Bigger if not better
Four years later, Thacker, 78 in April and the town’s mayor since 2007, is healthy. But Anson Community Hospital sits empty, awaiting the wrecking ball. Three miles away stands a $20 million, 15-bed replacement completed in July by Charlotte-based Carolinas HealthCare System, which had acquired the old hospital in 1997. It was built in 1955 and had 52 beds, but when Thacker visited, only 30 were staffed. Occupancy averaged fewer than eight people a day. The new one has an emergency room, but it also touts itself as a medical home that emphasizes wellness and preventive care. With primary-care physicians and specialists rotating through, the new building is the “front door” to the Charlotte system’s vast resources, says Carol Lovin, an executive vice president and senior strategy officer at Carolinas HealthCare.
Anson’s quantum leap into modern health care represents a major turnaround in how millions of Tar Heels receive medical attention. Hospital consolidation, once reviled for diminishing competition and hurting the quality of care, has become the rule. Acquisitions and collaborations are producing megascale linkups inconceivable 20 years ago, when some hospital executives avoided their peers, lest they be accused of antitrust violations. Outright acquisitions such as Anson’s may be slowing because fewer hospitals are left to merge. Instead, mazes of management contracts, partnerships and joint-operating and clinical agreements are the rage. Most avoid antitrust issues, according to state and federal overseers, though skeptics see the deals as precursors to full mergers that they fear would enable Carolinas and other large systems to limit competition, stunt small-town economies and raise the cost of care. Of the 130 members of the N.C. Hospital Association, 19 are considered stand-alone — though even they typically surround themselves with clusters of services such as physician practices and nursing homes. It’s a startling reversal. In the late 1980s, only 23 Tar Heel hospitals were part of multihospital or corporate systems, and 115 were independent. “Nobody,” association president Bill Pully says, “is independent anymore.”
A new outlook on mergers was evident in 2013, when the Federal Trade Commission cleared Greensboro-based Cone Health’s merger with 238-bed Alamance Regional Medical Center in Burlington. Cone is investing $150 million in capital improvements and $50 million in a local health foundation. “We enforce the Clayton Antitrust Act of 1914, which asks if a merger substantially lessens competition,” says Alexis Gilman, assistant director of the FTC’s Bureau of Competition. “Fact is, the majority of the kind of hospital mergers we’re seeing now are not problematic.”
The Alamance deal followed Carolinas HealthCare’s 2012 agreement to oversee management of Cone’s system. Pressure on operating margins and high technology costs had prompted bond-rating agency Standard & Poor’s to downgrade Cone’s outlook to negative. Cone still owns its hospitals and is responsible for its debt. But its management-services agreement with Carolinas HealthCare — the two systems have combined revenues of $8 billion — has saved money and improved its business, says Terry Akin, Cone CEO since October. “We retain full autonomy and control, but there are ways we cross-pollinate in areas of quality, safety and service. It’s the best of both worlds.”
Many interpret cooperation broadly. In September, three of the state’s largest systems formed a shared-services operating company to purchase health care supplies in bulk, perhaps saving tens of millions of dollars annually, and exchange clinical knowledge and information technology. Greenville-based Vidant Health, Winston-Salem’s Wake Forest Baptist Medical Center and WakeMed Health & Hospitals in Raleigh share little common geography. Now their combined reach sprawls more than 300 miles, from Vidant’s Outer Banks Hospital in Nags Head to Wake Forest Baptist hospitals, which serve northwest North Carolina and southwest Virginia. Though the three had combined operating revenue of about $4.7 billion in 2014, only Vidant had an operating surplus — in for-profit terms, profit. Like all hospitals, the three are grappling with the shift in how they get paid, with medical outcomes gaining importance. Charges for repeated tests or procedures, whether the patient heals or not, are increasingly contested by insurers.
Acquisitions and collaborations produce mega-scale linkups inconceivable 20 years ago, while cutting small-town jobs.
