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State’s two largest health care systems combine, raising questions about effect on patients

UNC Health Care, the Triangle’s largest health care provider, is partnering with Charlotte-based Carolinas HealthCare to create one of the largest nonprofit health care networks and academic research centers in the nation, employing some 90,000 people and running more than 50 hospitals.

The state’s two largest hospital systems are forming a company to oversee their joint operations under a new corporate name with a headquarters at a location to be determined. In an interview at The News & Observer’s offices on Wednesday, executives of the two companies said the partnership would give them the leverage to negotiate better deals with insurance companies and vendors, saving the hospitals millions of dollars. They also promised to increase access to health care in rural areas and provide their patients access to experimental treatments through their research programs.

The organizational details will have to be worked out during negotiations in the coming months, then submitted for review by the Federal Trade Commission. Among the questions the FTC will consider is whether a health care organization of that scale would limit patients’ ability to choose doctors and hospitals, and whether it would inflate health care prices in the state.

“We think we have good answers to all the questions that will come,” said Bill Roper, CEO of the UNC Health System and dean of UNC’s medical school. “We’re not doing it to be against anybody or to compete with anybody.”

According to the letter of intent signed by both sides Wednesday, Roper will be the executive chairman of the board that will oversee the combined system. Gene Woods, the CEO of Carolinas HealthCare, will be the CEO of the new entity, which has yet to be named. Each partner will continue as owner of its assets and employer of its workforce, but all facilities will be financially and operationally integrated in the new joint nonprofit organization.

The “legacy” operations, as Roper referred to Carolinas HealthCare and UNC Health Care, would continue to exist within the new company but would be rebranded, much as UNC Rex Healthcare has operated since being purchased by UNC in 2000 when it was called Rex Hospital. Any new development or expansion in the Triangle “would originate through the new company,” said UNC spokesman Phil Bridges.

Roper and Woods insisted the partnership is not a merger, in which both organizations pool their assets to create a new entity. But it brings many of the benefits of the merger without the legal burdens.

“This is like a marriage,” Roper said. “What I’m describing to you today is we just got engaged. The wedding is still several months away.”

Mega-mergers by powerful hospital networks have faced stiff scrutiny by regulators in other states, and Carolinas HealthCare is facing an unrelated anti-trust lawsuit from the N.C. attorney general and U.S. Department of Justice; the suit alleges that the system’s insurance contracts discourage patients from using cheaper hospitals owned by competitors.

The announcement raised immediate questions as to whether the combination would improve care and lower costs for the residents of North Carolina.

Kevin Schulman, a Duke University professor of medicine who specializes in the business of health care, said hospital consolidation is the single biggest cause of rising health care prices.

“It gets them better prices from insurance companies – it raises the unit price – for them, not for the people of North Carolina,” Schulman said. “The leverage is, if you want to write a contract in this region, you have to deal with us, and we’ll tell you what the price is.”

Donald Gintzig, CEO of WakeMed Health & Hospitals in Raleigh, UNC’s primary competitor in Wake County, expressed skepticism about the deal’s touted benefits. Gintzig said he wasn’t familiar enough with the details to say if WakeMed would oppose or support the merger before federal regulators.

“This could be good if it increased access, especially for vulnerable populations who end up forgotten,” Gintzig said. “But I haven’t seen any evidence that the largest health systems are the lowest-cost providers in their communities. If that were the case, there would be lots of evidence to support that.”

UNC Health Care employs about 30,000 people and owns or manages 12 hospitals across the state, while Carolinas HealthCare employs more than 65,000 and owns or manages 40 hospitals in North Carolina and South Carolina. Each employs thousands of doctors who refer patients internally to company specialists, labs, clinics and hospitals. Last year, UNC Health Care posted a record $3.6 billion in revenue and an operating income of $196.6 million; Carolina’s HealthCare posted revenue of $9.8 billion and operating income of $422 million.

Roper and Woods said they began talking about a partnership this summer and have been laying the groundwork for their proposal during the past week and a half by emphasizing its benefits to North Carolina’s legislative leaders and other power brokers.

The boards of both health care systems unanimously approved the deal this week, clearing the way to formal negotiations on how to best combine their clinical, medical education and research resources. They expect to have the details worked out within six months and hope to have FTC approval next year.

Is bigger better?

Bob Seligson, CEO and executive vice president of the N.C. Medical Society, said the nation’s health care sector is in the midst of a hospital consolidation wave as the systems struggle with containing costs and treating those who can’t afford care.

