AN ILL WIND.

• Author: Martin, Edward
• Position: Brief Article - Statistical Data Included

Injecting itself with more hospitals and doctor practices didn't immunize Novant to what's plaguing the health-care industry.

Two months. That's all it took to merge the parent companies of Forsyth Medical Center in Winston-Salem and Presbyterian Hospital in Charlotte. The auditors declared their books sterile as mules, papers were signed, and the billion-dollar deal closed July 1, 1997, three months ahead of schedule.

"No skeletons fell out of the closet," an enthusiastic Paul Wiles noted. He stepped up from Winston-Salem-based Carolina Medicorp Inc.'s top position to become the first president and chief executive of Novant Health Inc., with a work force of 12,000 and service area covering 2.2 million people.

Optimism soared. The new company had big plans. There was talk of adding 30 hospitals to its eight-hospital network, along with scores of medical practices, nursing homes and clinics. Naturally, there would be economies of scale -- and vertical integration. Hire the doctor who treats the patient who is insured by the system's own health plan. The doctor admits the patient to the system's hospital. If the patient is too old or too sick to go home, the system puts him in its extended-care center. When Novant burst on the scene, the future of health care had arrived. Or so it seemed.

Three years later, Novant, wracked by management departures, financial shortfalls and unrealized dreams of expansion, struggles less to remake medicine than to right itself. Some of its troubles are self-inflicted, stemming from a hasty merger and a tendency to underestimate the competition and overestimate its own strength. But luck, mostly bad, has played a hand.

Sixteen days after the deal dosed, on a muggy Thursday morning in the farming crossroads of Supply, southwest of Wilmington, an unmarked sedan pulled up to Columbia Brunswick Hospital. The driver and another man got out and walked into the small, 60-bed hospital. "FBI," one said. "We have search warrants for your records." A similar scene was unfolding at Columbia Davis Medical Center in Statesville.

The hospitals were among three dozen owned by Tennessee-based Columbia/HCA Healthcare Corp. that were raided that day, nationwide. Hearing the news -- which had nothing to do with Novant -- Wiles wondered how far up the Columbia/HCA executive ladder the billing-fraud investigation would go. When it reached the top, his musings turned to misgivings. "The Columbia/HCA juggernaut had been acquiring every hospital in sight," says Wiles, who had reasoned that it would scare vulnerable Tar Heel hospitals straight into Novant's arms. "Suddenly hospitals began saying, 'We don't have to worry about Columbia anymore. The pressure's off, so why merge?'"

Novant was unprepared for the merger chill, but its faltering acquisition strategy would prove to be only the initial crack in the dam. Congress passed a balanced-budget act that will eventually cost hospitals $335 billion in Medicare-reimbursement cuts. The tab for Novant is $30 million a year and growing, since cuts are backloaded to increase annually through 2004. "It's only going to get worse," Wiles says. And vertical integration stumbled. Almost universally, hospitals have found that doctors cost more than they bring in -- at Novant, the red ink amounts to $40 million a year for the 300 physicians it employs.

Some problems go back to before Novant was created. It turned out that Presbyterian's closet rattled with skeletons, including an estimated $20 million in overdue bills, some 10 years behind. Wiles denies Presbyterian officials deliberately concealed them, but he concedes that auditors should have known.

Insiders, both former and current, say Presbyterian had relied too heavily on its reputation as Charlotte's hospital of choice. It had also given away tens of millions of dollars in weakly negotiated managed-care deals. "We spent $1.7 million in the first year trying to collect bad debt," says a former Novant executive, who adds that even if the extent of Presbyterian's woes had been known, Wiles would have pushed ahead anyway. "In the end, it didn't matter. The Triad is a slow, mature market, and Novant had to have Charlotte's growth."

By early 1998, as the scope of the problems became apparent, the...