News: CJ Exclusives

WakeMed and Rex Tussle Over Definition of ‘Private’

Legislative committee could rule today on offer to purchase Rex

RALEIGH — A legislative committee may decide as early as this morning whether to recommend that the full General Assembly consider the offer by WakeMed Health and Hospitals to purchase Raleigh’s Rex Healthcare.

The House Select Committee on State-Owned Assets is scheduled to meet today at 10 a.m., and the committee is expected to discuss the $750 million offer WakeMed made last year for Rex, which merged with UNC Health Care in 2000.

WakeMed sees Rex as part of an attempt by UNC Health Care to become the dominant medical provider in the state, and a direct threat to WakeMed’s financial viability. Rex wants to remain part of UNC.

WakeMed made its initial offer last May, a month before House Republican leaders created the committee, which is charged with evaluating and possibly selling assets owned by the state. Rex is on that list. Lawmakers are enticed by the prospect of adding $750 million to state coffers. Moreover, moving Rex out of the publicly funded UNC system could reduce health care costs for state taxpayers over time.

But would a WakeMed purchase of Rex put Wake County taxpayers at risk if, unexpectedly, the hospital had financial troubles? Part of the debate over the offer will center on how “public” or “private” each hospital is.

WakeMed officials claim Rex is a public hospital and uses state tax dollars to compete “unfairly.” WakeMed supporters suggest that Rex has attempted to obscure its status by claiming to be private for some purposes and government-run for others.

Rex officials say WakeMed isn’t any more private than Rex, as the county still appoints a majority of its board members. Moreover, Rex officials say the hospital receives no direct subsidies from UNC or the General Assembly.

Harvard Business School professor Regina Herzlinger says that neither Rex nor WakeMed is a fully private entity. But she says the easiest way to determine whether a hospital is public is whether it receives support from taxpayers. By that measure, Rex gets that support, indirectly, while WakeMed does not.

Herzlinger, an expert on health care finance, said each hospital’s financial statement should indicate whether it receives government funding.

In Rex’s case, it’s not that simple.

Although Rex is organized under the federal tax code as a 501(c)3, private nonprofit, it does not file an IRS form 990, as is required of most not-for-profit charities. A copy of form 990 is supposed to be available on request at any time. Among other things, it requires the nonprofit to disclose its sources of revenue, along with the compensation of all key employees and directors who receive more than $150,000 yearly.

The IRS exempted Rex from filing the financial disclosure statement in 2005, calling it “an affiliate of a unit of government.”

“It’s my understanding that not all 501c3 organizations are required to file 990s,” said Lisa Schiller, vice president of marketing and public relations for Rex Healthcare. “That is the reason why we make our financial statements publicly available through other channels.”

Schiller said financial information was available from the Electronic Municipal Market Access website, an online service of the Municipal Securities Rulemaking Board. Schiller said Rex reports quarterly financial and operational data, along with its fiscal budget and annual audit.

The real litmus test, Herzlinger said, is whether the hospital is a line item in the government’s budget.

But again, in Rex’s case, it’s not that simple.

Rex does not receive a direct appropriation in the state budget, but there is an appropriation for Rex’s parent organization, UNC Health Care. UNC Health Care directs some of that appropriation to the Enterprise Fund, a joint venture between UNC Health Care and Rex. Until recently, the fund had not been audited.

The first audit of the Enterprise Fund revealed that over the last fiscal year it received more than $115 million from UNC Hospitals, while Rex contributed $6.4 million to the fund. It also reported a transfer of $11.4 million from the fund to a group called Triangle Physicians Network, a group of physicians with various specialties that perform services in Rex or UNC Hospitals.

WakeMed Chief Financial Officer Mike DeVaughn considers this to be at least a $5 million taxpayer-funded subsidy to Rex.

“It’s not a direct subsidy, because the funds didn’t go directly to Rex, but the funds did go into an entity controlled by the UNC Health System, from which Rex directly benefits,” DeVaughn said.

