Second of four parts
WakeMed Hospital has been a destination for patients without options: the poor, the overlooked, those caught in unexpected tragedy.
For decades, this care shaped WakeMed's mission. But as a business, it promised to be its downfall.
In the 1970s, WakeMed found its salvation in hearts, and over the coming decade, took in millions from the government and insurers as the nation's leaders vowed to conquer the death toll brought by heart disease.
WakeMed built its heart business on the backs of an ambitious cardiology practice: Wake Heart & Vascular. This group of cardiologists had gone where the patients were, opening offices in rural communities throughout Eastern North Carolina.
The arrangement was simple: Wake Heart brought those patients to WakeMed for expensive bypass operations and other procedures; the hospital billed for the use of its facility and hospital stays that lasted days or even a week.WakeMed invested in a state-of-the-art facility designed for the cardiologists' needs.
"It was a co-dependency," said Bill Newman, one of the founding partners of Wake Heart. "We needed the hospital, and they needed us."
WakeMed ran a fragile enterprise.
If it were to lose its heart business, or a significant chunk of it, the hospital ran a serious risk of not meeting expenses. In 2010,WakeMed's heart business produced $24 million in profits, accounting for the hospital's operating margin of $20 million and offsetting $4 million of its charity care, records and interviews show.
Wake Heart doctors brought about 60 percent of WakeMed's heart patients and contributed $11.2 million of the profits from hearts.
A cross-town rival's ambitions for a thriving heart business would threaten this simple, undefined relationship. So would health care reform.
For years, cardiologists had watched their reimbursements whittled away as the government tried to rein in cardiology services through Medicare, the health care insurance program for the disabled and those 65 and older. Private insurers took a line from Medicare and lowered their reimbursements, too.
Suddenly, doctors who had enjoyed good livings in private practice saw the model upended. Small practices had little negotiating power with private insurance, so doctors raced to join hospital systems to take advantage of whatever leverage could be had.
Hospitals were on the move, too. The big ones wanted to get bigger to enhance their bargaining position with insurers. Smaller hospitals rushed to join larger systems.
Health care reform had sparked a sort of musical chairs for cardiologists. They didn't want to be standing when the music stopped.
"The writing was on the wall of what was coming," said Michael Zellinger, a senior partner at Wake Heart.
Pressure on heart docs
Wake Heart was already in a financial jam in 2009.
Medicare paid for treatments for two-thirds of its patients, and on top of the cuts that had dribbled out over six years, federal officials promised more in 2010. Medicare said it would cut by one-third reimbursements for nuclear stress tests performed in doctors' offices. Wake Heart had invested millions in this equipment.
To cut costs, Wake Heart senior partners closed an office in Apex, found cheaper space for their office staff and laid off a few employees. Senior partners studied the books weekly. They whispered about the worst: Bankruptcy? Splitting the practice?
Wake Heart doctors, one by one, gradually realized they could not afford to remain independent. First, a single practitioner, partner Bill Newman, approached WakeMed about hiring him and a few other cardiologists. WakeMed CEO Bill Atkinson told Newman he was concerned about breaking up the practice.
By September 2009, all 23 doctors at Wake Heart voted to tie the knot with WakeMed.
Talks turn sour
The cardiologists expected the negotiations to be quick and painless.
Instead, the talks were fraught with confusion and ill will. WakeMed was reaching deep, offering to buy the practice for about $5.5 million. Each doctor would be paid a salary, derived by reimbursements for procedures, though new doctors would be guaranteed a salary while they built up their patient base. Doctors at Wake Heart had been accustomed to a starting salary of $350,000.
Both sides were needing to extend more faith and trust than ever. And, week to week, both sides felt the other was scaling back promises made in prior meetings.
By summer 2010, Wake Heart's senior partners were so frustrated they decided to let their lawyer deal with the negotiations.
One evening in early August, Wake Heart partners sat around the conference room table and tried to make sense of the unraveling talks. To the cardiologists, WakeMed administrators had started to feel like strangers.
Despite the risks, "We decided we were better off staying independent than (taking) a bad deal," said Zellinger, one of the senior partners. In mid-August, all 23 Wake Heart doctors agreed and voted to abort negotiations.
On Aug. 20, Zellinger sent WakeMed administrators what he thought was a polite but clear breakup letter, though he left the door open to more negotiations. WakeMed administrators thought Wake Heart doctors would come back.
Both sides figured the doctors had no other option.
