April 12, 2000 and April 29, 2000

Interviewer: Beth Nelson

Beth Nelson: Let's talk a little bit about your background and how you came to be associated with the hospital.

Kathy Barger: I grew up in Virginia and graduated from Virginia Tech with a BS in Accounting. From graduation I went to work from what was then Ernst & Whinney, now Ernst & Young, which was then a Big 8 accounting firm. I became a CPA and did audit work for two years and then for the next six years did health care consulting work. We had a lot of hospital clients, did a lot of financial feasibility studies for healthcare clients. I lived in Charlotte at that time and moved for one year to Cary and worked out of the Ernst & Whinney Raleigh office. Pitt was one of our clients and I had never really worked with them. After I moved to Raleigh there was a transition where the CFO, Roy Clark, left and so while they were searching for a CFO, Pitt wanted Ernst & Whinney to provide them with someone to fill the interim CFO position and because I lived in Raleigh I was a good candidate for that and I went and started working on an interim basis. We can talk about it later but it happened to be a period of time when Pitt was going through a lot of financial struggles and during that time when I was working on an interim basis Dave McRae was actually the point person in looking for a CFO, although Jack Richardson was the President. They were having trouble finding a CFO, one that met their criteria and the salary. I asked Dave if he would consider me and so he hired me in March of 1988.

Beth Nelson: I thought it was interesting that you asked Dave about the job. You not only made a change that involved moving to Greenville but you made a career change moving from consulting to client side. Tell me about this.

Kathy Barger: Gosh, with Pitt and all that was going on there it wasn't the type of facility that it is today. It was dynamic and interesting and it was really what I considered to be a great opportunity for me at the time. I was twenty-nine years old and the thought of being a CFO at a major teaching center in the state was a real opportunity. All of that was a big plus. I was a Senior Manager at Ernst & Whinney at that time, which is one step away from being a Partner and had been there long enough and I was kind of burned out from traveling all over the place, and really didn't want to be a big sales person out there selling a lot of business which is what I would have had to have done had I become a partner. So, I had pretty much decided that I wanted to leave that kind of work and so this seemed like a really neat opportunity. I thought this was probably like a real chance of a lifetime for somebody as young as I was to have that kind of opportunity. Had I just submitted my resume and had never been there on an interim basis, I would have never even got called for an interview, probably. I was a CPA and had done a lot of healthcare work but I was young. It was just what I considered to be a real once in a lifetime kind of situation. Boy did it end up being that! Little did I know! Being an academic medical center and growing like crazy, it was so different then than the way it turned out to be ten years later. Even five or six years later it changed a great deal so it really more like going to a large medical center. It was a very big business then but it was more like a referral center but more like a big hospital associated with a medical school. It just didn't realize what it would really become; which was even a greater positive when it became this dynamic place.

Beth Nelson: I guess the fact in a way it is sort of surprising because you knew our financial situation so intimately at the point. In a way I guess that was an opportunity for a CFO to kind of change and turn that situation around but at the same time it has to be sort of a daunting thing to jump in wondering if you can right that ship or if you are going to just kind of continue to fall down with it.

Kathy Barger: I think when you are twenty-nine it is daunting, but in hindsight I realize that it really was a pretty big risk going into that kind of situation and I knew I would have a lot of struggles in the future which didn't happen but there certainly was a lot of potential for it. I had been there since November of 1987 and didn't take the job until March and I had gotten to know the people and I knew that they were good people to work with and they were trying to set things right, I mean there were a lot of positives there that really helped me realize that we could get through this.

Beth Nelson: We had been without a CFO by the time you were put in the permanent position for how long?

Kathy Barger: I don't know when Roy officially left but I think even though he may have not been gone that long before I came, maybe a few months, because I do think that Dave tried to get somebody in. Even though he had not been gone that long I think his spirit had been gone for awhile. Things had gotten pretty bad and I think there was a lot of communication breakdown, some animosity there between him and a lot of the other Administrative Staff but there was a lot of lack of financial things. People didn't trust him and that sort of thing and so a lot of things were not getting done because of that lack of communication.

Beth Nelson: So you were CFO for how many years?

Kathy Barger: Starting in March of 1988 and stopped in December of 1991.

Beth Nelson: At that point, that's when you moved over to Planning & Marketing and you had a number of different titles there.

Kathy Barger: Yes, I think we started out as Vice President of Planning, then it changed to Vice President of Planning & Networking. It started out really as being, we had never had an official planner at the hospital, there had been planning positions at the school of medicine but not at the hospital. In the Strategic Plan that had been put out in 1991, there was a recommendation for having a planning position. So, I really was burned out, literally very burned out, and wanted to do something lower key, actually didn't really want to be a vice president. I wanted to go off and do some business planning for the hospital and do some of the real neat things that we needed to have done, business planning, that sort of thing, actually CON work. At that time things were really taking off from a hospital perspective. We were still in 1991 basically a hospital. We had some other business lines but pretty much focused on our hospital. We really needed to have some concentrated planning on our services in the hospital and as well had CON things that had to get done too and so I decided to talk to Dave about the opportunity. He quickly made it a vice president position. I was never in anything than a vice president position, but still concentrated mostly in those areas. I had Marketing, working with you, also the Community Relations and News & Information area but basically even though I was over the other areas, my thing was for planning. So, started that in 1992 and then really 1993 was when healthcare was changing a lot throughout the country, 1993 was when we started seeing significant changes in eastern North Carolina a lot of movement towards some consolidation, more managed care contracting, the physicians were organizing, hospitals were organizing and we were trying to figure out what we needed to do. That's when things really kind of took off and really got into a lot of the networking responsibilities at that time, whether it was physician organizations or statewide organizations, physician/hospital organizations, and then, of course, we went from that stage of linking up in a more affiliated manner and not in any significant ways but more loose affiliations and we went from that stage to mergers and acquisitions and that occurred over several years.