Schiller insists that Rex is not a government entity. “When UNC acquired control over Rex, that’s merely what they did,” Schiller said in an email. “They didn’t buy the assets, they don’t own the stretchers or the land or the IV pumps. They purchased control of the board. Rex maintained itself as a private, 501(c)3, not-for-profit hospital. We have about 5,200 coworkers, we are not state employees.”

“Rex is responsible for our own operations and our own capital. We get no money from the state. We get no money from UNC.”

From county hospital to nonprofit

WakeMed opened its doors in 1961 as a government facility, the Memorial Hospital of Wake County. Along with hundreds of other communities in the South, Wake County started a public hospital as the civil rights movement swept away Jim Crow laws and integrated public facilities.

By the 1990s, the growth of managed care and other changes in the medical marketplace led government officials to change their priorities.

“Counties wanted to get out of the hospital business,” said Gary Pearce, a Democratic political consultant and legislative consultant for WakeMed. “They got into it in the ‘50s and ‘60s as part of the civil rights movement. Then later on they said, ‘this is way beyond us, we want out of this.’”

WakeMed cut almost all meaningful ties with Wake County in 1997, when it became a 501(c)3 private, nonprofit.

While WakeMed receives no tax dollars from the county or state, Herzlinger said it’s very unusual that the county appoints a majority (eight out of 14) of its board members.

“A private nonprofit controls its own destiny. Its directors are not appointed by anybody other than the organization itself,” Herzlinger said. “So WakeMed seems to be a kind a curious hybrid.”

WakeMed officials point out that while the county appoints a majority of its board members, it has no power to remove them. They also say the county has no control over the hospital’s budget, bonds, or any actions the board takes.

DeVaughn said in North Carolina, it is not unusual for a county to appoint members of a hospital’s board. In fact, he says, it’s required by law. If a county-owned hospital seeks to become a private, nonprofit, a state statute says the county must appoint a majority of the members of the nonprofit’s board.

WakeMed’s debt

A major concern for lawmakers in deciding whether to sell Rex to WakeMed is whether Wake County taxpayers would be on the hook if WakeMed got in over its head.

WakeMed and Wake County officials say the 1997 transfer agreement ended any taxpayer liability for the hospital’s debt.

One of the requirements of the agreement was that all of the hospital’s outstanding debt ($125 million) that was issued under the name of Wake County Hospital System had to be refinanced and reissued under the name of WakeMed Health and Hospitals, DeVaughn said.

In essence, WakeMed purchased the hospital’s assets for $125 million and the county used the money to pay off its bonds, he explained.

The shift from county ownership to nonprofit status also allows WakeMed to raise funds for capital improvements or acquisitions (such as the purchase of Rex) privately. WakeMed did that in 2009 when it sold $170 million in bonds to upgrade its facilities. If WakeMed were to buy Rex, taxpayers wouldn’t be involved in the equation, said Wake County Manager David Cooke.

“If they had to finance the acquisition [of Rex] with debt, they would go to the marketplace and sell bonds to private investors,” Cooke said.

If WakeMed became unable to continue for financial reasons — if it were forced to file bankruptcy, for instance — the hospital would transfer its assets to the county, Cooke said.

If the county did not want to take over WakeMed’s operations, it could contract with an outside health care company to run the hospital facilities.

A third player

As the debate between WakeMed and Rex rages, there’s a third major health care player in the Triangle: Duke Medicine.

It is the only truly private hospital in the region.

“Duke is a classic private, nonprofit hospital,” Herzlinger said. “It’s a 501(c)3 charity. It has no governmental control. A private nonprofit can receive government grants and funding for Medicaid and Medicare patients, but it typically does not receive direct funding from the state government.”

A top financial official at Duke Medicine told Carolina Journal the system is “unequivocally responsible for its own debt.”

Sara Burrows is an associate editor of Carolina Journal.