A quick deal
Across town, Rex had set out to build a first-class destination heart center. Doctors had always done procedures there, but facilities within the hospital were scattered. Rex leaders wanted to capitalize on future need for heart services as Wake County grew.
In 2009, Rex hired five cardiologists, cherry-picking from premier practices in the Triangle to form an in-house team. It applied with the state to build a $120 million heart tower, which signaled Rex was serious about competing in the heart business.
Even though the Wake Heart partners knew of Rex's ambitions, they never saw Rex as a good fit for the volume and pace of their 23-physician practice.
All that changed when senior partner Tift Mann spoke in August to Cam Patterson, head of cardiology at UNC, about teaching opportunities. Mann confided that Wake Heart had failed to strike a deal with WakeMed.
Patterson urged Mann to consider having Wake Heart join UNC and Rex.
On Sept. 13, 2010, Wake Heart cardiology partners sat across from Rex executives and told them about their predicament. A team of Rex leaders, including CEO David Strong, nodded and listened.
Within 15 days, Wake Heart partners and Rex officials had a tentative deal. On Oct. 12, Bill Roper, CEO of UNC Health Care, had dinner with the doctors at Fleming's Prime Steakhouse and welcomed them to the UNC team.
Wake Heart doctors and Rex officials say the cardiologists signed a deal that brought no bonuses or cash advance. They would be paid by insurance for the services they performed at rates UNC and Rex had brokered as an organization with hefty bargaining power.
Wake Heart would keep its practice and pay Rex to run many of its administrative functions. Wake Heart doctors, UNC and Rex officials say there is nothing more to their deal.
UNC and Rex leaders knew how dependent WakeMed was on Wake Heart. Still, no one thought to warn WakeMed as the deal with Rex and UNC crystallized.
A bid for Rex?
WakeMed leaders reeled when they heard of Wake Heart's partnership with Rex. They tried to figure out how this could have happened.
"They were the kings of WakeMed," said Tom Oxholm, then vice chairman of WakeMed's board.
Wake Heart partners met with Oxholm and board chair Billie Redmond on Oct. 15, hours before UNC released to the media news of Wake Heart's affiliation. The doctors assured Oxholm that they'd still treat patients at WakeMed.
WakeMed leaders wondered how UNC or Rex could come up with the money to pay the cardiologists. Oxholm was sure they had gotten a lucrative contract with Rex.
A dozen old wounds came to the surface.
WakeMed was the charity care hospital, and cardiology had been its saving grace.
Rex's financial model wasn't nearly as fickle, particularly since it joined UNC Health Care in 2000. By WakeMed's estimation, Rex shirked responsibilities to help care for the county's poor.
WakeMed board members had long been trying to bring more stability to their business model. In the mid-1990s, they had bid on Rex Hospital, figuring WakeMed could distribute charity care in Wake County and share revenues. But UNC won, and some at WakeMed still bore hard feelings about losing the deal.
And in recent years, UNC and Rex's operations brought new frustrations for WakeMed. WakeMed leaders couldn't understand why a state hospital, through its ownership of Rex, was competing so aggressively in their market. They saw Rex as an extension of UNC and as a state institution.
Losing Wake Heart was the last straw. Oxholm suspected that UNC had come in and lured doctors WakeMed considered theirs.
A week later, WakeMed board members huddled around a conference table at the Carolina hotel in Pinehurst for their fall retreat.
They griped about Rex and UNC and speculated about tactics they thought were being used to attract doctors.
Finally, Wally McBride spoke up. As a lawyer who issues bonds, he had been familiar with WakeMed's financial structure for decades.
"Maybe it's time to think about what's been thought about before," McBride told the board. He said WakeMed should buy Rex.
Some nodded. The more they talked, the more it seemed doable.
Toward the end of the session, board members invited Atkinson, who hadn't been at the retreat, to join them.
As they told him about their plan, Atkinson's eyes grew big.
"Really?" he asked.
He ticked through reasons it would be a bad idea. He also explained why it made sense.
In the coming months, the conversation turned more serious. The board hired a lawyer to request records from UNC. Board members met long into the night and promised to not tell their spouses and business partners. They brought in consultants to talk numbers: How much was Rex worth? How would they finance the deal?
Oxholm was hopeful. Even if UNC wouldn't sell Rex, he believed that WakeMed's bid would slow the rush to align with doctors' practices.
Tomorrow: CEOs in the center of the conflict