Beth Nelson: Tell me a little bit about what you think the hospital has meant to Greenville, Pitt County and the region.

Kathy Barger: I think it has probably been the center of new things but I mean certainly ECU has been but then when you take that medical school and PCMH, which I believe are so inextricably linked, I don't think you talk about one without the other, I think it has really been the centerpiece of what has happened to Greenville, and for a large part significant implications of what has happened all over eastern North Carolina.

Beth Nelson: Things that come to my mind are things like hospitals that were struggling, that without our or somebody's choosing to get involved either through acquisition or through management or through networking or whatever that we have stabilized those situations and I know you were a key person in quite a bit of that. I think about Bertie.

Kathy Barger: We really took a different and sort of tack. Back in 1993, I think I have the year right, I know I do as it is when I was on maternity leave, when we actually produced the document but prior to that Dave had really set the stage for what was our position out there, what do we think we should be doing, and in the midst of all of this turmoil of physician organizations popping up and hospital linkages potentially being out there and feeling like we needed to become more vertically integrated and get into other hospital services, we really sat down and started thinking about and asking what was going to be our strategy here. Do we just got this all happen? We knew we wanted to expand services and become more vertically integrated here and become bigger and better. We wondered how do we make that connection back with local medical communities and in that vision document we produced in 1993 and actually approved in 1994, we really set the stage for saying that we really just can't be worried about what happens to us, we have to be worried about what happens to the other providers in eastern North Carolina because we are very connected to them. But the ability to make this medical center grow in Greenville and flourish really depends on number one: economic viability of all of eastern North Carolina; and number two: the healthcare providers being as strong as they could be in the local medical communities. That was a big decision for us to make but we didn't think it all ought to come here and it was really important to have that local care out there and that it be as high quality as it could be and that was the first thing we felt should be important. Secondly, we said we had to be involved in it. We cannot just sit back and hope that it happens because it is likely not to happen and that it was really important from our not-for-profit role of feeling that we really needed to play a part in making sure that good quality health services were provided to the region and not just the county. That was a real, I wouldn't say shift from the standpoint that anybody had said that we shouldn't be doing that, but we had just been so consumed with growing the big thing in Greenville and we always looked out and were always involved in those medical communities but it was in that 1993/1994 time that we said whoa, we have got to be a lot more involved than we ever were before.

We are going to be a key part of their success and also our success. We really began thinking very differently about our regional relationships. Because of that we really stepped our foot out there and really helped those medical communities grow. I am not saying they wouldn't have grown without us, I'm not saying that some of them didn't have a lot of problems anyway, because they did. Of course we had certain legal limitations as to what we could do but we really did, I think, impact significantly the ability for those facilities to grow and be strong facilities. Sometimes it was because of the things we did in terms of helping them or providing them education or whatever, sometimes we helped them by things we didn't do; like go out there and put our own primary care practices out in those counties. We thought it was important to those medical communities to develop their own primary care practices and build them and yes, we wanted to be linked but we were not going to go out there and aggressively try to be the big magnet that everyone thinks of Greenville. We helped in some ways by so many things that we didn't do. There are a lot of those medical communities that were and still are very afraid of University Health Systems just because of its strength and its abilities, but for the most part, I think, over years most of those medical communities began to get the message and believe that it was a true message, that we really were not out there to bring them down, that we really thought that it wasn't worth it. If they were small then we would be small. It was really kind of a very different approach.

Beth Nelson: When I look back towards that time versus the time prior to that, our relationships with those hospitals were more esoteric, they were more "gentleman's agreement", and pat each other on the back and support each other in tangible ways, where things like the 1993/1994 time was a period when we started looking at some equity arrangements that we had never considered before and some serious management and the lease types of things that some of which we consummated and some of which you would sit it on the table for when they would become reality. Is that not some of the change that trickled out of that?

Kathy Barger: Yes, in that 1993/1994 period of time was when we started mentally changing our attitude. It really took several years for those truly integrated models to evolve where we were actually long term leasing facilities and then buying facilities. That was more 1997/1998 and really heavy in those years and also some of 1999. So, prior to that we were mentally adjusting but we were doing things like creating East Carolina Health Network. We didn't have some grand plan as to how we were going to do it, actually it evolved over a period of time and I'm not even sure that the hospital purchases were at the pure core of what we were ever trying to get to. We just responded to the need when it was there, in fact, we very reluctantly ever got into the management/hospital acquisition business and most people would look at what happened and said we had some grand strategy to take over the world. It was not that way at all and our philosophy was we need to look and see what the needs are out there and when we have really identified what the right needs are, then we need to think seriously about trying to meet the needs. Never did we envision big hospital acquisitions or anything like that. Over a period of time of 1995/1996 when we started seeing more certain hospitals that believed they couldn't make it without not only not just being managed by someone out there, but actually being owned, long term lease situation, so then we were hit with that. We asked could we really belly up and produce? It was a tough decision for management, a tough decision for the Board. So much was changing in healthcare, we were financially doing very well during that period of time and so that helped us in ultimately making the decisions but it wasn't an easy decision and, in fact, once we got into that business it became ever increasingly more difficult because the market for those sorts of deals went way off and actually to get to the table to play we were having to put lots of money on the table. Time will tell whether every decision that we made was the right one but the key thing was we were not just out there to just buy up services in the region. We really were looking at what were the smaller hospitals in the region telling us that they needed.

