Rural Hospital Mergers Make for Improved Bottom Lines, Mixed Feelings
In this second part of a three-part series, North Carolina Health News looks at the challenges facing rural hospitals and what it means for small communities when the local hospital merges with a larger hospital system.
Today’s story looks at some of the advantages and risks of rural hospitals merging into larger systems.
By Brenda Porter-Rockwell
Walk through many small community hospitals in a rural North Carolina county and you’ll feel like you’ve stepped back in time. Hospital walls are relatively barren, with faded prints decorating the walls and color schemes reminiscent of the 1980s.
While big building projects at large hospitals such as Duke, Wake Forest Baptist and Moses Cone gather a lot of attention, North Carolina’s smaller hospitals have much more modest existences.
“They’re the community safety net,” said Stephanie Strickland, director of communications for the North Carolina Hospital Association. “They have fewer resources; their demographics is often a sicker population, with more chronic disease, more Medicare and Medicaid, fewer insured to help cover the cost shift.
“They really don’t have the resources to build new clinics and facilities.”
And according to NCHA data, about a third of the state’s hospitals run in the red, with most of them in small and rural areas.
That’s part of the reason small hospitals across the state have been looking to their larger brethren to affiliate or merge outright, rather than flounder in uncertain economic times.
As part of a recent merger agreement, Cone Health System has pledged to fund a $150-million five-year capital campaign to include a facilities expansion of Alamance Regional Hospital’s emergency department and cancer center.
But while such mergers offer a small hospital new capital, updated equipment and better access to specialists, critics and federal regulators are taking a harder look at proposed hospital mergers.
And even though hospital boards are eager to sign merger agreements, patients and doctors in rural communities are wondering how beneficial mergers are for patient care.
Local hospitals make good
Since 2006, Wilson Medical Center in Wilson has been faced with a minimum of $80 million in renovations, including an overhaul of some 10 operating rooms, all built in 1964. The board had also been weighing the benefits of instead building a new 120-to-130-bed facility, to the tune of about $1 million per bed, to meet current federal guidelines.
Those ideas were put in hold as the economy turned south.
“We delayed and deferred, but it always comes back that you’ve got to upgrade your facility,” said Wilson Medical Center CEO Rick Hudson.
“We’re at that point now where, five years later, we’re still in a 1964 building and we still have all of the same inefficiencies in our operating rooms and our facility layout,” he said. “On top of all of that, we need to maintain the equipment – just routine, maintenance stuff. So we clearly need to have capital dollars.”
Those are the kinds of issues that many analysts point to when they talk about merging businesses like hospitals.
Wilson Medical Center eventually chose to merge with Duke LifePoint Healthcare. Wilson and Maria Parham Hospital in Henderson have both been on the receiving end of significant investments in information technology by their new common parent entity.
And, Hudson said, Wilson Medical Center’s relationship with Duke LifePoint will help the hospital finance, with grant money, phase two of its upgrades, expected to be completed by March 2014.
So for Wilson, access to capital and low borrowing rates were paramount to any partnership. That ruled out a management agreement.
“If you’re under a management agreement, that doesn’t require them to commit capital dollars to that community,” Hudson said. “In Wilson, we clearly needed to have access to capital, given the needs that we have.”
Currently, Wilson Medical Center has about $30 million in debt and would need to go to market to secure bonds to pay for any additional work.
Hudson said the relationship with Duke LifePoint will make the financing process easier and more affordable by giving it access to borrowing at lower rates.
“To clear our debt off the books gives us a major boost going forward. It puts us in a much stronger financial position to operate,” he said.
Economies of scale
Kevin Schulman, a health economist at the Duke University Fuqua School of Business, said there can be advantages for rural hospitals that end up affiliating.
“There’s an example from Hospital Corporation of America, where when they centralized their billing services, they took it out of the hospitals and put it in shared service units,” he said. “They realized they made a capital investment; they tremendously reduced costs and had better performance.”
But Schulman said the data also show there’s a darker side to hospital mergers – that larger systems end up with more negotiating power with insurers, driving up prices for patients.
He pointed to an analysis by University of California, Berkeley economist James Robinson that found consolidated facilities in concentrated markets were able to charge 64 percent to 95 percent more for common procedures such as knee and hip replacement surgery than in markets with more competition.
“Are there benefits to having your not-for-profit hospital join a system, or will people in those communities end up paying higher costs?” Schulman asked.
Those kinds of concerns are why the FTC held up the merger between Alamance Regional Hospital in Burlington and the Greensboro-based Cone Health System for a year and a half.
The agency also put the brakes on a proposed merger between High Point Regional Health in High Point and UNC Health Care for more than a year while regulators examined whether that deal was anti-competitive.
Eventually, the FTC allowed both of those agreements to move forward. But Schulman worries that more consolidation in North Carolina could have a negative effect on consumers.
A study from the American Hospital Association released earlier this year maintains that such mergers are not anti-competitive.
“I don’t see how health care costs are going to go up. Your logistical system, your tax structure … all becomes part of the larger system,” said hospital market analyst Patrick Riley of the research firm Frost and Sullivan.
“The FTC hasn’t ended up having issues with what is occurring in North Carolina,” said Jeff Spade, vice-president of the North Carolina Hospital Association who focuses on rural hospitals. “The places they seem to be more concerned are these huge urban markets, where there’s an ability to gain huge market share.”
“In North Carolina, the population is diversified across the state, and across the hospital catchment areas in rural counties,” Spade said. “So I don’t see the kind of market monopolies that can be formed.”
“It makes sense to connect with a larger system,” said the Hospital Association’s Strickland. “But in many cases, even those systems are struggling,” she said.
In January 2011, the for-profit LifePoint Healthcare partnered with the nonprofit Duke University Health System to create a joint venture, Duke LifePoint Healthcare.
In October of that year, Duke LifePoint became the majority shareholder of Maria Parham, with an 80 percent stake in the hospital. (The system now also includes Wilson Memorial Hospital and Person Memorial Hospital in Roxboro.)
“Our board felt that a management agreement was not the way to go,” said Maria Parham CEO Bob Singletary. “They felt like they needed someone who had more ‘skin in the game,’ if you will.
But talk to Michelle Ogle, who runs a rural health clinic down the street, and she’ll tell you she knows doctors who are leaving the staff and community members who aren’t happy.
“I think to call it an affiliation makes the concept of a larger entity managing the rural hospital more palatable to the community and the docs here,” she said. “But in fact, the corporate structure is indeed taking over the major administrative functions of the rural hospital, and they are calling the shots.”
Ogle said her patients tell her they don’t like being referred to the main Duke hospital in Durham and feel like they’ve lost the intimacy of having a community hospital run by local people who know your name.
“The first thing they say is, ‘Do I have to go to Duke?'” she said. “They don’t want to get lost in one of those big medical facilities.”
But that’s one of the things touted to people in rural communities when their local hospital is planning a merger – access to more specialists and treatments at the big hospital at the center of the affiliation.
That was a selling point for High Point Regional Health, which completed its merger with UNC Health Care in April.
Aligning with UNC gives doctors the support they need “to make sure our programs stay in the forefront,” said High Point CEO Jeffrey S. Miller. “UNC can help keep those high-tech services in our community, which I think is very important.
Officials at other hospitals merging with larger systems expressed similar sentiments.
But, said the Fuqua School’s Schulman, “Just because there’s a shiny hospital in the center, it doesn’t mean that the needs of the people in rural communities are being met.”
Correction: The story originally misstated the name of the High Point Regional CEO Jeffrey S. Miller.