Status quo is no longer an option for the Erlanger Health System Board of Trustees, its leadership has determined, and officials are looking to transition the public hospital to a nonprofit model in an effort to level the playing field with the system's private competitors and remain the Chattanooga region's safety net medical provider for decades to come.
Board chair Jim Coleman said it's been more than 45 years since local leaders saw a need to restructure the hospital and the Tennessee legislature passed the private act establishing the Chattanooga-Hamilton County Hospital Authority — which performs the governmental function of owning and operating the health system under the direction of an 11-member volunteer board.
"It's logical at this point in time that we sit back and look at all the changes that have happened since 1977 in health care — and it's been a tremendous number of changes and it's continuing to change — that we look at a structure that would allow us to respond to those challenges and changes in the health care arena more quickly and execute more efficiently," said Coleman, a hospital industry veteran who joined the board in 2019 and served as chair of its budget and finance committee before becoming board chair in November.
After nine months of due diligence, Coleman said the board began approaching stakeholders, including Hamilton County Mayor Jim Coppinger, to begin the process of exploring a new governance structure for Erlanger. Although Erlanger must provide notice and hold public board meetings to conduct official business, Tennessee law allows public hospital boards to meet in private to "discuss and develop marketing strategies and strategic plans."
While the board governs the hospital, the land and building are owned by the county.
Coppinger asked the Hamilton County Commission on Wednesday to approve funds to hire a lawyer representing the county in the transition, marking the first public signal that change is likely coming for the health system — which was founded in 1891 after Baron Emile d'Erlanger, a European financier with local railroad holdings, donated $5,000 to establish Chattanooga's first hospital.
Over 130 years, Erlanger has grown to become one of the nation's largest public hospital systems comprising six hospitals across Southeast Tennessee, including the only children's hospital within 100 miles, a hospital in Murphy, North Carolina, and an academic teaching program affiliated with the University of Tennessee College of Medicine.
It's also home to the region's only Level 1 trauma center, which treats the most severe injuries, and the Southeast Regional Stroke Center, which provides the highest level of stroke care and is one of the nation's busiest stroke centers.
On top of those costly specialty services, the health system is the largest area provider for low-income and uninsured patients. Last year, Erlanger provided around $150 million worth of uncompensated care — a figure that has grown 36% in four years.
Erlanger brings in more than $1 billion net revenue annually and employed just over 6,300 full- and part-time workers as of June 30, making it Hamilton County's largest employer.
Though the hospital is operating in the black, Coleman said continuing to operate in the public eye makes it hard for Erlanger to get ahead.
(READ MORE: Path to financial stability for Erlanger remains unclear a year after private offer rejected)
"When you're stable, that's the best time to take a breath and look around at what you need to do for the future because you're not consumed with survival," Coleman said.
But sustained financial success has historically eluded the public hospital.
Although Erlanger receives roughly $60 million in government funds to offset its uncompensated care costs, Coleman said that still leaves Erlanger starting each year $90 million in the hole.
Years of lean or lost earnings led Erlanger to neglect its infrastructure, and the hospital struggles to fill staffing positions.
Erlanger barely broke even in 2018 and finished 2019 with a $4.4 million loss. Since CEO Dr. Will Jackson took over in late 2019, management has aggressively cut costs to return to a place of financial stability.
Audited financial statements from the past two fiscal years show the health system finished the 2020-2021 fiscal year with a $38.5 million net income from operations and a prior year net income of about $35.3 million. Those figures include $55.9 million in federal provider relief funds meant to offset the cost of COVID-19.
Even with improved financial performance, Erlanger's operating margin has hovered around 3.5% since 2020, which Coleman said isn't enough to put toward the needed capital and new services that could bring in additional revenue. Nationwide, the average margin for all U.S. hospitals is around 8.8%, according to data from the advocacy group America's Essential Hospitals.
Becoming private will give Erlanger the flexibility to respond quickly in the market because there's less bureaucratic red tape, Coleman said. For example, the board won't have to provide notice and hold a public board meeting to allocate funds to hire new physicians.
It would also allow Erlanger to explore new partnerships and likely increase charitable giving — which has been difficult to pursue as a government entity — and bring it more on par with Hamilton County's other two acute care hospitals.
"In Chattanooga, we're the only hospital that has to publish our financials — and that's OK, because it is what it is — but it's very much a competitive disadvantage," Coleman said.
(Erlanger's financial situation attracted unsolicited purchase offer)
Many safety-net hospitals across the nation have already transitioned to a nonprofit structure, Coleman said, including UT Medical Center in Knoxville, Grady Medical Center in Atlanta and Tampa General Hospital in Florida.
Coleman said it's too early to say what the accountability or oversight for Erlanger would look like under a new model but the board and local leaders are committed to protecting Erlanger's mission as a safety net, teaching hospital.
"Part of our mission is to take care of anybody and everybody who walks through our doors, and that won't change," he said. "But that's another one of the reasons we have to look to the future, to make sure we have a structure that will allow us to continue this mission."
Officials say they expect changing Erlanger's structure to be a long and challenging process that may involve rewriting state law. Without any roadblocks, Coleman said it would likely be late 2023 before a transition is complete.
Speaking on behalf of Hamilton County's legislative delegation, Rep. Patsy Hazlewood, R-Signal Mountain, said it's still "too soon to say if legislation will be required, or what it might look like."
"We're really just starting the exploratory phase," Hazlewood said. "This is the first step in a long journey toward exploring more sustainable governance models for Erlanger hospital, which is vital to the health and wellbeing of the Chattanooga region. As stewards of taxpayer dollars, we need to assure that this safety net provider can continue and compete in the modern era."
Contact Elizabeth Fite at efite@timesfreepress.com or 423-757-6673. Follow her on Twitter @ecfite.
By the numbers
Erlanger Health System employs 6,300-plus people. Annual figures:
› Admissions: 35,186
› Emergency visits: 158,802
› Office visits: 622,603.
› Surgeries: 39,813.
› Air ambulance trips: 2,908
Source: Erlanger Health System fiscal year 2020-21 report