“Everybody has to be futuristic and innovative in thinking how these changes will play out so they will be prepared,” Seligson said.

But Seligson said size alone is not a reliable measure of whether a health care partnership is successful.

“You can grow big, but it gets down to how good is the system in the location where the medicine is being provided.”

Both UNC and Carolinas HealthCare have been adding hospitals to their networks. UNC expanded its hospital network last year with the addition of Wayne Memorial Hospital in Goldsboro and Lenoir Memorial Hospital in Kinston, both of which entered management deals with UNC.

In 2012, Carolinas HealthCare entered into a management services agreement with nonprofit Cone Health in Greensboro; under that arrangement, five Cone Health executives became employees of Carolinas HealthCare. In the following year, the FTC granted approval for Cone Health to merge with Alamance Regional Medical Center in Burlington, expanding Cone Health’s network to six hospitals, which are part of Carolinas HealthCare’s network.

Roper and Woods said hospital consolidation is a must in order to remain economically viable in a climate of rising health care costs, noting that North Carolina is contending with an opioid addiction crisis and a lack of adequate mental health care.

The two CEOs said that rural areas, which have been plagued by a chronic shortage of doctors and dearth of services, will benefit from the partnership; UNC and Carolinas HealthCare already provide health care to nearly 50 percent of patients in rural areas. Roper said that their combined resources will allow them to provide health care services “close to people in convenient locations, using not only physical facilities but technology,” such as the emerging field of telemedicine.

For instance, in areas where there’s a shortage of psychiatrists, a patient could see a primary care doctor and while there be connected remotely on a screen with a mental health specialist located elsewhere in the state. That patient would be able to receive a prescription for mental health needs before leaving the appointment.

Roper and Woods also predict their combined negotiating leverage will translate to millions of dollars in savings on medical equipment, hospital beds and other costly items, which will trickle down to patients in the form of lower costs.

But Allen Feezor, a former chief deputy insurance commissioner in North Carolina and retired health care consultant, was dismissive of that claim. He said hospitals already do bulk purchasing through group organizations that represent multiple hospital systems.

“At some point, you get to the economies of scale that it’s hard to improve upon,” Feezor said.

To allay concerns about the future of the state-owned UNC system, Roper and Woods said the union of their systems will preserve the independence of each partner’s board of directors, and will allow each to nominate members to the new company’s board of directors. They also said that their proposal shouldn’t raise anti-competitive issues because each organization’s health care networks don’t overlap, so that their combined operations will not boost each partner’s market dominance and reduce competition in Charlotte or in the Triangle.

Ultimately, they say that in an era of health care consolidation, North Carolina will be better off with a single dominant player headquartered locally, than having homegrown organizations gobbled up by out-of-state corporations.

One of the outcomes of the union that is raising concerns is insurance costs. By gaining negotiating leverage against health insurers, the new combined organization will be able to negotiate higher insurance payments for medical treatment, which would raise medical costs and potentially increase the cost of health insurance. Doctors and hospitals are prohibited by federal anti-trust law from colluding with other providers to wrest better payments from insurers, but a hospital system representing thousands of doctors and scores of hospitals can achieve the same result legally.

The new company could also directly compete with Blue Cross and Blue Shield by selling health insurance to its hundreds of thousands of patients, a strategy adopted by some health care systems. Roper said that the idea had crossed his mind but was not a priority.

Roper said he expects the concerns about insurance costs will be among the issues discussed in the months ahead. Meanwhile, Roper said he called Brad Wilson, the outgoing CEO of Blue Cross, this week to give him advance notice of Thursday’s announcement. Roper also called Patrick Conway, who is slated to take over as Blue Cross’s CEO in October.

“We’re not doing this to extract monopoly rents from Blue Cross and Blue Shield,” Roper said.

Asked about the partnership on Thursday, Blue Cross responded with a statement: “We look forward to seeing how they will lower health care costs so that we can pass those savings on to our customers.”

John Murawski: 919-829-8932, @johnmurawski

UNC Health Care

Number of hospitals: 12

Number of acute care hospitals: 12 (6 owned, 6 managed)

Total annual revenue in 2016: $3.6 billion

Employees: 30,000

CEO: William Roper

Headquarters: Chapel Hill

Carolinas HealthCare System

Number of hospitals: 40

Number of acute care hospitals: 31 (12 owned, 19 managed)

Total annual revenue in 2016: $9.8 billion

Employees: 65,000

CEO: Gene Woods

Headquarters: Charlotte

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