The public hospital — those owned by counties, cities or other local government entities — is an increasingly endangered species.
This article was published on Friday, January 29, 2021 in Kaiser Health News.
By Jordan Rau
In America's healthcare system, dominated by hospital chain leviathans, New Hanover Regional Medical Center in Wilmington, North Carolina, is an anomaly. It is a publicly owned hospital that boasts good care at lower prices than most and still flourishes financially.
Nonetheless, New Hanover County is selling the hospital to one of the state's biggest healthcare systems. The sale has stoked concerns locally that the change in ownership will raise fees, which would not only leave patients with bigger bills but also eventually filter down into higher health insurance premiums for Wilmington workers.
Hospital consolidation has been a consistent trend unabated by recessions, bountiful times or even a pandemic. The New Hanover sale, which requires only the approval of the state attorney general for completion, prompts the question: If Wilmington's self-sufficient medical center cannot stand alone, can any public hospital avoid being subsumed into the large systems that economists say are helping propel the cost of American healthcare ever upward?
"We project the prices will go up, they'll probably lay off employees after a couple of years, and the hospital will decline in terms of its quality," said Dale Smith, a retired Wilmington businessman who opposed the sale. Applying his professional experience buying chemical companies to the hospital industry, Smith said: "A very large percentage of mergers and acquisitions, like 90%, never succeed in fulfilling their initial goals."
The public hospital — those owned by counties, cities or other local government entities — is an increasingly endangered species, numbering 965 out of 5,198, according to the American Hospital Association. While the total number of hospitals in the nation dropped by 4% between 2008 and 2018, the number of state or local hospitals decreased by 14%.
Many have been absorbed by large systems. Over the previous 14 years, the percentage of markets where one healthcare system treats more than half the cases grew from 47% to 57%. In 2017, nine out of 10 hospital markets met the federal definition for being highly concentrated.
While the industry says larger systems allow hospitals to run more efficiently, numerous studies have found that charges to insurers and patients are higher from hospitals with more market power. One study calculated the premium to be 7% to 9%; another study found 12%.
"There is a growing consensus that hospital mergers do lead to higher prices," said Christopher Whaley, a policy researcher at the Rand Corp., a research organization.
Novant and backers of the sale disagree that prices will increase more than they would have otherwise. "We looked into the future and we felt we needed more resources," said Spence Broadhurst, who was the co-chair of the committee the county created to evaluate the medical center's future. "We were pretty convinced that the risk of doing nothing was significant."
While the coronavirus inflicted serious financial damage on many hospitals by forcing them to postpone elective surgeries and improve infection control, the outbreak has not stymied mergers and acquisitions. In the third quarter of 2020, Kaufman Hall, a Chicago firm that advises companies on such deals, identified four substantial healthcare transactions, tying the highest number the firm has seen in a single quarter.
"In 2021 and beyond, even more activity in M&A is expected," said Anu Singh, a managing director at Kaufman Hall.
Consolidation has been marching rigorously through North Carolina. Seventy-four percent of North Carolina general hospitals belong to systems, more than any other state except Hawaii, Maine and Rhode Island, according to a KHN analysis of 2018 data from the federal Agency for Healthcare Research and Quality. Since then, in the western part of the state, the investor-owned chain HCA purchased the nonprofit Mission Hospital in Asheville; in the middle, Greensboro-based Cone Health merged with Sentara Healthcare into a 17-hospital system; and on the coast, Novant Health is buying New Hanover.
Both the Mission and New Hanover sales provoked substantial community blowback. New Hanover opened its doors in 1967, in the midst of the civil rights movement, as Wilmington's first integrated hospital. It grew to become the nation's third-largest county-owned hospital, serving seven counties in southeastern North Carolina.
But unlike many public hospitals, the medical center makes money: $110 million in the fiscal year ending in September 2019, which translated to an enviable 10% surplus. It is the largest county-owned system that does not require taxpayer subsidies.
Despite its market leverage as the only general hospital in Wilmington, New Hanover charged private insurers less than did the 24 other North Carolina hospitals for which Whaley and his Rand colleagues could assess inpatient and outpatient prices from 2016 through 2018. New Hanover's prices were 13% lower than UNC Health's, 15% lower than Novant Health's and 32% lower than Atrium Health's, according to the Rand data.
