How Baylor Was Saved

IT HAD BEEN 70 YEARS SINCE THE NOTORIOUS HOMECOMING of 1926, when visiting Texas A&M Aggies rushed onto the football field, jostled several Baylor University coeds participating in homecoming festivities and sparked a fight that resulted in the death of an A&M student and an Aggie refusal to play in Waco that lasted four years.

During Homecoming Week 1996, the visitor to the Waco campus was a graying executive and fellow Baptist from Dallas-Boone Powell Jr., chief executive officer of Baylor Health Care System. The furor his proposal inadvertently unleashed ted to no deaths-just a standoff between Dallas and the Baylor board that lasted four months and peaked with talk of lawsuits, threatened intervention by the Texas Attorney General and an onslaught of angry letters and faxes between Dallas and Waco. The folks from Waco learned that Dallas can be an even tougher foe than College Station. The lesson cost them $1 billion.

When Boone Powell Jr., the nationally recognized 60-year-old hospital administrator, stepped before the university regents after sharing supper with them the evening of Oct. 24, he wanted permission to link his health-care system with two other nearby non-profit hospitals in a joint operating agreement. He had run Baylor Health as a Baptist institution for 16 years, his father for 24 years before him. But now the health-care industry was changing rapidly. HMOs and government programs like Medicare and Medicaid were battering down the prices hospitals could charge. Some hospitals were banding together to cut costs while others were being gobbled up by aggressive for-profit corporations.

Powell told the regents gathered in the elegant, old Pat Neff Hall that Baylor Health had to do something dramatic to compete in this environment. A new company should be formed. Powell told them as he showed his presentation on an overhead projector. It would be ruled by a nine- or twelve-member board, with one-third of the members from Baylor Health, one-third from Harris Methodist Hospitals, Inc., of Fort Worth and one-third from Presbyterian Healthcare System, another Dallas entity. He would lead it as CEO.

As Powell outlined his plan, the regents, who had long appointed and therefore controlled Baylor Health’s board, noted that this new company’s board would be dominated by others. Why, they wondered, did Baylor get only one-third of the votes when it was larger than both Harris Methodist and Presbyterian?

Under the questioning, Powell, a robust man normally polished and in control, perspired, one regent recalls. “He seemed very nervous and unprepared. Maybe he knew he was trying to sell us something we weren’t going to like.”

Powell had reason to worry. Without realizing it, he had already put into play the hospital his family had toiled in for half a century. Even before his trip to Waco, forces were gathering to sell the Dallas system to a for-profit corporation. Talk had surfaced several years ago about selling Baylor Health, but that discussion had gone nowhere. Now it was swirling into a tornado that threatened to carry the non-profit system to a for-profit suitor.

A small group of regents had already gathered for six hours on the evening of Oct. 9 at the sprawling Houston home of Thomas R. Powers, a regent and retired corporate executive, to review a copy of Powell’s merger proposal brought by Baylor University President Robert B. Sloan Jr. A Nashville consultant specializing in the sale and merger of non-profit hospitals was there, as were high-powered health-care attorneys from Houston.

Joshua Nemzoff, the Nashville consultant, told the group the system would fetch perhaps $ 1 billion if sold. As Sloan went over the proposed merger plan, the seven or eight regents listening laughed, Nemzoff recalls. “We’re not going to give this thing away for nothing,” Sloan said, according to Nemzoff. The feeling was that Baylor Health would lose its Baptist identity anyway under Powell’s proposal, says Randy Fields, chairman of the university regents and a health-industry attorney in San Antonio.

The regents knew that selling Baylor Health would mean war with Powell and with Baylor Health’s board chairman, former District Judge P. Oswin Chrisman. University chairman Randy Fields’ solution: “For $1 billion, that board’s out of there,” Nemzoff says. Fields says he doesn’t recall saying those words, but may have indicated that, if the surviv-ability of Baylor Health was at stake, then the regents should do what was necessary. “If that means trying to remove a board or trying to remove an administrator-then so be it,” Fields said in a recent interview. The regents asked their lawyers whether they had the power to remove the entire Baylor Health board, Nemzoff says. The answer was “Yes.”

So on Oct. 25, the day of the university regents’ official meeting, the board that normally granted the prominent hospital admi-istrator whatever he asked for balked. Fields appointed a committee made up mostly of the regents who had attended the Oct. 9 gathering, directing its members to study the options for Baylor Health. For some regents-although probably never a majority-the favorite option quickly became to sell the whole thing to an outsider and pocket the money for Baylor University.

