Safety in numbers

It works for some, but merging hospitals into health-care systems isn't the remedy for all their financial afflictions.
By Edward Martin

In the fog, bare trees loom like skeletons. A sidewalk leads from Fayetteville Street to ornate doors framed by a brace of caduceuses, the entwined serpents that symbolize medicine. From some vantage points on a winter morning in Asheboro, Randolph Hospital looks the same as it did in 1932, when its art deco architecture was new. Behind the façade, the 145-bed hospital — 40 beds originally — is thoroughly modern. It has won awards for pneumonia care and its new cancer center. Visitors enter through a new wing. Here in the geographic heart of North Carolina, they wait in the lobby for word on friends and relatives.

Randolph is an independent hospital in a state dominated by health-care empires —six have headquarters within a two-hour drive. “The risks and rewards run higher,” says Robert Morrison, president and CEO. “You work without a net financially.”

Ninety miles away in Charlotte stands Carolinas Medical Center, flagship of Carolinas HealthCare System, the state’s largest and nation’s third-largest, with 4,300 beds in two states. Around the 861-bed medical center, clinics and doctors’ offices make up a medical city within a city.

Michael Tarwater, CEO of Carolinas HealthCare, enjoys pointing out that, on average, 32 babies are born at Carolinas Medical Center each day. The hospital is one of 15 in a system that had $2.3 billion in revenue last year. Despite his system’s size, he faces some of the same woes as Morrison. Carolinas wrote off $115 million in unpaid bills last year, about 5% of revenue. Randolph took an even bigger hit in proportion to its size — about $12 million in uncollectible bills, nearly 13% of its revenue.

It’s possible that health care, once almost entirely a local endeavor, soon will be delivered only by networks such as Carolinas HealthCare. Many say that wouldn’t be so bad. Large systems offer economies of scale, huge patient volumes that enable them to spot best practices quickly and the ability to offer technology that small hospitals only dream of. Another wave of consolidation might spark cost cutting, they say, especially if the state were to deregulate hospitals. The Federal Trade Commission, for one, says opening health care to market forces would make hospitals lower charges.

But some hospital administrators doubt the public is ready for the tough choices competition entails — such as rationing care to those who can’t pay. Regulation, they say, will remain necessary. “If you don’t care who you hurt, then you can get rid of it,” Tarwater says.

Those who expect a new wave of finance-driven consolidation point to the deal in which Winston-Salem-based Novant will lease and run Brunswick Community Hospital, south of Wilmington, starting this month. “In the next round, there’ll be fewer and fewer independent hospitals and a few large hospitals dominating each state,” says David McRae, president and CEO of University Health Systems of Eastern Carolina in Greenville, which covers 29 counties.

Morrison disagrees, but then his hospital is financially sound. Unlike many of the 157 others in the state, Randolph has operated in the black since 1993, when he took over. It earned $4.5 million in 2005, a healthy 4.8% operating margin, by excelling at procedures that don’t require big-city expenditures for staffing and equipment.

On one point, though, both sides agree. A perfect storm is brewing, for systems and independent hospitals. Factory layoffs, rising insurance costs and other factors last year added 400,000 North Carolinians to more than a million already uninsured. That’s nearly 17% of the population. For those still holding jobs, businesses will pay about $7,000 per employee for medical coverage this year, says Will Sneeden, Hewitt Associates health-care practice director in the human-resources consultant’s Charlotte office. That cost, he says, could double in seven years. Meanwhile, the baby-boom generation is nearing age 65, when medical needs escalate sharply.

Morrison pores over financial charts that show increasing medical costs and a rising tide of uninsured people nationwide. If those lines don’t change, he says, the outcome will be dire. “The system as we know it currently will crash and burn. It is in the process of self-destructing.”

A saloon, barbershop and fruit stand were on the first floor, and a 45-bed hospital was above. Founded in 1903, Presbyterian Hospital, now part of Novant, spent some of its formative years renting rooms in a Charlotte hotel. In 1918, it moved east of downtown, where it’s based now. Another local hospital — Charlotte Memorial, now Carolinas Medical Center — was chartered in 1938.