In 2011, Winston-Salem-based Novant Health established a shared-services division to improve clinical care and help smaller hospitals with bulk purchasing, information technology and similar needs. The division includes eight hospital partnerships in the Carolinas and Georgia. In late January, it signed an agreement to manage 261-bed Lenoir Memorial Hospital in Kinston, 30 miles from Vidant’s headquarters. Gary Black, who will remain CEO, says the contract “will preserve the legacy of local health care,” which looks increasingly shaky. Lenoir’s operating loss in 2014 was a record $5.3 million. Other eastern North Carolina competitors aren’t sitting idle. In recent months, Fayetteville-based Cape Fear Valley Health agreed to manage nearby Harnett Health’s hospitals in Dunn and Lillington. New Bern-based CarolinaEast Medical Center, Vidant and Jacksonville’s Onslow Memorial Hospital began crafting a regional partnership. CarolinaEast and Chapel Hill-based UNC Health Care forged an alliance last year that will include a new $30 million cancer center in New Bern.
Powerful forces are driving consolidation, none more important than pressure to reduce wasteful spending. Eliminating it could save the state $20 billion or more a year. “Depending on who you talk to, it’s 30% or 40% or more of the health care dollar,” Pully says. Uncoordinated care, duplicated and unnecessary tests and needless administrative expenses add $900 a year to a patient’s medical costs, according to studies by Chapel Hill-based Blue Cross and Blue Shield of North Carolina, which insures nearly half the state’s population.
Efforts to make care more efficient are visible at Carolinas HealthCare’s Wadesboro hospital, an eye-catching 46,000-square-foot building where patients with diabetes and other chronic conditions are nudged away from expensive emergency-room visits into more preventative care. “About 25% of the people who come into the ER now end up being triaged because they’re not emergencies,” says Lovin, the Carolinas HealthCare executive. It has 37 fewer beds than the old hospital, reflecting shorter hospital stays and more outpatient treatment.
Cone, too, is spending heavily to cope with similar pressures in Greensboro, but its patients won’t see a new building. Since 2010, it has spent more than $122 million on an electronic medical-records system. Dozens of Tar Heel peers use similar software systems that allow hospitals, doctors and clinics to instantly access and share patient charts, though at enormous cost. That’s another reason small hospitals are seeking shelter in large systems. “The investment required to keep up with the evolution in electronic medical records is making it difficult, if not impossible, for small community hospitals to compete,” says Dr. Adam Zolotor, interim president of the N.C. Institute of Medicine, a quasi-state agency that monitors health issues.
The Affordable Care Act, the politically divisive 2010 federal reform often called “Obamacare,” has accelerated hospital consolidation, though the trend started long ago, says Dr. Kevin Schulman, a professor at Duke’s medical and business schools. The law requires electronic medical records and created Accountable Care Organizations, which force hospitals, doctors, clinics and community health groups to coordinate care, even after patients are discharged. That’s best for patients, but Medicare can also penalize hospitals up to 3% of their reimbursements if too many relapse and are readmitted within 30 days. Traditionally, almost one Medicare patient in five returns, and about two-thirds of North Carolina hospitals were stung for subpar performances in 2014. Duke Raleigh Hospital was penalized more than $480,000, which it could afford. For rural hospitals, the levies can be devastating.
Some benefits of consolidation aren’t as obvious as trimming costs or closing old buildings. The more a surgeon repeats a procedure, such as removing a diseased kidney like Thacker’s, the better the results. Access to specialists and subspecialists is also enhanced. At a small or medium hospital, you might have access to a cardiologist but not an electrophysiologist — a heart specialist who uses various procedures to correct arrhythmias. Consolidation and electronic records also amass stores of data that can determine the best ways to treat patients.
Many North Carolina hospitals date to post-World War II bond campaigns and fundraising bake sales, and they engender intense community pride. They often are among their county’s largest employers, but efficiency inherently means smaller staffs. “One of the major drawbacks of consolidation, particularly in rural North Carolina, is a lot of good jobs go away from the community to the larger health systems,” Zolotor says. “Communities are struggling and seeing their dollars flowing into Chapel Hill, Durham or Charlotte, because consolidation takes away a lot of specialization and administration functions.”
Vidant’s 2011 acquisition — and subsequent 2014 closure — of tiny Pungo District Hospital angered Belhaven Mayor Adam O’Neal so much that he walked 273 miles to Washington, D.C., protesting that the big system reneged on a promise to maintain local emergency care. Ten years before, he says, his 4-year-old son suffered a seizure, stopped breathing and was saved because emergency care was only minutes away in his town of 1,600. “They stole our hospital,” he says. “It’s a crime.” Reconciliation may have been reached in January, when the town approved Vidant’s plan to build a $4.2 million, 24-hour medical center with emergency flights to its main hospital in Greenville, 50 miles west of Belhaven. The old Pungo building will remain shuttered, joining six other hospitals closed or absorbed into parent systems since 2006, state officials say.
