Carolinas HealthCare System joining with UNC to form hospital giant

Carolinas HealthCare System, the Charlotte region’s dominant hospital chain, will partner with UNC Health Care of Chapel Hill to form a medical giant – one that leaders of the two systems predict will expand access to care, improve quality and boost the state’s economy.

The two hospital systems announced Thursday that they plan to create a joint operating company that would allow them to work together in myriad ways, from building new hospitals to negotiating with insurance companies.

“The new organization will deliver world-class care to people in North Carolina by creating the most comprehensive network of primary, specialty and on-demand care in the Southeast,” the two systems said in a news release.

Gene Woods, currently CEO of Carolinas HealthCare, is expected to become chief executive of the new entity. Bill Roper, the CEO of UNC Health Care, will chair a new board that will oversee the combined system.

It marks a major development for Carolinas HealthCare, Charlotte’s largest employer. The new system would run more than 50 hospitals and employ more than 90,000 people, making it one of the nation’s largest hospital chains.

But experts in hospital consolidation cautioned Thursday that deals like these tend to drive up health care costs. That’s because larger systems have more leverage to negotiate higher payments from insurance companies, which then pass on the higher costs to patients.

The two systems on Wednesday signed a letter of intent to join their clinical, medical education and research resources. A website for the new corporation is already up and running:

Many details, though – such as what their new organization would be called and where it would be headquartered – have not yet been hammered out. The two systems hope to finalize their plan within 180 days, and to secure approval from the Federal Trade Commission next year.

The outcome will be closely watched by the 65,000 people employed by Carolinas HealthCare, and by the thousands of patients who rely on the system.

“This is like a marriage,” Roper told reporters from The Charlotte Observer and (Raleigh) News & Observer. “What we’re describing to you today is we just got engaged. The wedding is still several months away.”

Leaders of the two systems stressed the benefits of collaboration, saying they will work together to improve cancer treatment, mental health care and substance abuse treatment. They also said they would push to improve access to care in rural areas, which suffer from a shortage of doctors and services.

“Since our organizations already serve almost 50 percent of all patients who visit rural hospitals in our state, we are perfectly positioned to participate in the reinvention of rural health care in partnership with others,” Woods stated in the news release.

Roper said some rural North Carolinians have to drive “quite a distance” to access special types of care, such as radiation therapy. By combining forces, Roper said, the systems want to bring services closer to where patients live, using not only physical facilities but also technology.

Dr. Jessica Schorr Saxe, a health care advocate and family physician who retired from Carolinas HealthCare System, said, “If it’s truly going to bring health care to rural areas and if it’s going to bring mental health care to those areas, that would be important.”

The joint operating company – a public, nonprofit corporation – will also allow the two systems to become more efficient with functions such as billing and purchasing, hospital officials said. They wouldn’t rule out job cuts but said it was too early to provide specifics.

Roper and Woods said hospital consolidation is a must in order to remain economically viable in an era of rising health care costs.

Both parties will retain their own boards and ownership of their assets. But according to the letter of intent, the new corporation will operate as “ONE system” and “function as a single economic entity” with “one management team, one strategy, one budget and one vision.”

The new board that will govern the partnership will have members appointed by each organization, according to the letter of intent.

Is bigger better?

While hospital officials around the country have touted mergers and other combinations as a way to control their costs, critics point to evidence that consolidation tends to make patients pay more.

Carolinas HealthCare – a public nonprofit hospital system – has roughly 40 hospitals and 900 health care locations in the Carolinas. Last year, the system pulled in nearly $10 billion in revenue.

It is already the state’s largest hospital chain. And it is the leading hospital system in the Charlotte area, controlling about 50 percent of the market.

The planned megadeal comes at a time when CHS’ dominance of the local health care market is under close federal scrutiny.

A federal antitrust lawsuit filed last year contends that patients in the Charlotte region face higher health care costs and fewer choices because of CHS’ efforts to prevent competition.

The lawsuit, filed by the U.S. Justice Department and the N.C. Attorney General’s office, alleges that the system illegally reduces competition in the local health care market, using its dominance to get its way with insurers.

In a 2012 investigation, the Observer and News & Observer found that consolidation has given CHS and other large hospital chains leverage to demand higher payments from insurance companies. Carolinas HealthCare has said that it follows the law and that it is dedicated to making health care more affordable.

Kevin Schulman, an expert in hospital consolidation who teaches medicine and business at Duke University, said it’s clear that the deal between CHS and UNC will give the systems more leverage with insurance companies. That will likely translate into higher insurance premiums or co-pays for patients, he said.

“It’s hard to see how it’s going to lower costs” for patients, he said.

Leaders of the two systems said they did not believe their partnership would reduce competition. They noted that the two systems operate in different geographic areas.

“There will continue to be strong health care competition in the Charlotte area, and there will continue to be strong competition in the Triangle area. … We’re not doing this to extract monopoly rents from Blue Cross and Blue Shield,” Roper said, referring to the state’s largest insurer.

In the Charlotte region, CHS’ largest competitor is Novant Health, which owns 14 hospitals in North Carolina and Virginia. A Novant spokeswoman wouldn’t comment on the proposed CHS deal.

N.C. Attorney General Josh Stein’s office was noncommittal on the proposal but said the office “will be reviewing it closely to ensure that it benefits consumers.”

Officials for CHS and UNC say their partnership will not technically be a merger because they do not intend to pool their assets.

Joint operating companies, sometimes known as “virtual mergers,” are nothing new to the health care industry. Experts say such arrangements help hospitals achieve efficiencies and improve their financial health. But such transactions have also sparked antitrust concerns.

The partnership represents the biggest project taken on by Woods, who began leading Carolinas HealthCare less than two years ago, when he replaced retiring CEO Michael Tarwater. Woods described the deal as an opportunity for the combined system to be a “national model.”

UNC Health Care, a not-for-profit health care system owned by the state, operates the only state-owned teaching hospital in North Carolina. By teaming up with the renowned medical research system, Carolinas HealthCare hopes to expand medical education in the Charlotte area.

In 2010, the UNC School of Medicine launched a Charlotte campus at Carolinas Medical Center, the flagship hospital of Carolinas HealthCare System.

“We look forward to growing that with them,” Roper said.

News and Observer staff writer John Murawski contributed.

Deon Roberts: 704-358-5248, @DeonERoberts

Ames Alexander: 704-358-5060, @amesalex

Carolinas HealthCare System

Number of hospitals: 40

Total annual revenue in 2016: $9.8 billion

Employees: 65,000

CEO: Gene Woods

Headquarters: Charlotte

UNC Health Care

Number of hospitals: 12

Total annual revenue in 2016: $3.6 billion

Employees: 30,000

CEO: William Roper

Headquarters: Chapel Hill

Related stories from Charlotte Observer