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By Mark Tosczak

When Morehead Memorial Hospital President and CEO Dana M. Weston started at the hospital in December 2015, she knew that the answer to the hospital’s financial woes was probably to become part of a larger health system.

Morehead Memorial CEO Dana M. Weston.

“I knew they had challenges,” she said. “I thought, sure, we can do a few things and turn it around — right the ship.”

She didn’t know that a Chapter 11 bankruptcy filing would be required to get buyers interested. Since 2013, Morehead Memorial had been trying, unsuccessfully, to persuade a large hospital system to buy it.

There are still more questions than answers about the fate of the 108-bed Rockingham County hospital, which filed for bankruptcy in July. However, a number of potential bidders are looking at the hospital — examining its financial and operational records, talking to senior managers and visiting.

Greensboro-based Cone Health is one system that’s taking a look.

“We are evaluating the materials related to the bankruptcy proceedings, guided by our ongoing commitment to serve the residents of Rockingham County,” Jim Roskelly, executive vice president for strategic development at Cone Health, said in a statement.

Cone Health owns Annie Penn Hospital, a 110-bed hospital in Reidsville, about 11 miles south of Eden. It’s not clear if Cone’s ownership of Annie Penn would create antitrust issues in a potential bid for Morehead.

Morehead Memorial won’t reveal how many potential bidders it’s heard from. But Weston said the announcement of an auction for the hospital’s assets has attracted both non- and for-profit health care organizations and private equity investors. She also said potential bidders include organizations with a presence in North Carolina and some who would be new to the state.

“There’s a lot of interest,” she said.

Seeking suitors

Kicking the tires?
  • Charlotte-based Novant Health: declined to comment
  • Wake Forest Baptist in Winston-Salem: “considered a variety of options with Morehead Memorial,” but eventually demurred
  • Sovah Health, southern Virginia: declined to comment
  • Duke Lifepoint Healthcare: no response

This isn’t the first time the Eden hospital has hung out a “for sale” sign.

In late 2013, Morehead Memorial board members contacted area health systems seeking a partner. None were interested in buying, although the conversations did lead to Novant taking over the management of the hospital in 2014, displacing another manager.

But the hospital continued to lose money. Weston spent 4 to 5 months on a second search for a potential acquirer in the second half of 2016.

“We had a lot of conversations,” she said. But Morehead’s debt — $67 million in liabilities at end of the hospital’s 2016 fiscal year, with $64.6 in net assets — was blocking potential deals.

By early this year, Weston and the hospital board were starting to talk Chapter 11 bankruptcy to deal with the debt.

Sale scenarios

Morehead has hired an investment banking firm, Hammond Hanlon Camp LLC, to help draw more potential bidders.

Potential buyers can bid on some or all of the hospital’s assets. One outcome could be to split the hospital operations from some of its ancillary services. For example, Morehead operates a 121-bed nursing home that, Weston said, could attract a bid on its own.

Off its main campus, Morehead also owns an imaging center, an urgent care clinic, a family practice, and a physical and occupational therapy facility.

A winning bid could be from a single buyer that wants all the assets, or there could be multiple winning bids.

It’s also possible there won’t be any successful bidder.

Weston says that she and the hospital board are looking for more than just a bid that satisfies Morehead’s financial obligations. Their priorities include “keeping health care local,” preserving jobs, and keeping wages at or near current levels.

“This hospital is the largest employer in Eden and the fourth or fifth largest in the county,” Weston said. “We’re not just talking about the physical health of people. We’re talking about the economic health of a county.”

Morehead Memorial employs more than 650 people, plus dozens of contractors; those jobs pay higher-than-average wages for the area.

“We value the existence of the hospital and look forward to its continued existence,” said Eden City Manager Brad Corcoran. He said the city trusts the hospital’s board to make the best decision for the hospital and the community.

Republican State Sen. Phil Berger, who represents Rockingham County and is president of the senate, said he hoped the hospital would be acquired by a strong partner that would continue to operate it.

“One of the challenges they’ve faced over the last several years is the fact that they’ve not had a strong partner, and that’s created some issues for them in terms of their reimbursement rates on insurance and that sort of thing,” he said. “I think there’s a good opportunity there for us to continue to have a hospital.”

Operating under a shadow

Since the hospital filed for bankruptcy, some of the biggest challenges have been public and employee perceptions, Weston said.

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“When people hear asset sale, they think Chapter 7 [bankruptcy] — liquidation — not Chapter 11,” Weston said. “So folks thought ‘They’re going to be selling the artwork off the walls, the furniture.’”

She also thinks that unsubstantiated rumors of the hospital closing, or just the fact of the bankruptcy filing, may have prompted some patients who might normally come to Morehead to go elsewhere.

Chapter 11 bankruptcy proceedings are designed to allow businesses to reduce or renegotiate their debts while continuing to operate, with the goal being that the business eventually emerges from bankruptcy and continues to operate.

“I told our team that I view Chapter 11 as a tunnel. You come in, you come out. So we’re in it. In order to come out,” Weston said. “We have to demonstrate to the court a plan that says we can be a viable organization going forward.”

A light at the end?

Morehead is hardly alone in its challenges. Some 40 percent of rural hospitals operate at a loss. One headwind has been that North Carolina chose not to expand Medicaid under the Affordable Care Act.

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Weston said Medicaid expansion might have improved the hospital’s revenues some, but it wouldn’t be a cure-all for Morehead’s financial problems. It would have, however, probably have given the board “more runway” to solve their financial problems.

Berger, who has opposed Medicaid expansion, says Morehead’s bankruptcy hasn’t changed his mind on that issue. But, he said, he believes that he and other state legislators would be open to legislative proposals to address rural health care problems.

Weston, though, is putting her hopes in being part of a larger health care system.

“While we are in a challenged position, we are not in a no-way-out-of-the-tunnel position,” she said. As part of a larger organization, Morehead would have more clout with suppliers and be able to negotiate higher reimbursements from insurance companies.

With the debt resolved after emerging from bankruptcy, those efficiencies and higher payments would get the hospital closer to profitability.

Getting back in the black, Weston believes, requires more medical specialists so Morehead can treat more of the patients that come through its doors.

Some emergency room heart patients, for example, end up being transferred elsewhere when the hospital’s lone cardiologist isn’t on call. Morehead also has an orthopedic surgeon, a gastrointestinal specialist and a urologist on its medical staff — but just one of each.

In 2013, Morehead had 4,612 inpatient admissions. By last year, when Weston was courting potential buyers, the number dropped to 2,901. Graph source: Bankruptcy court filings, which reads, ” As patient volume has decreased, so have the Debtor’s net revenues.”

When those specialists aren’t on call, patients who need them must go elsewhere.

While outpatient visits have remained fairly steady the last few years, inpatient admissions have declined precipitously.  From 2013-2016, the hospital’s net revenue declined by about $15 million.

Eden residents and Morehead employees should have a better idea what the future holds in coming weeks. Bids are due Oct. 23 with the auction to be held Oct. 30. A bankruptcy court hearing to approve the winning bid is set for Nov. 6.

Weston said the plan is that any potential acquisition would be closed within 60 days after court approval.

Mark Tosczak

Mark Tosczak has worked as a writer and communications professional for more than 20 years, including stints as a newspaper reporter and editor, think tank communications director, marketing agency vice...

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