Health-care heavyweights work system

Hospitals wheel and deal to settle rival bids for state's OK of new facilities, equipment

Here's how it's decided where you can go to get a bone scan or how far you'll have to drive to find a hospital:

The state decides Wake County could use another imaging scanner, and two hospitals want to operate it. The state gives one the OK and the other appeals the decision. Instead of fighting it out in administrative court, which might take months or even years, the winner instead writes a check to the losing hospital, which drops its appeal in exchange.

"That happens frequently," said Noah Huffstetler, a partner in the Raleigh law firm of Nelson Mullins Riley & Scarborough. He often negotiates such deals for clients with health-care projects.

North Carolina is one of more than 30 states that tightly controls health-care services, deciding both what facilities and equipment are needed and who operates them.

Officially, such decisions are made in what's known as a "certificate of need," a public process subject to open meeting and records laws. But in practice, private competitors often strike back-room deals in confidential legal settlements. Even state regulators may not know the terms. Critics say the process favors big hospitals, which can manipulate the system and monopolize care.

The News & Observer is taking a look at this little-known facet of health care as part of Sunshine Week, a national effort highlighting the importance of open government and freedom of information.

Huffstetler said it is not unheard of for hundreds of thousands of dollars to change hands -- just a fraction of the revenue the successful provider stands to earn with its new device or service. "Cease-fire" agreements in which providers agree not to go against each other's interests are also common.

Huffstetler and others, including the head of the state division that authorizes health-care expansions, say there is nothing inappropriate in settling disputes among competitors behind closed doors. In fact, they say, such settlements are essential to keep the system from becoming clogged with appeals, giving patients quicker access to needed services. In some cases, providers routinely appeal every project competitors have in the works.

"The [regulatory] process would probably grind to a halt if there were no settlements," Huffstetler said.

Pros and cons

Supporters of the existing system agree it is imperfect, but they prefer it to deregulation, which they argue would allow profiteers to cherry-pick the most lucrative services. They contend such a system would result in clinics that cater to the wealthy and leave hospitals to worry about the poor and uninsured.

Critics of the state-controlled system say private settlements are a prime example of how North Carolina allows health-care providers to skirt anti-trust laws, slice up markets and attempt to predetermine future regulatory decisions.

Last fall, for example, observers were amazed when WakeMed Health & Hospitals in Raleigh did not object to a proposal involving crosstown rival Rex Healthcare. In that case, Rex teamed up with Franklin County's only hospital to build a new facility in northern Wake County. WakeMed had objected to an earlier version of the project, which did not include Rex, but later withdrew its official comments to the state.

At the time, a WakeMed official said it had negotiated a truce with Franklin Regional Medical Center. A week later, the Franklin County hospital pulled its own objections to a WakeMed proposal to convert a northern Wake County outpatient center into a mini-hospital. A second agreement between Rex and WakeMed to leave each other's projects alone is rumored.

"A lot of competition between hospitals is in the process -- it's not in the marketplace," said Dr. Hadley Callaway, a Raleigh orthopedic surgeon. He'd like to see North Carolina dismantle its system for controlling health-care services and replace it with a free-market system.

Callaway said the current system is particularly unfair to doctors who don't regularly contend for services regulated by the state. When such a practice does try to compete, he said, it goes up against larger, more savvy hospitals that have years of experience working the system.

Callaway is not a disinterested critic. His practice, Raleigh Orthopaedic Clinic, spent years seeking state approval to acquire an MRI scanner. Last year, in its third attempt, the practice finally got the OK.

Both times the practice was unsuccessful, Raleigh Orthopaedic Clinic negotiated settlements with the successful parties. In one case, the practice secured a non-confidential pledge from WakeMed, which had won the right to add an MRI scanner, not to interfere with its future attempts.

"We play the game," said Callaway. "But it certainly isn't fair."