Getting Group Health

Facing mammoth money problems, community hospitals size things up by becoming part of large health systems.
By Edward Martin

Kids swarm across soccer fields and scamper over backyard play sets in Holly Springs, where the median age of residents — 31 — is unusually young. “One of the fastest growing in the state,” Mayor Dick Sears says of his town. With only about 900 residents in 1990, it is forecast to have 31,000 by 2015. Most adults are college-educated, and many commute to high-paying jobs in nearby Raleigh and Research Triangle Park that provide good health-insurance benefits. That partly explains what happened here last year.

“It’s not often you have people come to town with money in their pocket saying, ‘We’ll buy the land and build you a hospital, and it won’t cost your taxpayers a cent,’” Sears says. The outsider was Winston-Salem-based Novant Health Inc., the state’s second-largest health system. Though state regulators have blocked it for now, Senior Vice President Jim Tobalski says Novant still hopes to build a $110 million hospital with 41 beds and four operating rooms in Holly Springs.

This bedroom community is a prize catch in a rapidly consolidating health-care industry, especially in a state where 1.4 million people — nearly one in seven — are uninsured. Once the domain of tiny community hospitals, North Carolina now is ruled by giants. “There are 183 hospitals left in the two Carolinas,” says Michael Tarwater, CEO of Charlotte-based Carolinas HealthCare System. “Of those, 45 are still completely independent.”

His is the nation’s third-largest health system, sprawling from mountainous Haywood County to Charleston, 280 miles away on the South Carolina coast. With more than 5,300 licensed beds and 40,000 employees, revenue exceeded $4.2 billion last year. Novant hospitals — the system owns nine and has partnership or affiliate agreements with seven — have 2,650 beds. Revenue in 2008 exceeded $2.8 billion. At opposite ends of the state, Greenville-based University Health Systems of Eastern Carolina topped $1 billion in revenue for the first time last year, and Asheville-based Mission Health System anticipates its first $1 billion year in 2010. More than 650,000 people were treated last year in the state’s 10 largest health systems, which took in $22.5 billion.

“It’s kind of like looking for a spouse,” Tarwater says of the system’s growth. “You’re looking for an alignment of values, of mission.” But with a large slice of the state gross health-care product — estimated at upward of $70 billion a year — at stake, this mating game often resembles bull elk butting heads. State regulators say nearly all new-hospital and expansion requests are opposed by competitors.

Small hospitals and communities such as Holly Springs are driven into the arms of giants by the economic realities of modern health care. “We’re not predatory,” University Health Systems CEO Dave McRae says. His system covers 29 counties, has eight affiliated hospitals and owns six others. “We simply go where invited, on their terms.” That’s how Carolinas HealthCare grew, Tarwater says. “We didn’t set out to do it. It just happened.”

When he moved to Holly Springs in 1995, Sears frequently drove his 90-year-old mother-in-law nine miles to WakeMed Hospital in Cary, a 10-minute trip that now takes four times as long. Rex Healthcare in Raleigh, part of Chapel Hill-based UNC Health Care System, committed to an urgent-care center in Holly Springs, but Novant offered a hospital. “The mayor called us,” Tobalski says, “and that’s how our interest came about.”

Such a move would have been unheard of in the ’80s and early ’90s, when health systems emerged. Like most, Forsyth Medical Center used affiliated physician practices and smaller hospitals to feed it patients. In 1997, it merged with Presbyterian Medical Center in Charlotte, creating Novant and going nose to nose with Carolinas HealthCare. Jumping into Wake-Med’s and UNC ’s backyard no longer seems like a leap. In March, Novant merged with Manassas-based Prince William Health System in affluent and fast-growing Northern Virginia, pledging to pump $200 million into the deal.

Small hospitals, strangled by burgeoning bills for charity care, niggardly government payments and tight credit due to the banking crisis, want into the fold because they are unable to expand, update equipment or keep up with long-term maintenance. “A couple of years ago, about a third of hospitals were losing money on operations, about a third were at break-even, and a third were in the black,” Tarwater says. “Now the first and second groups aren’t getting enough money over the long haul to stay in business.”

“You’re going to see more and more pulled into the large systems because they don’t have the cash resources to wait out the recession,” says Don Hardin of Mercer Human Resources Consulting in Charlotte. Systems such as Mission Health and University Health typically maintain double-A or higher credit ratings. “Capital’s hard to come by, even for us,” University’s McRae says. Mission CEO Joe Damore adds: “Used to be, you got a better rate. Today, a good rating just means we have access to capital. But small health-care organizations can’t access capital at any cost, so they have to look to organizations like Mission.”