Had such a sale taken place, Dallas’ largest and best-known hospital, after the publicly owned Parkland Memorial, would have been owned by an out-of-state corporation. The institution that had received millions in Baptist contributions would be owned by the stockholders of America.

The university had gained control of the hospital in 1920, when the Baptist General Convention of Texas, with no money changing hands, simply placed the hospital under the board that ran the university.

In the years since, Baylor has grown into a system of 13 hospitals and medical centers in North Texas and southern Oklahoma in addition to clinics and fitness centers. It had made history as the birthplace of the Blue Cross insurance program and the American Association of Blood Banks. Now, with its flagship hospital near downtown Dallas, it treats charity cases and the losers of Saturday night knife rights. But its reputation for complicated procedures like liver transplants was such that when baseball great Mickey Mantle needed a new liver, he went to Baylor.

The regents committee reportedly told Nemzoff to contact Tenet Healthcare Corp. of Santa Barbara, Calif., the nation’s second-largest for-profit hospital chain. Tenet, while known as National Medical Enterprises, Inc., had paid $324 million in fines in 1994 after pleading guilty to fraudulent billing at psychiatric facilities it then owned.

Before doing this, Nemzoff needed detailed financial information from Baylor Health officials. Sloan had already made the mistake of mentioning that the regents committee was using Vinson & Elkins, a Houston law firm everyone knowledgeable in the health-care industry knew represented one of the largest for-profit hospital chains, Rather than alarm Powell further, Sloan, at Fields’ direction, used an alias for Nemzoff when he introduced the wellknown consultant in a phone conversation. Sitting in his office recently, Sloan, cautious and reserved compared with Powell, said he thought it was obvious that Bill Jones was not the consultant’s real name. “I thought that it was clearly a pseudonym,” he says now, “It was understood throughout the negotiations that we were not going to disclose the name of our business analyst.”

By Nov. 15, Nemzoff and Dennis Dunn, a health-industry lawyer with Vinson & Elkins, were ready to discuss a price with Tenet. Nemzoff says Tenet made a firm offer of $1.2 billion to him. then repealed it a week before the January regents meeting in a phone conversation with Fields.

On Jan. 17, Powell and several Baylor Health board members boarded a van near the main hospital on Gaston Avenue between 7 and 8 a.m. and headed toward Waco. When they arrived two hours later, they spotted the consultant who had been introduced to them as Bill Jones in the regents’ meeting room with a pile of handouts and the name Nemzoff all over them. Meanwhile, Tenet’s CEO, Jeffrey C. Barbakow, and president, Michael H. Focht Sr., had flown in and were waiting with others from the company in a conference room at Pat Neff Hall.

Outraged, feeling they had been blindsided, Powell and the Baylor Health board members pulled Fields into yet another room, telling him they would watch Nemzoff s slide show but had no intention of sitting through a purchase offer from Tenet.

They listened as Nemzoff told of the two options: selling Baylor Health or merging it with the other systems. Bill Aston, a Baylor Health board member and donor over the years, was not impressed. “It was obvious that this was a well-orchestrated presentation that was designed to reach a foregone conclusion-which was to sell.” That was something they were not interested in doing.

When it ended, the Baylor Health officials scooped up the box lunches the university had prepared for them and headed back to the parking area and their van, passing the Tenet representatives as they left. “We saw them go and load all their materials back in their vehicle and leave,” Aston said of the Tenet contingent.

Two hours later, Powell pulled into Dallas to find insistent reporters on the phone and worried hospital staff in his office. Baylor University had held a press conference after the health board’s departure. News that the university was considering selling Baylor Health reached Dallas before Powell and his board. The furor was immediate: A venerable church-affiliated institution was going corporate.

If the university regents in Waco thought they had gained an advantage by catching Powell off-guard, their victory was shortlived. Furious, determined to prevent a sale that could strip Baylor of its roots. Powell, his lawyers and his big-city public relations team immediately went on the offensive.

The problem was that the regents clearly had the power to remove any board members-and through them Powell-who stood in their way. Work began that afternoon as phone calls flew among Powell, board members and leaders at the system’s suburban hospitals. Chrisman, the health system’s chairman, says he returned from Waco on Saturday to find a pleading “Help!” message from Robert E. Luna, chairman of the Baylor Medical Center at Garland, on his answering machine.

