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Behind Wellmont Health's Search for a Partner

 |  By John Commins  
   January 22, 2014

Wellmont Health System CEO and President Margaret "Denny" DeNarvaez discusses the Tennessee-based system's search for a potential buyer. Not having an immediate need to make a deal is key, she says, because "it is more important to do it right than to do it fast."

 

Margaret "Denny" DeNarvaez
Wellmont Health System CEO and President

When Wellmont Health System announced this month that it was looking for a partner, the Kingsport, TN-based health system, with seven hospitals serving Upper East Tennessee and Southwest Virginia, said it had "launched a process to evaluate strategic options for the organization's future, including the possibility of aligning with another health system."

Wellmont CEO and President Margaret "Denny" DeNarvaez spoke with me recently about the challenges facing her health system and finding the right partner amid the global shift towards provider consolidation.

HLM: What prompted Wellmont to search for a partner?

DeNarvaez: Quite frankly, we feel like we are in a good position both financially and with our clinical standing in the area to be seeking a partner at a time when we don't need to seek a partner. We are looking proactively at what is out there that would enhance our position and our ability to provide care.

And we're doing that in a time where we don't have a gun to our head and we can be thoughtful about what those partnerships might look like and who they might be with and what they might bring to us beyond what we can do by ourselves.

HLM: What can't you do on your own?

DeNarvaez: It's really more with respect to what we know is going to happen in the next few years than it is an immediate need. There is nothing per se today that we are not able to do as a result of our financial position. But we look downstream and we see the significant reimbursement cuts that continue to come and we look at the penalties that will also continue to increase, year over year, for failure to meet certain standards.

The reality is the headwinds in healthcare are going to be pretty strong. To combat that there is going to be a change in the business model for healthcare. Many folks will be taking on risk so they can advance healthcare in a different fashion from what we have traditionally done. To do that we definitely believe a partner would be a preferred option.

We are in an area that does not have the population that is necessary to take on risk. It's common wisdom that you need a minimum of 50,000 lives and many people would say much more than that. We are in a total market area of 400,000 people. So obviously that is going to be very difficult.

HLM: What are Wellmont's selling points?

DeNarvaez: We are market leaders in the areas where we do business by far—a two-to-one preference. We are running very strong facilities both clinically and financially. When it comes to cardiology and oncology, there is nothing shy of transplants that we aren't doing. They will be very surprised at the level of sophistication of the physician community and the caregivers and the technology.

They will be excited when they see the level of sophistication of the board. These are not folks just being fed information from management. They are knowledgeable about the difficulties in healthcare and they also know what they want for the community."

They will be impressed with our senior team. I have been at the CEO level for over 20 years and this is the strongest management team I have ever worked with. It's helped position us in a challenged fiscal market.

Those who have gotten to know us just a little bit are always stunned to see what we have done at the level of reimbursement in this area with the payer mix we have. That may be an area where they would see that we could help them. That is one of the things we hope, too, that it's not a one-way partnership.

We are looking for things, but we will be able to show them how to work in an environment that is very challenging and yet produces the kinds of results we are producing. There will be plenty they will be impressed with.

HLM: Are you looking at an affiliation or an outright acquisition?

DeNarvaez: We have no preconceived notions of what the partnership should or shouldn't be. We will have a financial advisor go through this process with us because we need to reconcile what we may want versus what a partner might want.

We are aware that for some partners, a clinical affiliation might be of interest. It may not be for some entities. And it may not meet our needs either. We want the right partner who meets our needs and we can get the kind of commitments to the community and the health of the community that we are looking for. We are not looking to acquire another entity. We would be willing to be acquired another entity.

HLM: Is this a hard sell for your community?

DeNarvaez: I have been proud of our community. For the most part we were concerned about being very vocal with our community in advance of actually beginning this phase of the investigation. But it is a community asset and we felt it was the right thing to do. They have responded with gratefulness that we have kept them apprised of what we are doing and that this isn't going on in a smoke-filled backroom.

The community includes successful businessmen who understand that size and scale matter, getting both intellectual and fiscal capital matters. I personally haven't heard anything but positive comments. That's very telling about using an approach that is not going to be done haphazardly.

It's going to be done very thoughtfully. And it is meant to be in the best interests of the community. We have a sophisticated board that is trusted by the community and that goes a long way toward making them feel comfortable about the process and the people who are driving it.

HLM: Both Tennessee and Virginia have rejected Medicaid expansion money. Was that a factor in your decision to seek a partner?

DeNarvaez: It wasn't the factor, but there is no question that it was a factor. Generally speaking it is just another indication of how hard it is to have a solid fiscal plan when in our case, 70% of our revenues come from a government source that is very much subjected to that type of decision making.

By a flip of the pen one way or the other, millions of dollars of revenue can be taken or diminished. If we were 10% Medicare and 5% Medicaid as a payer mix, that would be a different conversation. Medicare makes up over 50% of our payer mix and Medicaid makes up 13% and we have 9% or so in complete no pay. When you have that sort of a payer dynamic, it also is more subjected to these types of changes that have come very rapidly and don't allow you enough time to change your infrastructure to respond to it.

HLM: Are you concerned about the funding status for rural hospitals?

DeNarvaez: We had to close one of our rural facilities for a combination of issues. Probably more significant than the financial losses, although they were significant, was the inability to recruit and retain physicians. That is a growing issue because our economic challenges regarding what the government is going to do also translate into physicians who don't wish to work in an environment where they don't know from one day to the next what their economic challenges are going to look like.

And frankly even if they are employed by the health system, they also know the health system would have to make dramatic changes if disproportionate share went away. That would be a significant crisis for many hospital systems, not just our own. And the rural facilities are by far the most impacted in those discussions because there is a heavier concentration of Medicaid.

HLM: What is your timetable for some sort of partnership?

DeNarvaez: This month we will send a (request for proposal) to three financial advisor firms. In short order we will make a decision as to which one will be our advisor for this second phase. They will help us determine a list. I don't know if that list will have two candidates or 10 candidates. We will have a small group from the board and myself doing our homework to interview those folks and make sure we are talking the same talk and that we are interested in one another and interested in the same things about one another.

There is no real time table for that. If it takes us six months from start to finish to find the best partner, so be it. If it takes another six months to find what the right transaction is with that partner, so be it.

It's one of the beauties of being proactive in this regard. We don't have a timetable. We don't have a gun to our head. And we do think it is more important to do it right than to do it fast. We do believe that in 2014 we would be pretty far down the line selecting a partner and a transaction to be done.

HLM: Is there a deal breaker or a deal maker with potential partners?

DeNarvaez: There certainly are criteria that we will be testing for. One is that they are consistent with our own mission vision and values. To be candid, the more they look like us, talk like us, and act like us, the easier this will be. We are very committed to our service and quality agenda and we want a partner who is equally concerned with that. Culture will matter.

We are clearly going to look for a financially sound entity. We are a BBB+ plus bond rated entity. Those that would be interesting to us would be A-rated entities and above. We don't want to sign up with a partner who might also be looking for a partner. We want a partner who is committed to the technological advances that we have been committed to.

We have made a huge investment in Epic electronic records. We want a partner who is equally sophisticated in their medical and intellectual property. We want to know what they are invested in, what they have done with it, how they have used these tools.

We want a partner who can help us recruit physicians. We have strong service lines and strong medical staffs but when someone retires it is not obvious where a replacement is coming from. We have a strong commitment to physicians as leaders.

There are other criteria, but those are the ones that come to the top of mind right now. Clearly, as we listen to their stories, as we listen to who they are as an entity, we are going to look for certain markers that match up with our philosophy.

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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