In Wadesboro, Mayor Thacker is more positive about the changes, though he misses the doctors and nurses he knew for decades. “We’ve had almost a complete turnover,” he says. “But most here think the results so far are positive. I loved the old hospital, but this one is a godsend.” In Anson, the state’s eighth-poorest county, Carolinas HealthCare employs about 100, down from the previous hospital’s 144. In Belhaven, equally poor, about 100 jobs disappeared and a study estimated the closing will cost the region about $16 million a year. Not all consolidation losses are at small hospitals. Wake Forest Baptist has cut more than 1,000 positions in the last two years, while Carolinas HealthCare in September announced that it was cutting more than 100 central-office management jobs. More cuts are likely as the legislature refuses to accept federal money to expand Medicaid, the government health care program for the poor.
With six beds, Vidant Bertie Hospital in Windsor is the state’s smallest hospital. Its predecessor, Bertie Memorial, similar in size to Anson’s and likewise built in the 1950s, closed briefly in 1985. It reopened but struggled and later closed for good. University Health Systems of Eastern Carolina Inc., which changed its name to Vidant Health in 2012, took over the hospital in 1998 and spent $10 million on its 48,000-square-foot replacement. Now, by way of telemedicine, electronic records and other technology, doctors here can instantly link to Vidant’s core medical center about 40 miles southwest in Greenville for services such as cardiology consultations, interpreting X-rays and psychiatry. “Consolidation,” says Julie Henry, a vice president at the state hospital association, “is precisely the reason a lot of these little hospitals won’t disappear altogether.”
Attitudes toward consolidation were much different two decades back, as Asheville’s historic hospital fight shows. Catholic-affiliated St. Joseph’s Hospital opened in 1900 as a tuberculosis sanitarium. A block up the hill, Mission Memorial Hospital, which started as a charity infirmary operated by the Women’s Christian Temperance Union, predated it by 15 years. But when the two began merger talks in the 1990s, only a convoluted agreement called a certificate of public advantage cleared the way. Now, 17 years after the deal closed, Mission Health System, the state’s sixth largest, still must regularly submit reports to the N.C. Department of Justice and state regulators that show the merger’s benefits outweigh the loss of competition. “Antitrust law remains somewhat of a barrier, but it operates mainly to restrict consolidation within a single geographic area, not consolidations across the state,” says Mark Hall, professor of law and public health at Wake Forest University.
Hall is among many experts who are skeptical that mergers help hospitals contain costs or improve care. Hospital costs jump as much as 20% after full mergers, according to the Princeton, N.J.-based Robert Wood Johnson Foundation, which funds health care research. Zolotor and others doubt if savings are passed along to health plans and their members. Instead, the money is plowed into new buildings and higher executive pay. At least 10 Carolinas HealthCare executives had compensation of more than $1 million in 2014, while 10 Novant leaders got $1 million-plus in 2013.
Some health care consumer advocates say federal efforts to implement reforms, along with provisions intended to control costs, are pushing regulators to go easy on the new wave of consolidation. “Absolutely not,” says Gilman, the FTC official in Washington. “I quibble with the notion the [Affordable Care Act] would be any reason we’d relax enforcement.” Some reform measures, such as requiring hospitals and medical practices to come together to form Accountable Care Organizations, practically dictate collusion. But the act includes detailed antitrust guidelines, he says.
Gilman and others insist enforcement is aggressive. “Generally, what antitrust authorities are looking at is the impact on the local market and how concentrated that market is becoming,” says Kevin Anderson, senior deputy attorney general in the N.C. Department of Justice, which regulates the industry at the state level. Pully isn’t surprised the hybrid consolidations are passing antitrust tests. “None of these deals were designed without a covey of lawyers, some of the best legal minds in the state,” says Pully, who was paid $900,000 in 2013, according to the hospital association’s tax filing. “I reject the notion that it’s about maximizing profits.” Consolidation isn’t over, say Hall and analysts at rating agencies. They expect North Carolina to end up with about six giant medical systems over the next decade or so. It will be far from painless for Tar Heel health care systems juggling politics, public sentiment, market pressures, antitrust concerns and demands for better care. “When you pass your hospital executive, give him a hug,” Pully says. “He’s having a hard day.”