On Sunday, Powell. Chrisman and Baylor Health’s attorneys gathered at headquarters on Gaston Avenue at 1 p.m. and toiled until 10 that night. It was an in-house attorney with almost 23 years at Baylor Health, Robert B. Cook Jr., who came up with a plan to move the five suburban hospitals-in Garland. Grapevine, Waxahachie. Irving and Richardson- beyond the university board’s reach. The Waco regents might be able to replace the Health System board, he reasoned. But it” the five community hospitals acted fast enough to change their bylaws. giving appointment power to an entity other than Baylor Health, then they would be protected even if a new health board wanted to sell.

This would take $200 million in assets out of the package, making Baylor Health less valuable to prospective buyers. It was Baylor Health’s version of a corporate poison pill.

Early on Tuesday, Jan. 21, the suburban hospital boards began meeting to change their bylaws. At 3 p.m., Baylor Health’s board gathered and gave its executive committee authority to approve the smaller hospitals’ bylaw changes and to prepare to change its own bylaws as well in the hope that the board, too, could somehow be moved beyond the university’s grasp.

On Thursday, the Baylor Health board told the executive committee to implement the bylaw plan, and that same day, the new articles of incorporation were filed in Austin. Meanwhile, Dallas public relations efforts reached gale force. The message was simple: A mega-corporation concerned only with the bottom line was about to take over an institution Dallas residents had donated their hard-earned money to and strip it of its charitable, educational and research missions and its necessary but money-losing trauma care. It’s unlikely the story was ever that one-sided. But Nemzoff and the Houston lawyers were shoved to the sidelines, leaving Sloan, a 48-year-old former theology professor who had been president for less than two years, to go up against the savvy Powell.

Luna, in close touch with Powell and Chrisman, called his board to work that Sunday after the Jan. 17 regents meeting. The Garland board passed a resolution opposing the sale of Baylor Health, then bought full-page advertisements in The Dallas Morning News, The Garland News and the Waco Tribune-Herald. The ads listed the names, addresses, and phone and fax numbers of Baylor’s 36 regents, urging the public to call or write with their complaints. Between 250 to 300 faxes and letters descended upon Sloan’s office, with the regents each receiving a similar number.

Then the Dallas County Commissioners Court passed a resolution opposing the sale. Even the state legislature got into the act, with bills introduced to dictate what should happen when a for-profit company buys a community asset.

Donors to Baylor Health-some of whom also gave to Baylor University-joined the barrage and on March 24, even Texas Attorney General Dan Morales stepped in. In a letter to Sloan and Fields, Morales warned he would make sure a portion of the proceeds from any sale was set aside for charitable health purposes.

But by then the battle was over. Powell and Baylor Health had won. On Feb. 4, two and a half weeks after the Jan. 17 meeting, Baylor University agreed to set up an 11-member joint committee with Baylor Health. The six Baylor Health board members who are also university regents were on the committee as well as Chrisman, Fields and three other Baylor University regents. Paul Powell (no relation to Boone Powell), a member of both the board of regents and the health system board, became the joint committee’s unofficial chairman. The group held its meetings at Dallas Love Field, with the out-of-town-ers flying in. At that point, Baylor Health hardly needed the home court advantage.

The new committee had not one but two consultants, working for a total of $400,000. Nemzoff, whom Baylor Health insisted it would not work with, was nowhere in sight. Instead, William M. Pinson Jr., executive director of the Baptist General Convention of Texas’ executive board, appeared before the committee twice, making it clear the convention did not want Baylor University to sell the Christian institution Baptists had placed under its stewardship 77 years ago. Also, if there were a sale, the convention should get part of the money.

At no time, Paul Powell says, did the joint committee treat the sale of Baylor Health as an option. “By that time, we were all agreed on two or three things. One of them was that the hospital system should not be sold. And that the hospital needed a different form of governance-that it needed to be free from the university. And that there would be some monetary expression of our good relationships down through the years.”

On March 31, Baylor’s regents approved in principle the joint committee’s suggested compromise granting Baylor Health its independence in return for payments to the university.

The Baylor Health board unanimously approved the final deal on May 8. The health system would pay $34 million and continue to train students in the university’s nursing program. If Baylor Health is sold, 30 percent of the proceeds will go to Baylor University. Another 10 percent will go to the Baptist General Convention of Texas, headquartered in Dallas. The rest will fund a Dallas-based foundation for charity health care.

The following day, the Baylor University board approved the deal in a 28-6 vote. The regents gave up their right to appoint Baylor Health’s board and approve major financial decisions. From now on, Baylor Health’s existing board members will name replacements.

Peace between Baptists was restored.