Beth Nelson: More in response to what they were telling us rather than us targeting them and going in?

Kathy Barger: Yes, we were not targeting them, we did certainly try to analyze every situation and in some cases try to certainly always tell them what we thought was the right thing to be doing. We did not always come in there with a cookie cutter approach, in fact, we had integration options but you know you had lots of options involved and with other folks as well.

Beth Nelson: What about the school of medicine perspective at the time? I know from the standpoint of being a state-owned operation that didn't have a lot of financial support to offer but did you have trouble getting them to say yes, they supported the decision to do that, or were they pretty much with you all along?

Kathy Barger: Generally, they were very supportive and our private physicians were too. Remember, we developed that Vision document which didn't specifically say to us to go out and buy hospitals but it certainly set the stage for it. We developed that in isolation. That was actually at the time a University Medical Center document and it was bought off on by ECU. I believe that they actually approved that document at some higher level. I am not quite sure about that but I mean they certainly bought off on it and so did our private physicians and that wasn't just a management/board cut in that they felt they would sneak off and do this kind of thing. They went along with it all the time, both the school of medicine and the private physicians generally were always supportive of the move and we were involved. Our Board is set up such where there is input from ECU and others as well. Of course, most of the negotiations at some point end up being very confidential and so it was a difficult time for everybody to be going through between hospital acquisitions and at the same time the State network potential of UNC, Charlotte, and Carolinas Medical Center, N. C. Baptist and Pitt was going on and you had all this stuff and home health businesses were coming and going and it seemed like at every
Board meeting we had huge agenda items to be addressed. It was a crazy time for everyone but the nice thing about that really bizarre, crazy time was that there wasn't a lot of fractionating of the core of what is now University Health Systems in making that decision. It was pretty amazing. There was a lot of debate, should we do this or shouldn't we.

Beth Nelson: I think of Dave as having been the kind of the person who set the stage and led the charge for that kind of thing. Are there other people that you can think of who kind of set the tone, gave you the direction? It could be Board members.

Kathy Barger: All through that whole period of time you had people like Lawrence Davenport, David Brody, Ed Monroe, all of our key Board members helped us move through that period of time and were supportive. Jim Ross was really for the most part the key point person out there in all the hospital transactions. He was the lead person for the most part even in a lot of the presentations in front of county commissioners, etc. I mean that Dave did that and was involved but actually Jim was the key lead executive in all of the hospitals acquisitions. Tom Irons was very involved in most of the acquisitions, Nancy Aycock was really key in all the things we were doing during the period of time. I think she was kind of the unsung hero in a lot of the things. Privatization, she was one of the stars on that one.

Other people that were very key were certainly Jack Holsten. Poor Jack got involved in everything in one way or another but he was very key and Jack was in a precarious position where he was looking over the money of the hospital and yet really having the guts to say that this is a lot of money but it is the right thing to do. Everyone looked to him with our vision and I know it is right but are we going to be able to do this, this and this. Jack was kind of a balance in a lot of that and he was definitely a key person as were probably some of the real key folks. Ernie Larkin was involved a lot and all these people were very much involved in helping guide the overall decisions regarding what do we do in this particular phase. We had our 1:30 p.m. Monday meetings that involved some really difficult decisions which were laid on the table for a fairly small number of people. There was Debbie Davis, Diane Poole and others and we really kind of came together as a team and decided what was the right thing to do. They were really exciting, unbelievable times that we hoped and prayed we made the right decisions and did the right things. I know we had the right heart and the right reasons for doing what we did. I think that really guided Pitt throughout its history with Jack Richardson, Dave McRae. Our spirit tried to do the right thing and yet understanding that you have to be guided by a real strategy and understanding of where you want to go and I think they both were extremely good at that and I think that is really good along with other leaders like Dean Hallock, Dean Laupus who were doing the right thing and understanding why you are there, understanding your not-for-profit reasons, loving the region, are real key reasons.

Beth Nelson: Can you think of any, I know the big one we could be talking about was the Blue Cross situation where you kind of came in the midst of that and we had big cash flow problems, but I don't have time to get into that right now as we have about two minutes. Can you think of any kind of funny or poignant things that you saw that need to be included? The kind of things I am talking about is like, I'm talking to Fred Brown next week when he is here and I remember when we had the gypsies here. He went out and asked them to cease and desist washing their clothes in the fountain and some of those kinds of things-things that are not important necessarily in the preview of their work but just things that you can recall. Buck told me about when times were tough and he was in charge of the business office and we were just really in dire need of the next two weeks payroll and everything was hand-punched back then and he packed up several ledgers in a briefcase and drove to Durham and sat down with Blue Cross and told them he needed to leave with a check and he did.