Through the ’60s, hospitals near one another competed mostly by word of mouth. Charlotte Memorial served a disproportionate number of the poor, while Presbyterian catered to the affluent and insured. An axiom spread: “I’d rather die in the ambulance on the way to Presbyterian than stop at Charlotte Memorial.” In the ’70s, federal and state legislators forced hospitals to get approval for new buildings and expensive equipment to head off medical arms races.

In the mid-’80s, what is now Carolinas HealthCare System began buying up medical practices. Employing its own doctors assured a steady source of referrals. Later, it and other systems began buying or signing management contracts and leases with smaller hospitals, frequently badly managed ones or those in financial straits. But by the late ’80s, another player emerged.

Managed-care companies burst onto the health-care scene. By 1995, 23 were licensed in North Carolina. Hospitals were forced to establish managed-care offices with bookshelves lined with volumes of regulations from each company. Tit for tat, health-care systems bulked up to negotiate better deals with managed-care plans that demanded large discounts, sometimes 50% or more. But the bloom on health-maintenance organizations faded when insurers cut each other’s throats in price wars. Today, the industry in the state has shrunk to seven HMOs. Those left — United HealthCare and Blue Cross and Blue Shield of North Carolina have the biggest — remain able to demand large discounts.

Negotiations can be intense. In June, North Carolina Baptist Hospital — part of a system that includes hospitals in northwestern communities — balked at signing a contract with Blue Cross. Baptist executives complained that the insurer wanted to reimburse them at less than cost. They didn’t sign an agreement until October.

Now, after 15 years of consolidation, the medical landscape shows the impact. Big is in vogue. In a massive complex of glass-fronted buildings, the Wake Forest University and North Carolina Baptist complex sprawls near downtown Winston-Salem. Duke University Medical Center dominates west Durham. Hub of the university’s health system, it is the largest hospital in the state with 1,124 beds. Raleigh-based WakeMed has 752 beds in Raleigh and Cary hospitals, along with nursing homes and other services. In Chapel Hill, UNC Health Care is centered on its 684-bed UNC Hospitals complex. Cape Fear Valley Health System has grown from a 200-bed Fayetteville hospital in the 1960s to four hospitals with more than 600 beds. New Hanover Health Network in Wilmington includes four hospitals with 855 beds.

Administrators say the quality of care improves as patient volumes rise. At Duke University Medical Center, for example, an oncological surgeon will typically perform the same operation more than 300 times a year. A study in The New England Journal of Medicine concluded that a patient operated on by such a surgeon has a better than 95% chance of being alive a month later. With a less experienced surgeon, it’s less than 85%.

Large systems also can buffer financial shocks by spreading costs over a larger base of patients. Don Dalton, a vice president of the Raleigh-based North Carolina Hospital Association, says many need help. In fiscal 2004, 74% lost money or made so little they couldn’t borrow at an affordable rate.

“The future of the small, independent hospital certainly is challenged, and maybe even bleak, unless they do some things like joining forces with a larger system for support,” McRae says. University Health Systems owns or leases five hospitals in Eastern North Carolina. “We see this cycle in which you have a few years of panic, then consolidation, then people relax. Then they go back to saying, ‘We’d better hurry up and pick our partners.’ We see that beginning to happen again in North Carolina.”

Luck is relative. A growth in the woman’s breast was malignant, but she detected it early. Once, her surgeon would have removed the breast, underlying muscles and nearby lymph nodes. Instead, on a recent day in the Randolph Cancer Center, a surgeon inserts a balloonlike device in the cavity where the cancer was removed, then bombards surrounding tissue with radiation. Her breast will be spared, and the newly developed treatments will take two to three days rather than being spread over several months. This is one way independent hospitals can survive — excelling at high-demand procedures and leaving exotic ones to larger hospitals.

