain the hospital’s affiliation with the ECU School of Medicine.
– The county would appoint 60 percent of the corporation’s governing body. Extraordinary actions such as dissolution or transfer of assets to the county would require approval by 85 percent of the trustees.
– Corporation board meetings would be open to the public under the North Carolina Open Meetings    Law. County commissioners would have access to all meetings, open or closed.
– The corporation would pay the county’s expenses for the transaction.

PCMH representatives did not ask to speak at the April 20 commissioners’ meeting, because they were still reviewing the county’s proposal. The hospital administration was consulting with financial experts, including its bond counsel, to ascertain whether the hospital’s credit rating would be damaged by paying out the $30 million initial payment requested by the county.

Portions of the conversion were subject to approval by bond counsel, who had indicated that the provision for the county to appoint 60 percent of the hospital trustees, with the UNC Board of Governors appointing 40 percent, was not acceptable. The bond experts had recommended that the county appoint only 50 percent.

At the April 20 commissioners’ meeting, there was a heated discussion about PCMH’s ability to pay the financial requirement of the county’s proposal on privatization.

PCMH’s chief financial officer, Jack Holsten, told the commissioners that the hospital would have to dip into cash reserves to pay the $30 million up-front that the county wanted, along with Medicaid reimbursement and payment in lieu of taxes. At the end of March, the hospital had a cash position of $169 million, which was the median level of “AA”-rated hospitals, he said. If no cash came in, the hospital could pay bills for 191 days.

After the meeting, Ms. Burgdorff, county attorney, said that the question of how much money was available was moot at the current stage of the negotiations. She said that under statute 131E-8 the hospital would not be able to make any major financial decision without agreement by an 85 percent majority of the trustees, or without approval by the county commissioners.

The commissioners continued to press for appointing 60 percent of the hospital trustees. PCMH called for the county to appoint only 55 percent, or 11, of the 20 trustees. PCMH officials said the bond counsel might not approve the conveyance if the county appointed more than a simple majority of trustees.

On May 12, PCMH officials approved final revisions to the agreement with the county. The executive committee of the trustees had made changes that were submitted to the county board on May 18. Commissioners were expected to approve the final draft on June 1.

The major revisions would affect the county’s involvement in the governance of the hospital and how payments in lieu of taxes would be made. Other changes made were basically clarifications. McRae said county and hospital attorneys had met over the past week to make revisions. “We’re pleased that this is a document that is fair to all sides and represents the interest of the county and allows the hospital to serve the county and the region through the development of healthcare services.”

A significant revision involved county appointments to the hospital board of trustees. County commissioners would appoint 55 percent or 11 of the 20 trustees as long as one of them was a doctor. At the recommendation of the bond counsel, the revised agreement permitted trustees to serve only two consecutive five-year terms. Currently they could serve three consecutive three-year terms.

Another change affected payments to the county in lieu of taxes from which PCMH as a private, not-for-profit enterprise, would be exempt. Originally, the annual payments were $1.2 million with annual inflationary increases of no more than 3 percent per year, based on the Consumer Price Index. The revised document increased the amount of payment in lieu of taxes to reflect the tax value of real property acquired after the hospital became private.

“It’s taken a long time, a lot of meetings, and a lot of public input. I believe what we have is satisfactory to every concerned group,” said Dr. Ed Monroe, vice chairman of the board of trustees.

The reported on May 16, 1998, that PCMH had agreed to most of the commissioners’ terms on privatization.

According to a copy of the counter proposal obtained by the , PCMH was agreeing to pay the $30 million up front that the commissioners had asked for: $15 million would be paid at the time of conveyance, $7.5 million on the first anniversary of the agreement and $7.5 million on the second anniversary. The hospital was offering to give $1.2l million annually in perpetuity in lieu of taxes, where they had originally agreed to pay annually for 25 years, capping annual inflationary increases at 3 percent per year. The proposal also countered the county’s demand for $550,000 a year in perpetuity in reimbursement for Medicaid payments with an offer of $425,000 annually, with an inflation factor of no more than 3 percent.

On May 18, the commissioners discussed the details of the hospital’s draft counter proposal and accepted it except for a few relatively minor changes, adopting a resolution to approve the offer during their June 1 meeting. The board voted 5-4 in favor of the resolution, with commissioners Jeff Savage, Eugene James, Farney Moore, and Charles Gaskins opposing.