Kathy Barger: There were lots of funny things. I wasn't here at the time the gypsies were here but I heard about them. When I was here on an interim basis things were really bad and I looked at Dave and said I told him I was not sure we were going to make the payroll and things are really tough and told we had to go to the bank and get a lot of credit. I told him we were just too close and what if we cannot make payroll and we have got to do something and Dave said okay. I was just coming in like a couple of days a week or three days a week. It was like over Thanksgiving and I think I went home and had come back and Dave had gone in and was trying to get a line of credit and I think in the process had gone to the County and Bill Watson told him that we were a public institution and we cannot just go into the bank and get a lot of credit or borrow money. You have to go through the Local Government Commission and all that. Here this interim, stupid little twenty-nine year old had told Dave to go to the bank and get some money. Anyway, he hired me. I was sorry, but of course that didn't solve our problems as we couldn't do that and thank goodness we made it through that but it was like this stupid little girl said we got to get some cash.

Beth Nelson: I remember that so well because my office was there in Administration at that time and I remember Dave was just a tormented individual during that period and I remember particularly that he came to me one day and said we needed to start thinking about how we were going to handle the fact from a public relations standpoint that we might have to withhold paychecks two weeks after Christmas.

Kathy Barger: We were busy and we had business, but it was cash flow and we had all kinds of problems with cash flow. We had changed over to new information systems and that process didn't go well. We fundamentally had some problems with the way our Business Office was organized and worked. The people were great and wanted to do the right thing. Back then between the way we were organized plus we made some bad decisions about how the new system was actually put in, but a combination of all those things, I think, put us behind and then the folks in Billing and Collections got so far behind.

Second Part of Interview - Saturday, April 29, 2000

Beth Nelson: Let's talk about increasing the bond rating. The decision first of all to be rated at all and some of the logic that drove that.

Kathy Barger: Pitt Memorial had never had a bond issue based on its own revenue stream. The revenue stream of Pitt was the only thing securing the bond. We had never had that prior to 1989. We had had some general obligation bonds which initially built the hospital but those were actually County general obligation bonds where the tax levying powers of the County actually helped secure the debt. In 1989 we needed to go forward and pay for the new bed tower. We had just received in 1988 our CON for the bed expansion so Ralph Hall and his folks were in the process of putting together the building plan and we needed to finance it. Although we had very little debt we had basically no cash, I shouldn't say that because in 1989 we did have some cash but I'm not quite sure, we probably had $10 or $15 million, we had a lot less than that in 1987 which we will talk about later, but we did have some cash but for a major medical center with the type of revenue stream we had that wasn't basically very attractive to the bond market. Probably by 1989 our payroll was in the $3 or $4 million range every two weeks and so $10 or $15 million in cash was not very much. Our balance sheet didn't look good and we knew we needed to finance this major expansion and so what we did was we got with the underwriters and we strategized what we needed to do and so we decided to do two different bond issues. One in 1989 and then followed that up with one in 1990 and the one in 1989 didn't actually fund the bed expansion at all but what we basically did was we went back and looked at projects we had already spent cash on and financed the projects so we could pay ourselves back for money we had already spent and get some cash on our balance sheet.

Beth Nelson: Let's go back to the philosophy that had gotten us to that point. My memory is that the whole philosophy was pay as you go, avoid any debt and don't accrue any revenue as such. Please talk a little about that.

Kathy Barger: Yes, we definitely were a pay as you go hospital and so basically had a small amount of debt we incurred when the building was initially built and had other than some equipment loans and some small debt related to some equipment that we had, we had no debt. We also had a philosophy of really keeping our return on our operations really low which is fine and very supportive of being a not for profit entity but when I came in 1988 we hadn't had a rate increase in three years and while that is kind of very common these days, back in the 1980s it was not common at all so other hospitals were having three, four and five percent rate increases a year and we weren't. So, what we were charging people looked great, our prices were great and that was phenomenal but we had got into a situation where we weren't making much return off of the business that we had to even get any cash on our books plus we were paying as we went, which I wouldn't say was the wrong strategy but it was the wrong strategy in the late 1980s when we were a major medical center needing to do major expansion on our facility. So, what we were faced with was going to the bond market with not a very good balance sheet, issuing debt for the bed tower and having to pay really high rates for it because our financial picture didn't look good. What we ended up doing was we ended up repaying ourselves for our past capital expenditures and you would say all you are doing is putting debt on one side and cash on the other but actually from a financial credit standpoint as long as that debt is a reasonable amount of debt it is better to have some debt and also have some cash and the reason for that is that if you have any cash flow problems at all and you are a fairly good size institution, and we were actually a large institution, you can very quickly use up your cash reserves and so the debt market really you need to balance financially between the amount of debt that you have and the amount of cash you have on hand. We knew we wouldn't get a good rating and so what our strategy was and we worked with First Boston but we used them as our underwriters and they helped us put together a strategy of issuing this debt but have it insured and basically the insurance allowed us not to be rated. We lived through the rating agency process in 1989 but we actually insured the bonds and the insurance actually gave us the rating that was on our debt. Of course, we had to pay for the insurance but it was financially still better for us.

Beth Nelson: Were the 1989 and 1990 issues both insured?

Kathy Barger: No, in 1990 we had turned around financially and we looked better, our balance sheet looked better and a couple of things happened. We paid ourselves back for the past capital expenditures and then concurrent with that back in the late 1980s when we had problems financially in having enough cash on hand, we started increasing our rates and so we were generating more income off of our business and between 1988 when things financially didn't look good and 1990 when we actually issued the debt that we actually got rated for, we had put some cash on our books, not only from the 1989 bond issue but we also had by increasing our rates getting some operating efficiency, our volume had increased and it gave us another year to get our operational act together as well as getting some cash on our books so we actually issued the debt that paid for the bed tower in 1990. I'm pretty sure 1989 and 1990 are the two years. In 1990 it was a big deal for a bond issue which in these days doesn't sound so big, but it was back then. It seems like it was about $58 million on the 1990 issue.

