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Why UNC and WakeMed Both Want Rex

Rex Hospital

In May, the board of trustees of WakeMed Hospital in Raleigh made an offer to buy Rex Hospital from UNC Healthcare. UNC has owned Rex since 2000.

Try calling your local hospital to find the price of a procedure, or a surgery. You can’t find it, in part because everybody pays something different.

Doctor Ashish Jha from the Harvard School of Public Health is one of the nation’s leading researchers in health care management. He says hospitals almost always lose money on patients who have Medicaid

Ashish Jha: "The numbers I've seen vary, some people suggest that Medicaid pays 60 cents on the dollar whereas Medicare pays oh, maybe 95 cents on the dollar. So there's a much smaller loss if there is one."

Add to that people with NO insurance, and it’s reasonable to ask, how do hospitals stay afloat? Private insurance, like Blue Cross Blue Shield is one of the only places where hospitals can make money. But consumers can’t get their hands on that pricing information because it’s private and proprietary. Even the Federal government doesn’t know what hospitals charge private insurers for services.

Jha: "They have their charge, but it varies from payor to payor what they get paid is totally different. And of course, the craziest part of the system is that the charges are typically three to four times a hospital's actual cost."

Whether for-profit or not-for-profit, hospital administrators always look to find the best mix of payers so they can stay afloat. And that’s the appeal of Rex Hospital. Located in one of the more prosperous parts of Raleigh, Rex Hospital has a great payer mix, with only about 4 or 5 percent Medicaid patients and relatively few uninsured. In contrast, WakeMed C-E-O Bill Atkinson says about 15 percent of their patients are Medicaid-eligible. And they have more uninsured patients.1

Bill Atkinson: "Simply because a person comes to the door doesn't mean that they have payment for the service that we deliver. And 80 percent of the uncompensated care in Wake County occurs with us and us alone."

It’s difficult to determine how much charity care each hospital provides because they all estimate it differently. WakeMed cites numbers it calculated from the state Medicaid program. The state hospital association has a different figure. Now matter whose numbers, though, there’s little question that WakeMed delivers a greater share of charity care in Wake County.

Atkinson: "That's one of the arguments we have about the UNC system, it is a state government system and we don't think if they can purchase a hospital like Rex and treat it as a private institution but its state owned, then it's a problem, it's a… it’s not a level playing field and it's not an appropriate way to do business."

WakeMed administrators also publicly complained about U-N-C’s business practices after a large group of heart doctors defected to Rex late last year.

U-N-C chief Bill Roper defends his organization’s business practices. His board and the administration at U-N-C Healthcare have shown little appetite to sell Rex. They say they’re considering the offer carefully. Roper argues Rex is an important part of the U-N-C system, which delivers a lot of charity care overall. And it’s a common strategy to spread losses around a hospital chain.

Bill Roper: "Our physician practice lost money on operations, the hospital here in Chapel Hill made money, and the hospital in Chatham County lost money on operations so we manage ourselves as an integrated healthcare system, on some parts we quote, make money, on other parts we lose money."

Because the U-N-C health care system is state run, it gets a subsidy from the General Assembly. Last year, that was 36 million, this year that was cut to 18 million. And U-N-C gets reimbursed for all of it’s Medicaid costs. That provision will start applying to Rex later this year if it stays part of the U-N-C system. 2 WakeMed officials like the chief financial officer, Mike DeVaughn say that gives U-N-C an unfair advantage.

Mike DeVaughn: "Other than Pitt there's not another hospital in the state of North Carolina that gets even its cost reimbursed for treating Medicaid patients. More like 70, 80 cents on the dollar, on average… There's nobody that subsidizes us."

But what happens if Rex does get sold to WakeMed? WakeMed would control more than 90 percent of the Raleigh market. And compelling evidence from around the country shows that when one provider controls the market, insurance premiums rise faster… because hospitals with market dominance can negotiate harder with insurance companies. WakeMed’s Mike DeVaughn brushes off that idea. He says no one gets what they want from insurers and that’ll be even more the case in the health reform era.

Devaughn: "I don't know anybody that is building their financial plans on expecting to get paid more."

Ashish Jha:"I think most hospitals look to the future and see things looking bleak. "
Again, Harvard’s Ashish Jha

Jha:" And that's part of the motivation why more and more hospitals are trying to buy out competitors, buy out hospitals that have a better payer mix, because they don't think they're going to be up to do very well with Medicare and Medicaid as payers."

Jha says that’s probably why both WakeMed and U-N-C want Rex, where the payer mix is so good. But he and other economists worry about market consolidation. Jha points to a torrent of evidence from around the country showing that insurance premiums rise 10, 20 even 40 percent faster in markets with monopolies than in the markets where there are several big players.

Jha: "There are lots of areas of healthcare where there are areas of controversy... this is not one of them. When… when a provider has strong market power, they are able to negotiate better rates. Anyone who thinks that doesn’t happen, sort of doesn’t believe in markets… this has been an area, where there’s really… there's been pretty strong and consistent evidence."

Several working papers done by the Federal Trade Commission have taken a more critical look at hospital mergers than the agency traditionally has… and used not-for-profits mergers as examples. One conclusion -- not for profits with market domination can be just as monopolistic as for-profits. Kevin Schulman a health economist from Duke’s Fuqua School of Business says now the F-T-C – and other regulators – are looking harder at hospital mergers.

Schulman: "Orlando is now merged down two hospital networks, and one of them asked for 60 percent rate increase over four years."
Hoban: "Did they get it?"
Schulman: "They negotiated over it and I don't know what the final result was, but … But that's the magnitude of the pricing pressure that we are seeing. And the Attorney General of Massachusetts has a report out about Partners Healthcare System in Boston that has outlying community hospitals that have tremendous increases in costs over time."

Schulman also points out it could cost WakeMed 875 million dollars to acquire Rex. 3 WakeMed officials say they’ll need to issue bonds to cover some of that cost. Those bonds have to get paid back… with interest.

Schulman: "A simple way to think about it is if the interest is going to be five or 10 percent a year... additional money that they would have to come up with just to pay the interest"

WakeMed officials say they’ll make up that money by being more efficient and by creating economies of scale between the two hospitals, not by raising prices. But Schulman, Jha and others, say the evidence shows prices and then insurance premiums, inevitably rise faster.

Schulman: "Medicare and Medicaid prices don’t go up just because there was a change in management. Which means that Blue Cross Blue Shield rates are going to go up that much more as a result. The eventual payer is everybody in Wake County who's going to see an increase in their insurance rates."

Health reformers and free market proponents alike say health care consumers should be shopping around, looking for the best bargain for their health care dollar. But until all of hospital and insurance costs and pricing information is transparent, consumers can’t know where to go. And they’ll watch hospitals compete against one another and be left wondering – is this a good thing, or a bad thing?

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