And then there were three

Wellmont’s leaders expound on search process

By Jeff Keeling

Wellmont Health System made it official Jan. 9: To prepare for a successful future in “the rapidly changing healthcare industry,” the not-for-profit provider would spend 2014 “evaluating strategic options,” including the possibility of aligning with another system.

Under board of directors guidance and led by a strategic options committee, that process has passed through several phases since. A July 30 announcement and accompanying letter from new Chairman Roger Leonard revealed the number of contenders had been winnowed to three, for what most in the community expect to be a merger with Wellmont as the seller. The three remaining contenders are, notably, all not-for-profit systems, with one described as a “regional system” and the other two as “significant health systems beyond our area.”

In an Aug. 5 conversation with the Business Journal, Leonard, CEO Denny DeNarvaez and CFO Alice Pope discussed the principles that have guided the strategic process. While speaking with some pride of the assets that make Wellmont an attractive partner, they also freely acknowledged what Wellmont and the communities it serves need from a partner. (Hint: In many respects, bigger is better.) And the trio answered questions about fiscal performance through the first three quarters of fiscal 2014 (to March 31), and discussed the trends and uncertainties likely to impact finances in the future.

Just the facts, ma’am

“One of the clear points we have been advised to follow, and that we are following, is that this is an independent process that is unbiased by external forces. Just like we believe evidence-based medicine improves outcomes, this is an evidence-based process.”         Roger Leonard

Wellmont has had 18 years to establish itself as one of the most significant institutions in the Tri-Cities. Since the 1996 merger of Kingsport’s Holston Valley Medical Center and Bristol Regional Medical Center, the not-for-profit system has grown to an $800 million operation with six hospitals. As hospital systems have adapted to changes in health care, it has grown to include urgent care centers, oncology and cardiology institutes, diagnostic centers, outpatient rehab facilities, physician practices, long-term care options and more.

The system has grown in stature and reputation like its slightly bigger, Johnson City-based counterpart/rival Mountain States Health Alliance – without having to cede any control to an entity from outside the metro. So, with the varying opinions sure to accompany something as personal as health care, especially when it’s provided by a nearly $1 billion entity, Leonard and his fellow board members entered the strategic process fully aware that emotions and opinions were unlikely to be in short supply.

The board respects the community and values its input, Leonard said. In fact, Wellmont launched a new website, forwardwithvision.org, on Aug. 6 that allows community members, physicians and employees to learn more about the strategic process, to rank its “guiding principles” and to keep up on rumors and fact. Nonetheless, Leonard noted, the strategic committee – comprised of Tri-Cities natives or longtime residents with plans to remain here – is focusing mostly on the main factors driving the process. Those members include entrepreneurs, CPAs, and the treasurer of Eastman Chemical Co., among others.

“The focus has to be on the triple aim of improving patient experience of care, including quality and satisfaction, improving the health of populations, and reducing per capita cost of health care,” Leonard said.

Broadly speaking, the committee has been vetting interested suitors on seven principles. Management and staff have acted largely in a support role, providing data and consultation when asked and in addition to Kaufman Hall, the consultancy the board retained in January. The principles include:

• Commitment to Wellmont’s mission and values, including a “culture of collaboration” and a commitment to low-cost, high-quality care delivered close to home.

• A track record of excellent clinical care.

• The financial heft to invest in personnel, medical equipment, technology and facilities.

• Expertise to help Wellmont continue moving successfully to the newish model of “population health management.” (Terms such as “quality incentive and risk-bearing payment arrangements,” “protocols to redesign care” and “systematically improving outcomes while lowering cost” provide clues as to the meaning behind the terminology.)

• Commitment to a strong physician network and to physician leadership into the foreseeable future.

• Being a good employer with a commitment to investing in the region and growing Wellmont.

• A strong vision for the importance of philanthropy and stewardship of donated funds.

Leonard said the three finalists “have submitted compelling responses to the list of questions in these focus areas.” The board isn’t taking them at face value, either, he said, but essentially reference checking. “We have board members and physicians as well as an external consultant who are calling hospitals that have merged with these systems before to say ‘did they do what they said they were going to?’”

Why now? Why ever, really?