Beth Nelson: It seems like it was said too at that time that it was the largest publicly funded construction project east of Raleigh.

Kathy Barger: I'm sure it was because nobody else would have had anything probably that big. It was a big undertaking. We also financed a few other projects but it was primarily the expansion. Actually in 1990 we had the full-fledged rating agencies. We had a great story to tell and great market share. Financially things couldn't have looked better but what was nice in 1990 was we had a real plan in front of us as to how we were going to get there. Volume was increasing and we had had so many patients in our hospital and so many patients turned away. It was a huge risk that we took on that bed tower. I don't think many people think much about that and others may have talked to you about that.

Beth Nelson: You're right and I remember that being the case because I remember the CON office was very much opposed to that project in the beginning and they even got ready to deny us and a big part of their concern was that we were looking at building, expanding and also HMOs were the coming thing and there was a concern about financing and that we might not be able to fill it.

Kathy Barger: All of those were big issues. I wasn't there when we literally filed the CON. About the time I got there we actually were awarded the CON so we probably got it in 1987 in May for that project, so we already had it but I know it was a challenge and I remember too that CON application was gotten through the teaching exemption.. We were one of four academic medical centers that could have taken the route that we took to get those beds so we are very unusual. No other hospital in this State ever has gotten beds through the teaching exemption.. There had been very few bed CONs that were given period because generally people had backup facilities. The teaching exemption was never used for that and I think that was probably a challenge for the CON office to even use this and basically the argument in the CON application was that we could not train the number of physicians we needed to train unless we have increased capacity. It was really a very, very unusual thing to get the CON for that big of an expansion, to get it through the teaching exemption and thirdly, to do it the way we did it. You have to remember all health care was turning upside down. DRGs were just coming and it was a phenomenal change in health care, everyone, absolutely everyone faced declining utilization and in fact it was happening all over the country because DRGs had come into play and because they paid a big fee amount for an admission versus how many days you were in the hospital. All the incentive was to get patients out of the hospital faster and therefore, even if you kept your admissions up at the hospital you would have reduced need for capacity because they would get out quicker. This was also of time when things were going outpatient, technology had changed, ambulatory surgery centers were not on the scene long and more and more procedures were being done there. They were absolutely totally against every prediction, everything that we heard on health care and I don't think many people knew. Even after having received the CON, there were many discussions that went on amongst medical staff and physician leadership back then. Were we doing the right thing? Should we do a scaled back project? There was a lot of discussion about that. I have to admit that being the CFO then I can remember specifically having Jack Richardson and Dave McRae and others on the Administrative Staff saying you shouldn't do it. Even though we were well on our way, we just should not do it because there would not long term be a need for the debt and I really believed that. I thought we were absolutely crazy, this might have been the right thing to do five years ago when we were planning it but so much has changed and we needed to step back.

Beth Nelson: How did they convince them to go ahead with it anyway in spite of the fact that it was risky?

Kathy Barger: I think the combination of the physicians who were so much supportive and wanted this to happen and felt like it was the thing to do. I think Jack Richardson and Dave McRae really thought it was the thing to do and that we had gone that far and that we had always been different from everybody and I think they knew and understood that. I was just the new gal on the block saying, holy cow, we are absolutely crazy. I can remember these discussions very vividly. I can remember Dave saying something that actually made me feel comfortable with the decision of moving forward and that was, hey, as our hospital is getting older and older, even if we only need these for a short period of time and even if utilization increases over time, essentially we will need to replace the beds that we have because their configuration is not really that good. So, I felt okay, this is alright, because no matter what the timing won't be that bad for actually replacing out some of the beds and we can operationalize and be more efficient in providing services. Of course, everybody knows the story. We filled those up very quickly and need additional beds now. I did not see this and thought we should not be doing this and actually, I thought we should not be building that many beds and that we needed to do something more scaled down. It was a very good decision to move on and it took a lot of guts. I knew a lot of people around the state were saying look at them they are adding beds but it was definitely the right thing to do.

Beth Nelson: What were people in Health Care Financing telling you at that time? I know you had a relationship with E&Y doing a lot of work for us and people like Kathleen O'Connell and folks like that. Did they agree with taking on a lot of risk and maybe we should scale back?

Kathy Barger: I'm not sure at what point we actually asked for an independent assessment of what we should be doing but generally all of those consultants were saying that hospitals were going to have to scale back. They were not going to need as many beds. I think a lot of people were asking if we needed another 143 more beds. Remember we were concerned about how we sold it to the bond-rating agency because it was a different project.

Beth Nelson: Lets talk about some of the acquisitions that we began to buy or manage in eastern North Carolina. The change of mindset that came about, certainly came from a national, but for our hospital to go that route and you were one of the people who were kind of leading the charge.