The 10 day public notice required by the statute was published on May 30, 1998. A vote on the conveyance was to be taken at the June 1 meeting of the commissioners.

Public Response

About 150 people attended the meeting. After all the commissioners but James voted against a last-ditch effort by Savage to postpone a decision on the hospital, they went on to the business of the day.

The board heard nearly two hours of emotional public comments against the change—some detailing personal complaints about treatment received at the hospital—before moving the issue to the top of the agenda. Nancy Colville spoke through tears to tell the board that the county was the sacrificial lamb on the altar of the hospital officials’ desire to serve a 29-county region. She said, “I know our hospital is going to go away. I know that this is not best for the citizens of Pitt County. I am not crying for me. I will not set foot in Pitt County Memorial Hospital. I will die in the street before I go there.”

Some of the speakers attacked Commisioner Ed Bright personally, reminding him that Grifton voters had communicated clearly in the May primary that they opposed his position. After a particularly abusive assault, Mark Owens asked speakers to refrain from personal attacks, eliciting an angry debate between Dews, who agreed with Owens, and Savage, who wished to permit the speaker to continue without interruption. A deputy sheriff moved to the front of the room, and the uproar subsided.

PCMH trustee chairman David Brody and Greenville-Pitt County Chamber of Commerce President Chip Cherry spoke in favor of privatization.

When public comment was finished, the commissioners discussed the proposition at length, and Bright made a motion in favor of the hospital’s proposal, seconded by the commission’s vice chairman, Tom Johnson. As the commissioners favoring privatization made a show of hands on the final vote, opponents in the the audience burst into moans and boos and shouts of “ Shame on you.” Some clapped for the three commissioners who voted “No.”

The Final Resolution

After more than 18 months of discussions about PCMH’s status the county commissioners voted 5-3 to allow the hospital to become a private, not-for-profit entity. Gaskins, James, and Savage opposed the resolution. Moore was absent because of illness. Bright, Dews, Johnson, Owens, and Warren supported it.
Brody, trustee chairman, and hospital President Dave McRae said they were satisfied with the outcome. McRae said after the meeting he was anxious to get on with hospital business.

Ms. Burgdorff estimated that the transfer of the hospital’s deed from the county to the new corporation would take two or three months after PCMH paid off $120 million in existing hospital bonds and arranged for reissue of the bonds in the corporation’s name. This could take from three to six months, with the transaction being overseen by the N.C. Medical Care Commission.

Despite the commissioners’ vote Savage continued his attempts to determine the county’s dealings with hospital business. He made a motion at a September 14 meeting to form a Hospital Rules Compliance Review Committee, and the commissioners voted 5-2 to postpone consideration. Only Savage and James, constant opponents of privatization, voted against postponement, insisting that the action was needed immediately in order to quiet public fears about the change in the hospital’s status. Owens and Moore left the meeting before the vote.

PCMH trustees at their meeting on September 15, voted to issue bonds to pay off a $115 million debt to the county and cover some capital projects. The hospital secured an exceptionally low interest rate of 5.15 percent for the bond package of $207 million. Thomas Bradshaw of the Salomon Smith Barney firm said that the interest rate, the lowest ever obtained by the N.C. Medical Care Commission on behalf of a hospital, would save the hospital about $12 million over the next 30 years. The hospital had recently secured interest rates between 6.2 percent and 7 percent. The current state of the bond market and the hospital’s “AA” credit rating made the low rate possible. Fewer than 1 percent of the country’s hospitals could match it.

On September 17, 1998, Pitt County Memorial Hospital officially made the transition from being a public hospital to being a private, not-for-profit establishment. The change occurred when the hospital wired $15 million to a county bank account at North Carolina Management Trust in Charlotte. Dews, chairman of the county commissioners, had signed the deed at the bond closing the day before that transferred ownership of the hospital to a private corporation.

The hospital trustees on October 17 approved the bylaws and articles of incorporation for University Health Systems of Eastern Carolina Inc., which would help oversee operations of the hospital and its affiliates. The county commissioners had indicated that they would not appoint PCMH trustees to the University Health Systems board of directors until they had seen the bylaws. Copies of the documents had been sent to the commissioners a week before, and they were to discuss them at their meeting on October 19. It was a question of more than a trivial technicality, having major consequences for the governance of the newly private hospital.