Consolidation also has been accelerated by the rise of powerful insurers, which bulked up in the ’90s to gain the clout to force hospitals to cut their fees — and have become so large and aggressive they can force them to provide services at less than cost. “Blue Cross and Blue Shield is the 800-pound gorilla,” says Adam Searing, director of the nonprofit North Carolina Health Access Coalition, based in Raleigh. “When you’re a lone, rural hospital, you’ve got a lot less leverage than if you’re banded together, and Blue Cross has a near monopoly on the small-business and individual market in this state.” Chapel Hill-based Blue Cross, which covers 3.7 million Tar Heels, declined to comment. Some hospital administrators say insurers also create paperwork burdens — sometimes intentionally — that small hospitals can’t manage, forcing them to write off thousands of dollars. The irony? Insurer consolidation — what once were 23 managed-care plans in the state are now 10 — was so successful that hospitals have borrowed the tactic to fight back.

Consolidation can improve care. Along the corridors of Pitt County Memorial, as in most large hospitals across the state, patients are treated like groceries. That’s a good thing, experts say. Wristband barcodes, scanned by nurses like produce prices at supermarket checkouts, access medical records that reduce medication errors, track treatment and eliminate expensive duplication of tests. “It’s almost impossible to do the task at hand without connectivity, the ability to follow patients and physicians,” says Bill Atkinson, CEO of Raleigh-based WakeMed Health & Hospitals. Mission Health links 16 hospitals electronically. A patient might have X-rays at one and, when transferred, find them waiting at another. Merging can provide this and other economies of scale, in obvious and hidden ways. “We buy a zillion Band-Aids at a time,” Tarwater says, “but it’s not just that. The thing that’s really cool is when we go someplace like Union, S.C., and find they’re doing things that are helpful to us. When you apply them to Carolinas HealthCare System, we save millions. We had one case in which we saved $2.4 million. That might have been a $30,000 idea for them.”

On the flip side, health systems can become virtual pricing monopolies within their regions because patients want to be treated close to home. “No individual consumer has any hope of dictating fair pricing from any player in the health-care system,” Searing says. But do large systems stifle competition? And if so, ask some health experts, is that bad?

The nuns, many longtime Asheville residents insist, were the best medicine at St. Joseph’s Hospital, founded by the Sisters of Mercy in 1900. When it merged with Mission Hospital, a block up Biltmore Avenue, some cried. Many feared the nuns and community-scale care would disappear. But the agreement contained fine print that 11 years later sheds light on the crux of health-care consolidation in 2009: cost.

To get state approval, Mission agreed to let Raleigh monitor its charges. Now it’s the only Tar Heel hospital operating under what amounts to price controls. “Our average cost increase in the last five years has been slightly over 4%,” Damore says. “When you look at our brethren at Carolinas in Charlotte and around the state, you’re looking at about 7%. Costs here are generally about 25% lower than in Charlotte hospitals, so I believe regulatory oversight has worked.”

Another factor is at work, too. Western North Carolina has the least-competitive health-care environment in the state, while the Piedmont has the most competitive, with rival systems such as Novant and Carolinas in Charlotte dicing for market share. Even with state regulation, that can lead to duplicated services as systems try to one-up rivals. Some doctors even say privately that such high-tech equipment as medical robots matter as much to marketing as they do to medicine. An outsider — Hardin, the Charlotte consultant — agrees. “You can argue that through efficiencies, standardization, buying power and the centralization of specialties, consolidation should contain price. But historically what we have seen is that competitive battles raise the price.”

Hospital CEOs might disagree, but none dispute that containing costs is critical. The Washington-based National Coalition on Health Care says insurance premiums, a marker of overall costs, increased 120% since 1999, compared with inflation’s 44%. And, whether cause or effect, rapid rises in cost have generally paralleled the pace of consolidation.

Like them or not, many health-care executives grudgingly accept restraints. The state already issues — or denies, as in the case of Novant’s Holly Springs bid — certificates of need allocating hospital beds and expensive medical equipment. That law, legislators say, prevents arms races in which competing hospitals duplicate technology and treatments — patients and insurers ultimately pay for their excesses — and blocks specialty hospitals from cherry-picking profitable procedures such as knee-replacement surgery while shifting unprofitable care to the public. “For me as a businessman, the CON is kind of a pain,” Tarwater says. “But when it has been done away with in other states throughout the country, you see a proliferation of expensive technology.” A study by the Big Three automakers found health costs 20% higher in states without certificates of need, he adds.

Answers? Health-care experts say the state and nation must insure the nearly 50 million uninsured, bringing them into medical care before illnesses become critical and devastatingly expensive to treat. President Obama’s proposals for health-care reform might be a step in that direction, but they’re vague on a critical element — how to pay for them. Such factors point to an era of hybrid health care in which systems continue to grow and reap free-market efficiencies of scale but also accept greater regulation.

At the biggest, Tarwater sits on the eighth floor of a new office tower and traces health-care’s problems with his fingertips, tapping out points on a conference table. Ultimately, he says, health-care systems have grown largely because Americans demand more medicine — a trend unlikely to be reversed as long as lifestyles lead to obesity, diabetes and other ailments. “We’re good at rescuing people from traumatic events such as auto wrecks. But sometimes we’re rescuing them from themselves.”