Kathy Barger: I think the last time we talked we talked about vision documents. We said that we ought not go out and buy hospitals but we had to play a greater role in the medical communities that surround us and we needed to be attuned to what those medical communities need. You don't have to meet all those needs but we had to play a part in helping them so that was basically the framework that was in place that we came into in late 1996/1997 when health care was changing a great deal. Consolidations were happening all over the country and were starting to happen all over the state. Basically what happened was we started hearing from community hospitals in the region that they needed to have a partner and not very loose alliance which we already had with East Carolina Health Network and other things that we were doing in the communities like our residency programs and those sort of things. They were saying that they needed more, they didn't think they were going to be able to survive at all alone and they were going to have to be owned or leased and certainly managed to make it. We were hearing these things from several of the community hospitals. The first time we had anyone come to us was Roanoke-Chowan Hospital and this was in 1996 and 1997 timeframe and Pete Geilich, the CEO at Roanoke-Chowan and their Board, and remember they were a private hospital, not a public hospital, and there were a little bit different dynamics that were playing in the Ahoskie community. They basically through their strategic planning had decided that they were going to have to sell their facility. They were looking for that partner and they had been talking to Carolinas Healthcare System. They were talking to for-profit institutions as well. They were talking to Centara in Norfolk and they came and talked to us. It was interesting. I don't think they really thought we were that much of a viable candidate, in part because we had never done anything like that before and I'm not sure they thought we really were that interested in a purchase or a long-term lease of the facility. So, that is when we really struggled with what to do and I think it went back to looking at our strategic plan and our vision document that specifically never talked about leasing or managing hospitals. But we said we were going to have to play a key role and we talked about really being able to pull it off. Could we really improve operations.

Beth Nelson: Talk about the long-term lease as opposed to the outright purchase at that time.

Kathy Barger: We did it in the Roanoke-Chowan transaction and actually all of the transactions. Some of them looked similar but they were actually the models that we used and actually changed specific to the issues that they had. Actually, Roanoke-Chowan wanted to outright sell their hospital. We entered into a long-term lease because we could pay it out over time although other long-term leases we have up front lease payments. The Roanoke-Chowan transaction we actually did it on an annual basis. We felt like we wanted to save ourselves from putting a lot of capital up front and essentially what happened with the Roanoke-Chowan bond issue was they had either $11 or $14 million worth of cash and they were able to keep that cash and put it into a Foundation so it was real positive for that community. It wasn't a county-owned hospital so it was a little bit different; it wasn't going into the county's coffers it was going directly to the Health Foundation. We really modeled that, really tried to keep the cash flow down. We learned later, market forces later on required us to pay much bigger bucks than what we had to put on the Roanoke-Chowan deal but the market hadn't really heated up very much when we did the Roanoke-Chowan transaction. Also, because it wasn't a public facility, it wasn't actually publicly bid, not like the other public facilities and so we were able to do it more quietly, we basically sat in the room with the folks at Roanoke-Chowan and Kathleen O'Connell from Ernst & Young facilitated the process and we worked out the transaction and it was a huge step for us. We really did believe we could make an impact on operations there. I have to admit we were new at the game and had a lot to learn. It was one thing doing the transaction which I was involved in-all of our acquisition and lease transactions-but the really tough part is operationalizing it. Jim Ross and all the people in Operations at Pitt and Roanoke-Chowan, those were the ones that really had to do the toughest work. It was a big step and then once we made that step a combination of things happened. One, we had said we were willing to do this and once you purchase one hospital or long term lease one hospital, you are going down the road and you really can't find the efficiencies until you do some more. You are actually able to provide hospitals better services if you have several hospitals. What happened after that transaction was consolidations really heated up all throughout the country. They heated up in North Carolina and then market forces just created more options for purchasing or long term leasing facilities.

Beth Nelson: What about Bertie? Was Bertie right after Roanoke-Chowan?

Kathy Barger: Bertie was the next one. They all kind of started happening together. Bertie and Martin. Martin was kind of a very long process and it was kind of stopped and started several times. Bertie and Martin were kind of happening at the same time. Of course, we were successful at Bertie. Bertie was different in that we basically had no other competition for that lease. With Bertie we essentially took over the operations of that hospital and agreed to replace it with a new critical access hospital but we didn't actually pay any money or lease payment for that facility. We were obligated to operate the hospital and to build this new replacement critical access hospital and the County in that lease still is committed to pay $300,000 a year towards the operations. That is what they were already paying.

Beth Nelson: Roanoke-Chowan historically has been a financially successful hospital over the years, but Bertie had fallen into financial trouble?

Kathy Barger: Well, Ahoskie was having financial difficulties then too but they had a bigger patient base and a very nice facility. They were more attractive to other entities wanting to lease them. Bertie had a failing facility and their transaction is a perfect example of Pitt working with local communities to try to find the right answer for delivering health care. We basically did and Coopers & Lybrand helped us with it, an operational assessment there before we made any decisions and basically the results of the assessment said that this facility is not going to survive as an inpatient hospital and we need to change this to primarily an outpatient facility. The thing about Bertie is that we really did sit down and try to work with the county to decide what was the best thing for the future of that hospital and actually what Pitt is doing there is totally changing basically to an outpatient hospital. Then, of course, we have Martin General which we didn't get. By the time we got to Martin, the market for consolidations and acquisitions, particularly rural hospitals, really heated up. A lot of the national companies were very interested in buying small hospitals and so we had all kinds of people interested in buying Martin and that's when we realized that the price of these things was going to be very high and essentially what happened was the competition was willing to pay more money than what we wanted to pay. We got to a point and refused to counter anymore and so it was sold to Community Health Systems out of Nashville, Tennessee..