Researchers at Lakewood, Colo.-based HealthGrades, which rates more than 5,000 of the nation’s hospitals, including those ranked for this issue of Business North Carolina, say small hospitals in the state perform many procedures as well or better than their larger counterparts. For example, HealthGrades found hip-replacement patients at Alamance Regional Medical Center, a 238-bed hospital in Burlington, less likely to suffer complications than those at some of the state’s largest hospitals. At Margaret Pardee Memorial Hospital in Hendersonville, a 222-bed hospital, knee-replacement patients have fewer setbacks than those at Mission Hospitals, an 800-bed hospital in Asheville.

Randolph Hospital and other independent hospitals that have resisted consolidation share other traits. One is competent management. “Some of the hospitals that have merged with larger ones do it for access to resources, both in terms of capital and management expertise,” Dalton, of the hospital trade group in Raleigh, says. “It takes both to successfully operate a hospital nowadays.”

Tarwater says shaky finances and management have pushed hospitals into Carolina HealthCare’s arms. “I’d say between a third and a half either came to us or we reached out to them because they were in real trouble. There are probably three in our system today that are doing OK and meeting the needs of their communities that wouldn’t be around. A third might not have been in dire straits but realized as a free-standing hospital it was going to be more difficult to meet needs.”

In Huntersville, off Interstate 77 near the sprawling suburban developments and strip malls around Lake Norman, stands a $57 million redbrick hospital with 50 beds. It’s part of Novant and the center of debate over the role that competition and state regulation have played in the growth of North Carolina’s health-care empires and the future of its independent hospitals. Presbyterian Hospital Huntersville’s birth took seven years from application to opening in October 2004. Even then, it stayed locked in a regulatory struggle that threatened to close it.

Its competitor in nearby Mooresville, Lake Norman Regional Medical Center, owned by Naples, Fla.-based Health Management Associates, argued that the new hospital wasn’t needed and that the state’s Division of Facility Services should have blocked its construction. But a Presbyterian spokesman says it had more than 70,000 patients its first year. The case went to the N.C. Supreme Court, which ruled last fall in favor of Presbyterian.

Critics of hospital regulation say the case underscores how both health-care systems and independent hospitals use state regulation as a competitive weapon. The critics have powerful allies. The Federal Trade Commission and the U.S. Department of Justice have urged states to drop regulation. “Competition will improve quality and drag down prices, which would improve access,” says a staff lawyer who drafted an FTC report urging states to abandon health-care regulation. “Competition is trying to make footholds in health care. States should let it.”

The stakes are huge — North Carolina has a $55 billion health-care economy. FTC officials say independent hospitals such as Randolph are hurt most by regulation because they don’t have the large financial, legal and other resources needed to fight lengthy battles such as the one over Presbyterian Hospital Huntersville.

But administrators of large health systems and small hospitals say they fear the impact of deregulation — on patients and hospital balance sheets. Dalton is adamant. “There is no such thing as the free market in health care. There is not now and won’t be in our lifetimes.” A major reason is how Americans pay for care.

Mostly, they don’t. At least, not directly. Hospital administrators say 60% to 70% of payments come from Medicare, Medicaid and other federal programs with fixed prices. That prevents hospitals from competing on a cost basis. And while marketing departments tout quality and technological sophistication, analysts say competition already has leveled most of those factors.

Hospital officials say they fear most for-profit companies such as Charlotte-based MedCath, which has developed 12 heart hospitals nationwide. Sans state regulation, for-profits could swoop into the larger markets and cherry-pick lucrative procedures — heart surgery and joint replacement, for example — leaving nonprofits saddled with nonpaying patients or those with chronic illnesses such as diabetes.

Hospital administrators don’t need that. They say they’ve got all the competition they can handle. In Greenville, Pitt County Memorial Hospital spreads in the morning shadow of East Carolina University’s Brody School of Medicine. University Health Systems has staked its claim to a vast expanse of Eastern North Carolina. Now, from Raleigh and other directions, other health systems are encroaching. “We understand the business reasons for consolidation,” McRae says. “We’re prepared to continue growing if we have to.”