New Hanover has also demonstrated its ability to provide care to Medicare beneficiaries thriftily without sacrificing quality: In the first six months of 2019, its accountable care organization, or ACO, earned a $3 million bonus from Medicare for saving more money than the government expected, according to federal data. Novant's ACO did not reduce costs enough to earn a bonus.
"This is not your typical county hospital. This is a fairly high-functioning hospital with high-quality care and reasonable prices," said Barak Richman, a professor of business administration at Duke Law School.
But leaders in New Hanover County and the medical center announced in 2019 they were exploring either selling the hospital or joining a larger healthcare system. They said they feared the hospital needed more capital and help to keep up with the surging population growth in the region and medical advances, including costly technologies.
The county's request for proposals drew many suitors, including Novant and Atrium, which had been battling for dominance throughout North Carolina's regional healthcare markets. Novant's winning bid, which the county accepted last October, will pay the county $1.5 billion. The county will use most of the money to fund a new nonprofit endowment to bolster community health but will keep $350 million. Novant pledged to invest an additional $3.1 billion to build and upgrade medical facilities and equipment in the region, and it said it would create a branch of the University of North Carolina School of Medicine at New Hanover.
"We knew we wanted more," said John Gizdic, president and CEO of New Hanover. "We wanted to do more; we wanted to be more."
Along with the hospital, the sale includes other medical facilities the county owns under the medical center's umbrella: smaller hospitals for children, rehabilitation and mental health on the medical center's campus; a nearby orthopedic hospital, a physicians' group and outpatient centers; and its contract to manage Pender Memorial Hospital, owned by an adjacent county.
Carl Armato, Novant's president and chief executive, noted in an interview that Novant already owns the nearby Brunswick Medical Center, which refers some patients to New Hanover and, he said, provides affordable healthcare. "The two organizations have a unique cultural alignment," he said.
Even some opponents of the deal acknowledged that New Hanover was not guaranteed to remain financially strong. "Owning and running a hospital has got some serious wind in its face," said Bertram Williams III, an investment adviser whose father was a surgeon who helped found New Hanover. "There's a lot of things coming down the pike making it more and more complicated to manage a hospital and keep it above water."
Williams said he expected Novant would need to recoup the money it is spending on the deal. "That money's got to be repaid," he said. "It's going to come from local payers. We know it's going to be higher costs, there's no question about that. Might there be higher costs anyway? Probably."
The sale of the medical center removes the direct leverage local consumers had in influencing the hospitals' prices. Novant agreed to create a local hospital board, with a majority of members living in the service areas, but the board's role will not extend to setting prices.
"Novant Health, what they're proposing to do sounds just too good to be true," said Howard Loving, a retired naval officer who questioned the sale. "To my mind, the first thing that's going to unravel is there's two years with the doctors who are there now, [and then] Novant will have the ability to decide who gets to stay and who gets to go."
State Treasurer Dale Folwell said he expects that, as part of Novant, New Hanover will press for higher rates from the healthcare fund that covers state employees and teachers, which Folwell's office oversees. "I'm their largest customer," he said. "I know we should expect quality to go down, access to go down, prices to go up. And when that happens, public service workers get hit the worst."
Novant disputed that its takeover would lead to higher costs. "Novant Health has a track record of lowering the cost of care to patients compared to other healthcare systems in North Carolina," the organization said in a statement. Novant also noted that more low-income people will qualify for free or lower-cost care under Novant's charity care rules than under New Hanover's.
Unpersuaded, opponents of the sale said the county did not take a serious enough look at finding other ways to raise capital without losing control of the hospital.
"They said the future is scary and unknown," Smith, the retired businessman, said. "The counterargument is, Why don't we wait and see what the future holds?"
"Once this is done," he added, "you can never go back."
“There is a growing consensus that hospital mergers do lead to higher prices.”
Christopher Whaley, RAND Corporation
Kaiser Health News is a national health policy news service that is part of the nonpartisan Henry J. Kaiser Family Foundation.
Photo credit: Andrew Craft for KHN
While the total number of hospitals in the nation dropped by 4% between 2008 and 2018, the number of state or local hospitals decreased by 14%.
Many have been absorbed by large systems. Over the previous 14 years, the percentage of markets where one healthcare system treats more than half the cases grew from 47% to 57%.
In 2017, nine out of 10 hospital markets met the federal definition for being highly concentrated.
While the industry says larger systems allow hospitals to run more efficiently, numerous studies have found that charges to insurers and patients are higher from hospitals with more market power.