Then it was Chowan in Edenton. That was a lease, a thirty-year lease, and it was essentially paid as was an up front lease payment and it was very expensive and you would have to confirm the numbers but essentially we paid $30 million for that hospital. It became very competitive. We thought strategically for Pitt it was very important because it was getting up to that northeast section where Sentara was coming down. Sentara and the hospital in Elizabeth City were competitors in trying to buy that hospital. We felt like Sentara would really eventually start having a real presence in northeastern North Carolina and we didn't think they should have that. The for-profits were very interested in Edenton too. There were five different companies other than Pitt in the running for that facility so the prices just kept getting higher and higher. We prevailed and we were really excited about getting that facility. It is a long-term lease but the payments were all up front. The reason that was a lease was not because of cash flow issues because we had to pay an up front lease payment to get it, but it was that the county wanted to make sure that we abided by certain covenants of how to operate that hospital. Essentially if we don't abide by the covenants, the hospital reverts back to the county. That was an issue of the county. The longer term the lease the more positive it was.

Beth Nelson: What about Nags Head?

Kathy Barger: We had extremely busy years in 1997, 1998 and 1999. They were unbelievable. Nags Head was going on then and we decided that we would try to get a CON for building what could have been up to a thirty bed facility but we actually submitted a CON for a nineteen bed facility in competition with Albemarle Hospital in Elizabeth City and Centara again, so we were butting heads again. Unbelievable as all of the leases, not Roanoke-Chowan because it wasn't competitive, but Martin General and Chowan, highly competitive, commissioner meetings, lots of press, lots of high profile in the Dare County CON, huge amount of profile on it, very much interest in that medical community, lots of decisiveness in terms of sides between the Centara/Albemarle coalition and the Chesapeake Hospital. Of course, in the midst of all of this was privatization. I can't impress upon anyone just how involved, not only from an amount of time spent with the Administrative Staff and the Board of Trustees and our medical staff leadership, not just the amount of time that was spent in dealing with the transactions and issues, but also it was also very high profile, a very stressful period of time. Incredibly important decisions that were being made.

Then, of course, Heritage came in the midst of all of this as well.

Beth Nelson: Was Heritage after Nags Head?

Kathy Barger: We found out we had got the CON for Dare County in November of 1998 and we bought Heritage, I think, in December of 1998. I think those are the right dates but it all kind of came together. We bought Heritage Hospital, the only outright hospital that Pitt has and that, of course, was from Columbia/HCA. There is a great article that Tom Fortner and his staff did in UHS People about the transactions and the timing and that would be a good thing to look at. It was very good and a nice description of what was done. You read that and you just go "wow." I guess the really wild part of it was how intense and important this was. Nerves were tense. There was so much scrutiny of what was going on. None of us knew whether we were absolutely making the right decision, but in the future, hopefully it will be said we made the right decision. I think always we looked back at what are we were supposed to be doing here. What is the right thing in health care in eastern North Carolina? That was the question asked many, many times in Administrative Staff meetings when we were making these decisions.

Beth Nelson: Are negotiations going on now for future acquisitions or things just staying pretty much as they are?

Kathy Barger: I think things have settled down. The Nashville contingent, first of all, is not out there as much. There are some companies that are acquiring out of Nashville for example, New American Health Care that was in the running for both Martin General and Chowan Hospital, actually had gone bankrupt. Community Health Systems also has had financial difficulty. They are not bankrupt but they have had some struggles. Those entities are not as aggressively out there now so that kind of helped the situation. I think those that felt like they needed to make a move did it a couple of years ago. There might be some other entities that are getting ready to be in the market but I am not aware of it.

Beth Nelson: At the time of the big shortfall, we talked about that the other day. I couldn't remember when that was.

Kathy Barger: I can tell you specifically as I remember it very well. In November of 1987 was when, November and December was really the toughest period of cash flow and it was November of 1987 while I was gone for Thanksgiving I had instructed Dave right before I left for vacation that he needed to go to a bank and get some cash and of course, that wasn't even legal to do as we were a public entity. That was in some of the tightest times and in either November or December of 1987 my memory was that we got down to $5 million in cash. And you might say that $5 million, big deal, but you have to remember that our payrolls were like $2.5 million so we essentially had two payrolls worth of cash on hand and of course we had plenty of other bills other than payroll to pay. Payroll was our biggest concern because if we couldn't meet payroll that would have caused mutiny among our employees. So we were staggering out our payments to vendors, etc. and we were very, very concerned but we had had larger cash reserves but they had dwindled down to $5 million over a period of time because we weren't able to collect on our bills and so we had gotten far behind because of lots of issues. We did have patients and that was a real positive thing. We knew we would be okay over the long term but what we had was an issue of not being able to get cash collected and were very quickly using up our reserves. I can remember being in managers meetings and standing before the managers and talking specifically about the fact that they could not spend any money on capital and we were not going to buy any capital. Remember that capital back then was probably anything over $500 so lots of things needed to be purchased and we just didn't. Deborah Davis and Dave were very much a part of that process. I can remember Debbie had the staff looking over the capitals that were being held. That was a very interesting tough time and we were afraid of what was going to happen but we pulled ourselves out of it. It was amazing. What we did was we got some outside help to come in. Of course, we had had outside people helping us out in making sure any information systems changes that needed to be changed were. We had hired Arthur Anderson to help us out, not only with our information systems but beginning in that December timeframe we actually brought Anderson folks on site to collect our old outpatient bills. What had happened was we had gotten so far behind because we had all kinds of information systems problems. We had installed county software and it wasn't doing what we thought it should be doing so we were getting a lot of billing errors and essentially what had happened was that we had gotten so far behind on billing, correctly billing out, that our billers and collectors couldn't get their heads above water. We essentially got Anderson in to get all the old stuff and take care of that so our Business Office folks could bill the new stuff that was coming off the system. We had corrected some things where the stuff was coming off better and cleaner and so that is essentially what had happened and we also, during that period of time, had gotten totally reorganized with our Business Office and how it was organized and structured and operated. So, really, when I first came on board we had the bond issue which took up a lot of time. We were pretty much zeroing in on operations and day to day billing and how do we correct things. Dave had set up a committee of other VPs that were really associated with finance to oversee what we were doing and to help guide us and make sure things were going okay. I think they had really gotten out of control before anybody really noticed it.