Exactly how close Baylor Health came to being sold may never be known. Both Tenet and Baylor University say there never was a firm offer. The lawsuit filed May 23 by university officials offered little clue. In that suit, Baylor claimed it owed Nemzoff no more than $17,000 above the $100,000 it paid after retaining him; Nemzoff said Baylor owed him $4.2 million. In early July, the University settled with the consultant for an undisclosed sum.

But some at Baylor University still believe a sale would have been wise. Ted Snider, a regent from Little Rock, also serves on the board of a five-hospital system in Arkansas. He published a letter on BaylorAlumni Association’s web page in March decrying the regents’ surrender of a valuable university asset. The sale of Baylor Health could have made “millions of dollars available for Christian education.” he said. According to Snider, even non-profit hospitals must take in more money than they spend in order to remain viable.

Baylor Health, which had operating revenues of $846 million last fiscal year, with almost $59 million left over to plow back into the system, runs like a business too, says J.D. Epstein, another Houston health-industry lawyer hired by Baylor University. “I guarantee you the majority of the people who go to be treated at Baylor Health Care System don’t look at it as a charity-not when they get their bill,” he says.

He and Nemzoff say the regents could have sold the health system-had they had the stomach for a fight. The five-hospital spinoff, if it had succeeded at all, would have simply lowered the sale price. Epstein says. As for the loss of donations from Dallas, Nemzoff notes, “If you have Si .2 billion, who cares if anyone ever contributes to your university?”

The Waco board was simply outmaneuvered by Powell and his public relations machine, Nemzoff says. “Once the first volley of artillery came in from Dallas and landed right on their heads, they backed down.” Epstein is more kind; he thinks the Waco Baptists decided they didn’t want a very public row with their Dallas brethren. “It was Baptist togetherness-we don’t fight each other.” As for Fields, he says he backed away from a sale once it became clear Baylor Health really wasn’t in jeopardy after all.

Ken Fairchild. a Dallas public relations expert who was hired by the regents, stands in awe of the trouncing his side took at the hands of Powell and Jennifer Coleman. Baylor’s vice president of public affairs. “They outmaneuvered me…every step of the way. It was personally and professionally embarrassing to me,” he says. However, he adds, the university regents opted for the joint committee rather than his plan to return fire.

Harris Methodist and Presbyterian decided in May to go ahead with their merger without Baylor; it was effective July 1. Arlington Memorial Hospital in June expressed interest in joining the combined system. Baylor is still welcome to join, says AI Herman, the Arthur Andersen consultant who helped design the deal. Some looser affiliation is more likely, says Chrisman, the health system’s chairman.

Meanwhile, Tenet has joined a Dallas managed-care organization that offers its services to employers buying health coverage for employees. The other members of that organization, known as the North Texas Healthcare Network, are Baylor Health, Methodist Hospitals of Dallas and Presbyterian Healthcare System. So Baylor Health and Tenet now are partners in an enterprise.

The Baylor Health board will consider alternatives for the future at a retreat this October in Austin. Powell says. “Anything is an option-except a sale to a for-profit corporation.”

WACO vs. DALLAS

ROBERT B. SLOAN JR.

The New President

Sloan had been president for less than two years when he was forced to go up against Powell and his public relations machine.



JOSHUA NEMZOFF

The Mystery Consultant

Nemzoff, whom Sloan referred to as “Bill Jones,” figured the price for Baylor Health at $1 billion.



THOMAS POWERS

The University Regent

The meeting where a sale was considered took place at his sprawling Houston home.



RANDY FIELDS

The University Strongman

According to Nemzoff, his response to Powell’s intransigence was, “For $1 billion, that board’s out of there.”



KEN FAIRCHILD

The Defeated PR Expert

At the end of the battle, Fairchild admitted he’d been out ma neuve reel “every step of the way.”

BOONE POWELL JR.

The Baptist Guardian

With his merger plan dying, he led the fight against a proposed sale.



P. OSWIN CHRISMAN

The Board Chairman

When they decided to consider a sale, the regents knew Chrisman would provide some of the strongest opposition.



ROBERT E. LUNA

The Garland Opposition

Luna helped start a public relations blitz that flooded Sloan’s and the regents’ offices with hundreds of faxes and letters opposing the sale.



ROBERT B. COOK JR.

The Savvy Lawyer

His “poison pill” plan took $200 million in assets out of the regents’ package.



JENNIFER COLEMAN

The PR Guru

Her quick action galvanized the public and left the regents scrambling for an answer.