Duke Medicine, WakeMed in exploratory talks on collaborating

jmurawski@newsobserver.comJune 30, 2014 

Two of the Triangle’s major health care systems announced Monday they are in early discussions to coordinate operations, a strategy one analyst called a “virtual merger” that hospitals are increasingly adopting to offset falling revenue and tighter budgets.

WakeMed Health & Hospitals and Duke Medicine said the collaboration should not be viewed as a baby step toward a merger. WakeMed and Duke officials emphasized that teaming up will result in lower operating costs and improved care for patients.

Monday’s announcement, coming just three years after WakeMed launched an unsuccessful takeover bid for rival Rex Hospital in Raleigh, was sent out to doctors and staff to suppress rumors and speculation.

“It probably is less dramatic than it sounds,” said WakeMed CEO Donald Gintzig. “But you have to put a framework in place so that you can have discussions and be reasonably transparent without creating a lot of expanded expectations while also reducing any anxiety for what the discussions are about.”

Still, some see the growing partnership between Durham-based Duke and Raleigh-based WakeMed as a pincer movement to outflank their common rival: Chapel Hill-based UNC Health Care and its Raleigh hospital, Rex Healthcare.

All three health care systems vie intensely for physicians practices and for patients at a time of ever-tighter profit margins. Triangle hospitals are facing increasing financial pressure and seeking competitive advantage to shore up market share in one of the nation’s strongest health care markets.

“If you start merging your clinical practices, it could be a defensive strategy against UNC Health Care,” said health policy analyst Adam Linker of the N.C. Justice Center. “Duke’s brand is powerful. If WakeMed has some of Duke’s mojo, then that could be threatening to UNC.”

Gintzig said Monday that the talks will initially review ways that WakeMed and Duke can work together on pediatric services, oncology services and population health. The latter refers to an approach to keep patients out of hospitals by making sure they see doctors and take their medications.

Duke and WakeMed officials offered scant details Monday on what form their partnership might take. Together the two employ more than 24,000 people. Moody’s Investors Service analyst Mark Pascaris said such partnerships are called “virtual mergers” because they offer the benefits of consolidation.

“This is not a surprise in that it’s similar to a pattern we’re seeing in other parts of the country,” said Pascaris, who analyzes not-for-profit hospitals.

The partnership is designed to complement both nonprofit hospital systems. For example, WakeMed does not have a cancer center, while Duke and UNC each have highly respected oncology facilities, creating opportunities for WakeMed to align with Duke for advanced cancer treatment.

WakeMed and Duke are also looking to build on their 2012 partnership that gave birth to a joint clinic that provides specialty pediatric services.

WakeMed has a 40-year partnership with UNC in which UNC medical students and residents train at WakeMed. Gintzig said the Duke partnership at this time does not include plans to bring Duke University Medical School students to WakeMed.

Aggressive expansions

Duke and WakeMed expect to announce details about their joint projects as they take shape, said William Fulkerson, executive vice president of Duke’s health system.

While Duke is aggressively expanding in Wake County and the Triangle, the UNC Health system is also on the move. UNC, which is building an eight-story cardiology center in Raleigh, in 2013 acquired High Point Regional and Caldwell Memorial hospitals and has since entered into joint ventures and management agreements with Johnston Health and Nash Health Care, expanding its holdings to eight hospitals.

Moody’s Investors Service has revised its outlook to “negative” for both UNC and Rex because they face lower cash flow as they face declining reimbursements from insurers and are installing a $125 million IT system.

The Duke University Health System, long accustomed to double-digit operating margins, dropped to a 4.3 percent operating margin in fiscal year 2013. Duke is focusing on a five-year plan to save $200 million in operating costs, according to a Moody’s analysis from November.

WakeMed last year posted its first operating loss in the organization’s history, leading to layoffs, closure of nursing facilities and the departure of then CEO Bill Atkinson. But WakeMed still has the biggest market share in Wake County, presenting opportunities for Duke to recoup some of its declining patient volume by offering services that WakeMed lacks.

WakeMed is also in the midst of building a $90 million hospital, WakeMed North at Durant and Falls of Neuse roads in Raleigh. That project, to open next year, is expected to lose money in its first two years of operations, according to a June analysis by Fitch Ratings.

Murawski: 919-829-8932

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