How One Rural North Carolina Hospital Defeated Bankruptcy

Dec 21, 2017

Community hospitals play an important role. Think, for example, of where your children were born. You probably have a good association with that hospital.

These hospitals, particularly in rural communities, are crucial not just for health, but for a community's whole ecosystem, according to Chris Ellington, UNC Health Care chief finance officer.

"Whether a community has a hospital in it or not, is sometimes a prerequisite to how industry can grow around it," he said.

In Eden, the community hospital Morehead Memorial was having problems. It had borrowed to finance an emergency department expansion, and by the summer of 2017 was up to its eyeballs in debt.

But while things looked bleak for a while, this hospital was about to get a lifeline, and the salvation story is one for health care law school textbooks. It has more turns than a high speed racing track and turned bankruptcy court into a spectator sport.

"This is a case that is going to be taught in business schools, that will be talked about in healthcare administration programs, that will be presented in law schools and at conferences," said Morehead Hospital Chief Executive Dana Weston. "Not only are the twists and turns just incredible, but the outcome is so positive for a hospital and a community that you really could not have written it any better."

Morehead Memorial Chief Executive Dana Weston
Credit Jason deBruyn / WUNC

How did Morehead Memorial get here?

Weston became the hospital’s CEO in 2015. She knew the hospital had a strong history.

"You will hear people in this community talk about Morehead's heyday. About when you really had to know somebody to get a job here," said Weston. "When it was the place you came to for care and the place you wanted to work."

But those days were in the rearview mirror. Eden's economy hasn't rebounded from the recession like some bigger cities in North Carolina.

Total employment in Rockingham County has improved from the lowest part of the recession, but still sits below employment from a decade ago.
Credit Department of Labor

"A little over a decade ago… times started changing in healthcare. It followed other industry shifts in rural communities. Here in Eden we saw the mills close. You saw other industries depart and health care typically follows after those," said Weston.

From 2012 through 2015, the hospital lost a combined $14.4 million, according to financial documents. The hospital board looked for help. But with its balance sheet upside down, finding a partner proved difficult.

Annual financial information for Morehead Memorial Hospital
Credit Morehead Memorial / Form 990

"You're asking larger health systems – that are battling the same headwinds we are – to come in, take on a rural community hospital that is so valuable, but yet has been struggling, and also absorb that much debt," said Weston. "That's a really tough sales pitch. And it didn't work out for us."

That led to what was arguably the darkest day in Morehead Memorial's history. Earlier this year, on July 10, the hospital filed for bankruptcy protection. This came as a blow to the community, one it has been all too familiar with. Less than a year prior, MillerCoors closed a brewery in Eden. That cost the community 520 jobs. In 2012, a body armor manufacturer closed. Other employers closed shops.

Struggling economy

Like other rural towns in North Carolina, Eden's industry has taken hits over the years. Today, an old mill sits empty, overgrown by weeds and rust. At its height, Rockingham County employed more than 47,000 workers and had an unemployment rate of 3.4 percent.

At the deepest part of the recession the economy lost one out of every five jobs and unemployment shot up to almost 15 percent. The economy is recovering slowly, but the population is still shrinking. When those in the community heard about the hospital bankruptcy, many thought, "Here we go again."

Population in Rockingham County has continued to decline.
Credit Census Bureau

Tom Barbour operates a photography studio in Eden's historic downtown. "It was a big concern to think that (Morehead) might break up or sold off or closed down," he said.

At the bankruptcy auction, two bidders emerged. One was UNC Healthcare, and the other was a mysterious bidder named Empower IHCC. The group was a partnership between the Empower Group and iHealthcare. These partners have acquired other distressed hospitals; they own or manage 20 hospitals including LifeBrite Community Hospital of Stokes in Danbury and Washington Community Hospital in Plymouth, according to a press release the company issued in late October.

In a move that shocked the community, the Morehead board picked the shadowy company.

"And it was a shock because they were unknown. It's a for-profit, more of an investor type of group," said Weston.

Tom Barbour operates a photography studio in Eden.
Credit Jason deBruyn / WUNC

Bankruptcy Court

Empower offered more cash. But there were many questions about its ability to keep the hospital running. Around town, people didn't like the choice.

"Even if it was a lower bid, the background of an organization like the UNC System was just an easy decision on my end," said Barbour.

UNC Health Care offered a smaller amount because it didn't expect other bidders. UNC would run the struggling hospital, but did not want to pay off the debt, said Ellington, the CFO.

"The intent of the auction was not necessarily to worry about the creditors in this case. I'm sorry that they were owed money, but our intent was to just gain control of the hospital and keep it open and keep those 750 people employed," he said.

UNC fought the Morehead board's choice and cast doubt on Empower during bankruptcy hearings.

The strategy worked.

Bankruptcy Judge Benjamin Kahn began the hearings saying he was unlikely to consider higher bids than what had already been submitted. But by the end of the first day of hearings, he decided he wanted to know more. He called a recess in order to call parties back the following week. In the interim, UNC upped its bid. By the time court came back in session, the UNC bid was the highest. It still wasn't a guarantee that Judge Kahn would accept the new bid, but after hours of hearings on that second day, he awarded Morehead Memorial to UNC Health Care.

"I was kind of jumping for joy when I heard that," said Barbour. "I got a phone call from somebody that was at the hearing and when I got that news it was just what you wanted to hear. We've had enough bad news over the past couple of years. So it makes me think things are really going to turn around now."

Weston smiles whenever she describes the roller coaster ride she took during the bankruptcy process.

"There has been a buzz around the community, and in Morehead around the partnership with UNC," she said. "And I tell our team, there are hospitals across the country that are struggling financially. Many of them close before they have the opportunity, or really the audacity to file for Chapter 11 bankruptcy. We did that here. There are many that file for Chapter 11 that aren't able to exit out of the back of the tunnel. They have to switch to Chapter 7 and end up closing before they can exit. We were able to get a plan that we're going to be able to exit bankruptcy. That's incredible and we should feel good about that. But not only that. But we are going to exit with a buyer."

UNC assumes ownership of Morehead on Jan. 1. It paid $11.5 in cash and assumed another $2 million in obligations and expenses. UNC has committed to keep the hospital open for at least five years and will invest $20 million at Morehead in the coming three years.