“If there is some major disruptive innovation, at $750 million and a break-even proposition it would be very difficult for us to sustain something that would have a multimillion dollar impact. If we were part of a larger organization, you can weather these storms until you can adjust to the new model.”          Alice Pope

“In my view, Obamacare is just the tip of the iceberg. Reimbursement cuts are going to continue regardless of who is in office, so we believe that right now we’re in an ideal situation. We have people that are very interested in merging with us because of the good things we’re doing.”             Roger Leonard

Wellmont’s leaders said it back in January. The system is by no means alone in seeking an alignment partner to move ahead with in addressing everything from increasing levels of information management and technological innovation (including electronic health records) to lower patient volumes, trends toward outpatient care and population health management. Undergirding it all, though, is money, or more accurately, the lack of it.

Payors, from Medicare and Medicaid to private insurors, may (a definite “if”) find a fair, effective method to tie reimbursement to a health care system’s successful management of patient populations. Wellmont may do a great job of hitting whatever metrics are in place, and do it with the lean cost structure and efficient organization that is one of the factors making it such an attractive partner. And yet alone, Wellmont may still slide toward an untenable situation with respect to net revenues that have, in tandem with patient volumes, been trending downward.

“Our board believes that scale will drive clinical excellence going forward,” said Leonard, referencing “conventional wisdom” suggesting a minimum size of $3 to $5 billion to successfully navigate the expected health care landscape of the next several years, not to mention unanticipated curveballs. (Between them, Mountain States and Wellmont had revenues of roughly $1.85 billion in fiscal 2013.)

The other factors in the search are all essentials, Leonard said, but they’re also all tied into a system’s ability to deal with financial realities.

What’s in it for the partner

Leonard and DeNarvaez tout Wellmont’s clinical programs, particularly in cardiology and oncology but across a wide spectrum of disciplines. They are proud of Wellmont’s implementation of its EPIC electronic medical record system. In an admitted oversimplification, Leonard said “EPIC will do for us what SAP (business enterprise software) did for Eastman.” DeNarvaez called EPIC the current “gold standard” for EMR and said “having that deployed and done is a competency that (potential partners) value.” Leonard and Pope mentioned Wellmont’s being “a potential platform for (partners’) expansion into this region” since “most not-for-profit health care systems grow contiguously.”

But the system’s recent record of maintaining clinical excellence while reining in cost should intrigue potential partners the most, the trio said. It’s been of necessity. Wellmont deals with a higher-than-normal ratios of Medicare and Medicaid patients, programs that offer low reimbursements. The system provides a high level of charity care, having included $40.25 million in provision for bad debts through the first nine months of fiscal 2014, up 6 percent from the same period a year earlier. The states it operates in, Tennessee and Virginia, have both declined to participate in the Medicaid expansion. And the system’s Medicare and Medicaid reimbursements are further crimped by the metro area’s “wage index” designation being among the nation’s lowest.

Through it all, Wellmont has posted positive net operating revenues. That net, at $6.2 million through three quarters, was down significantly from 2013’s $12.9 million at the same period, but it was a margin nonetheless.

“We have done a great job of driving down our cost of care,” Leonard said. “In our analysis, we are in this region of the country, the low-cost producer, bar none.” Added DeNarvaez: “That has been one of the competencies that we can bring to a potential partner. We have learned how to do more with less.”

All trends point to scale

Inpatient volumes and surgeries continued a steady decline through March, according to quarterly reports Wellmont files with bondholders. Average daily census dipped nearly 8 percent. Conversely, physician office visits and urgent care visits continued to increase. Pope did allow that she believes a trend that brought volumes down by about 12 percent has reached its trough, but added that it was largely due to “overutilization” and a bounceback is unlikely.

Maintaining positive cash flow in such a climate won’t be easy. It will require the scale to get the most out of electronic medical records systems, which have the potential to increase quality while reducing cost.  The new reality will also test systems’ ability to most effectively implement different methods of keeping various populations – from older or sicker ones to younger or fitter ones – optimally healthy in the most cost-effective way possible. And it will be kinder to systems with greater purchasing power as they negotiate with vendors of drugs, other medical supplies and even IT equipment.

Because of the many things Wellmont has done well, Leonard said, the suitors in this process are more willing now than they’ll ever be to make attractive offers and meet the system’s expectations about local governance and other fundamentals.

“Our board’s position is, if we tried to kick the can down the road a year or two years or five years, we would be less well-placed to negotiate a favorable alignment decision than we are now.”

Next month: Why only not-for-profit suitors made the final three. Can the community have enough influence without a partner that is a “regional system?” More on population health management, physician relationships, local governance and the importance of continued capital investment.