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By Mark Tosczak

With additional reporting by Rose Hoban

UNC Health Care finalized its purchase of Morehead Memorial Hospital this week and announced the hospital would now be called UNC Rockingham Health Care.

“All of us are focused on making this transition as smooth as possible,” said Dana Weston, who was president of Morehead Memorial and will stay on as a UNC employee to run the hospital under its new name. “Last year was quite a journey and yesterday was an important milestone, but it’s not the end of the work.”

Morehead Memorial CEO Dana Weston. Photo credit: Mark Tosczak

The deal was the culmination of a years-long effort by Morehead Memorial leaders to sell itself to a larger hospital system. Last July, that effort led to a last-ditch attempt by Morehead to find a buyer by filing for bankruptcy so it could shed debt that, hospital leaders had learned, was scaring potential purchasers away.

The transaction was completed Monday and the new name and other details announced Tuesday. The hospital-owned nursing home was renamed UNC Rockingham Rehabilitation and Nursing Care Center.

Under the terms of the deal, outlined in a lengthy bankruptcy court filing, UNC Health Care paid $11.5 million for Morehead Memorial’s assets. In addition, UNC agreed to invest another $20 million in capital investments at the hospital over the next three years.

It will likely be months, though, before details are released of how that $20 million might be used. Weston said the first task on her to-do list is integrating UNC Rockingham’s finance, information technology, human resources and other systems with the UNC system. Then, probably later in the first quarter, the hospital will start a new strategic planning process to identify how the hospital can compete and be financially sustainable.

“What are the services that our community needs most? What are the services that our community is having to leave our local area to get? Where should we specialize? What are we best at?” she said. “We get to focus on answering these sorts of strategic questions that we really haven’t had the breathing room to be able to do.”

Failed bidder

The bankruptcy filing led to an auction that included some drama about which bidder would win. The hospital’s board received bids from seven entities — some of them for all the hospital’s assets, some for just some.

Initially, Morehead Memorial trustees declared a little-known Florida company, Empower IHCC Inc., the winner. But that company formed just one week before the Oct. 23 deadline for bids and its proposal to buy Morehead’s assets raised plenty of questions.

In a Nov. 8 hearing in federal court in Greensboro, questions were raised about Empower’s ability to actually close the transaction and continue to operate the hospital.

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“The Sale Hearing on November 8, 2017 did not go well for Empower,” U.S. Bankruptcy Court Judge Benjamin Khan wrote in his order approving the sale to UNC. “The evidence and testimony was not credible and tended to demonstrate that Empower did not have the ability to consummate the transaction or fulfill its obligations post-closing, or that the estate or any other entity would be able to enforce any breach.”

Among the problems Khan identified was that Empower had just $5,000 in its bank account and that its “purported letter of commitment” for $15 million required Morehead’s real estate assets to be appraised at nearly twice the $10.76 million bid.

Khan was also critical of the Morehead board’s judgment in declaring Empower the winning bidder.

“Furthermore, it was troubling to the Court that the Debtor’s financial advisor and investment banker each testified that neither had done any due diligence with respect to Empower’s ability to close the transaction, but that they advised the Board to accept the Empower Final Bid,” Khan’s order says.

“Two things were apparent from that testimony. First, it is difficult to understand how the Board exercised reasonable business judgment when it had no information or advice regarding Empower’s ability to close,” Khan wrote. “Second, the Board cared little about feasibility because Empower was apparently the only option to keep its hospital open.”

UNC Health Care, the only other bidder seeking to buy all of Morehead’s assets, offered $500,000, compared to Empower’s offer to buy the hospital for $10.76 million, invest another $18 million, and keep it open for at least 10 years.

Khan adjourned the Nov. 8 hearing without making a ruling and scheduled it to continue on Nov. 13. At that hearing, Empower failed to convince Khan that it was the best choice. Others, including some of Morehead’s creditors and N.C. Attorney General Josh Stein, also objected.

Plus, by Nov. 13 UNC had put a new offer on the table that offered more money than Empower. Morehead’s board also had decided by then that UNC’s new bid was a better offer.

Bigger implications?

One question is whether UNC’s acquisition of a hospital in the district of NC Senate leader Phil Berger, the state’s most powerful Republican politician, will have any impact on the proposed “virtual” merger of UNC Health Care and the Carolinas HealthCare System.

According to Berger’s spokeswoman Shelly Carver, the senate leader is “pleased Morehead Hospital has a buyer that will ensure it continues to provide access to care and employ many Rockingham County residents.”

Carver also said that Berger was “supportive” of UNC and Carolinas “having discussions about ways they can partner in the future to deliver better, more affordable care to North Carolinians.” But she said Berger felt that any final agreement would have to be considered on its merits.

The two systems proposed in August to create a joint operating company that would operate their hospitals and other facilities. It would be, by far, the largest health care organization in the state and one of the largest hospital operators in the country.

Considering management agreements and other affiliations, it would put nearly half the state’s hospitals under a single corporate umbrella. The two organizations say their new company would focus on “increasing access and affordability, advancing clinical care expertise, growing their renowned academic enterprise and contributing to the region’s economic vibrancy.”

It would also, they say, serve nearly 50 percent of the state’s rural patients.

Many observers have raised questions about what impact such a deal might have on health care costs. A number of studies across the country have found that hospital mergers typically lead to higher costs for patients with private insurance, as large systems have the clout to negotiate higher rates with insurance companies.

“Any hospital merger that increases their market power is really bad for the insureds and the patients,” said Barak Richman, a professor at the Duke law school who studies health policy.

He added that he worries about potential political calculations in which preventing the failure of Morehead may have contributed to making the deal between UNC and Carolinas have an easier time with state officials, who may be greenlighting that deal.

“Whenever antitrust analysis veers away from asking the questions ’Is it good for the market , is it good for consumers’… because of politicians and dealmaking, then it’s doubly bad,” Richman said. “Then the market suffers because of the worst reasons.”

Gingerbread and strategy

In Eden, however, the new UNC Rockingham employees aren’t thinking too much right now about the larger implications of ongoing hospital consolidation. Instead, they’re excited that their hospital, after years of uncertainty, is going to stay open.

For now, at least, the hospital is offering the same services delivered by the same staff.

“Everything is the same except for the excitement level and the energy running through the hallways,” Weston said.

At the annual staff gingerbread house competition in December, nearly all the entries included some kind of UNC reference. One team built a replica of the Old Well.

Weston is excited, too. For the first time since coming to Morehead she can focus on strategic questions that go beyond keeping the lights on. But she also knows that being part of the UNC Health Care system doesn’t guarantee an easy path forward.

“Being part of a larger system isn’t a magic bullet,” Weston said. “There is still a lot of work to be done and it is still going to require the dedication of our staff and the support of the local community.”

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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...