There were some disagreements about the times of appointment for board members. Some county officials and residents said they thought the hospital was rushing the reappointments so that new commissioners taking office in December would not have the opportunity to make appointments.

PCMH trustee chairman David Brody said that a private bond counsel and the NC Local Government Commission had mandated that the changes in term should be effective when the deed was transferred. No trustees would then come up for reappointment at the usual time, in March. The trustees and the commissioners, Brody said, honestly differed on how to interpret the change.

Before privatization, trustees could serve a maximum of three consecutive three-year terms. Under the privatization agreement, the terms of PCMH trustees ran for a maximum of two five-year terms. The commissioners would not be able to choose members of the parent board until 2000. This would keep the terms staggered and avoid having as many as eight new appointments out of 20, at the same time.
Reversing the original bylaws, the new bylaws stated that the directors of the corporation were to be the same as the trustees of PCMH.

Under the new agreement, the county would appoint 11 of 20 trustees. The UNC Board of Governors would appoint the remaining nine, and had already agreed to appoint the same persons to the hospital board and to the board of the parent corporation. Brody said that the same people should serve on both boards to provide continuity.

The change in the bylaws allayed the concern some of the commissioners had that the hospital administration might somehow handpick people.

University Health Systems could finally go ahead with its mission to serve the region.

The divisions between the commissioners that had developed during the controversy over privatization continued, and were reflected in later voting. They showed up in the October 19 vote on the appointment of the corporation directors, in which the members took the same positions they had in the June 1 vote to approve privatization. They were apparent also in the later action allowing PCMH trustees to serve also on the parent board of directors. The votes were all 5-4, with commission Chairman Kenneth Dews, Vice Chairman Tom Johnson, and commissioners Ed Bright, Mark Owens Jr., and Edith Warren making up the majority, while Commissioners Charles Gaskins, Farney Moore, Jeff Savage and Eugene James took up the opposing position.
Savage continued to press for greater county control and oversight of hospital operations. As late as June, 1999, he wanted to budget $250,000 for an independent report on PCMH’s compliance with the transfer agreement it signed a year before. His motion was defeated on a 5-4 vote, with commissioners Mark Owens Jr., Charles Gaskins, Beth Ward, Terry Shank and Tom Johnson opposing. Savage’s influence dwindled near the end of the year when he chose to step down from the county board.

                                                           In the Aftermath of Privatization

During the rest of 1998 and the first half of 1999, PCMH continued its efforts to consolidate its position and increase its ability to serve clients in the region by associating itself with other hospitals and local healthcare providers, entering into partnerships with physicians, while improving the quality of care and lowering costs. Operating as a private, not-for-profit center certainly facilitated the efforts of University Health Systems, and was possibly essential for its continuing growth. McRae said he felt privatization was probably his most significant achievement for the hospital.

The rumor mill became busy following privatization. The story spread that the hospital administration had ended employees’ complimentary birthday lunches and the turkey or ham at Christmas. Both gifts were still in the budget.

There had been some bad news circulated a bit more accurately, if incompletely. During a couple of months at the beginning of the summer, coincidentally occurring just after the signing of the transfer agreement, the hospital’s income fell below expectations so that the management had to find ways of cutting non-essential expenditures and saving money. In spite of their efforts, the hospital was unable to meet its targeted annual operating margin of 4.25 percent. This meant that there would be no achievement bonuses paid out.

What was left out of the loose talk was, first, that the months with low income occurred before the hospital became a private entity, which did not take place until September 17 with the transfer of the deed to the not-for-profit corporation. Second, the change in ownership of the hospital had brought about no changes in the day-to-day management. McRae said, “The reorganization of the hospital was always a governance issue. It has to do with how our trustees are appointed, on whose books the deed to the hospital is carried and which entity is responsible for our long-term debts. It has nothing to do with these decisions that we have always made to manage our business in response to market conditions that can change on a weekly basis.”

He emphasized that layoffs were not anticipated, but that they could not be ruled out if a more extended downturn in business occurred. “Nobody knows what the future holds. We expect this hospital to be successful and we are positioning for that by becoming a health system. But none of us can guarantee that everyone who has a job will keep it, without regard to what’s happening in our market. My point is that this would be true whether our hospital was public or private.”