Anyway, we worked through that process and pulled things out and increased our rates at the same time which generated some more cash flow coming in. Volumes started picking up and actually it didn't pick up a whole lot until more like 1990. Those 1988 and 1989 timeframe things kind of stagnated at the hospital and there was another reason we were sitting there scratching our heads about the project. That's pretty much how that happened. Our Board was very supportive. These were very intense times from our Board's standpoint. Much of our meetings every month were about financial/operational issues.

Beth Nelson: What about relationships with the AMCS? How were we perceived by the others?

Kathy Barger: I can't really speak before I came. In the early years of being there I think we were definitely probably not considered to be of the same status as the other academic medical centers in the state. We were growing and still smaller than they were. Remember, before we added another 143 beds we were more the size of a community hospital and we didn't have the additional rehab beds, we were just bringing on our additional psych beds and we didn't have the original NICU beds that we are adding now so we were a large but more of a large middle sized hospital. Back then too, certainly our cardiac surgery program was taking off and doing very well, but there were certainly some specialties that we didn't have then. So we were an academic medical center, and I think we were as sophisticated and gave as good care as the others, but we just didn't have some of the services that the other academic medical centers had. Our programs hadn't been established as long. It is really amazing if you look at that State Medical Facilities Plan back in the nineties and look at some of those historical volumes. We were really coming into our own during those late eighties and really blossoming in the early nineties. We really changed so much from 1990 to 1995. We had changed by leaps and bounds before that but we kind of hit another plateau during that time period and I think then became even more recognized. I think we were always recognized by those in the Triangle and they were always very attentive as to what we were doing because market share that they had once had in eastern North Carolina was all of a sudden not theirs anymore. Pitt took away a huge amount of market share. Duke in particular, UNC, Wake, so they were seeing somewhat what was going on but I'm not sure we were appreciated. Certainly what we became in a few more years and then they really noticed and really saw what an unusual situation we were in eastern North Carolina and how we had really changed a great deal in taking the image of opportunity that had become a major tertiary center in a very rural area and they saw that we were very successful. Starting in the early nineties, cash flow wise, we were doing unbelievably well. Financially we were doing well, the bed tower was going up, I mean we were up and coming. Actually I think by then we had arrived. That was an exciting time.

Beth Nelson: Let's talk about some regulatory types of things that you have done. From my perspective, we are known for sticking our neck out regulatory wise in getting approval for services that, I guess were somewhat controversial. What is your perspective on some of that?

Kathy Barger: I think the gutsiest thing we have ever done was the 143-bed expansion which actually happened before I came. In doing that through the teaching exemption, knowing that it needed to be done and getting it done through that avenue, that was very gutsy, very different. And then we did some other things. We actually had several teaching exemptions in. The rehab center, most people don't realize those additional beds came through a teaching exemption. One of the gustiest things to ever have been done was going after the home health through the teaching exemption. Everyone said they didn't think we could use the teaching exemption for anything other than acute care but we did.

We eventually got the CON and we were actually awarded the CON but there was an appeal of the decision and it was a tough process that we went through to initially get that CON. We did the regional home health CON with a number of other facilities-hospitals in the region which were certainly very different. We did the Wellness Center. Of course there are other hospitals in the state that have done wellness centers. We probably had one as large as any other facility. We had controversy on that. A local athletic club appealed that decision. We often had CONs end up being litigated though we never went to trial on a CON, we were always able to negotiate them during settlement. There were not that many that we had that were that easy. We were in such a huge growth stage and still continue to be that it seemed like CON applications came up every few months so it was a sometimes. Tedious task to do some of the things we did.

Other things I think that are of note would be the expansion of our Neonatal Intensive Care Unit for an additional twenty beds. We got that CON maybe in 1997 or something like that. The reason I say that was different is because there is such a huge need for neonatal services in eastern North Carolina because of the high infant mortality. Lots of babies are being born and in addition to that you have the military bases that have a high concentration of very young people having babies and whenever you have lots of births you have need for neonatal services. Of course neonatal intensive care units don't make money. They are like the epitome of what being a not for profit health care institution. We are here for the region and so expanding and doubling its size, I think it is gutsy for a health care institution to do but Pitt made a decision to spend a great deal of money to have it done. The facility is not built yet but it has taken time to get done. It had to be staged along with the other construction because of where it is going to be located but I think it is a pretty unusual thing for someone to do. Certainly the Dare County Hospital is unusual and a different thing to do. Primarily, if you think about it, Dare County is not even really in the natural market area of PCMH. It is in the 29 counties but it is a long distance from Greenville. Pitt felt very much that it was important again to play a role in the local medical community in eastern North Carolina and Dare County is in eastern North Carolina. Again, very consistent with strategy. We went through a lot of toil and pain on getting that with Chesapeake General in Virginia. Pitt has the majority of ownership on that which is 60/40. I would say we have done some pretty innovative things.