Safety in numbers: it works for some, but merging hospitals into health-care systems isn't the remedy for all their financial afflictions.

• Author: Martin, Edward
• Position: FEATURE

In the fog, bare trees loom like skeletons. A sidewalk leads from Fayetteville Street to ornate doors framed by a brace of caduceuses, the entwined serpents that symbolize medicine. From some vantage points on a winter morning in Asheboro, Randolph Hospital looks the same as it did in 1932, when its art deco architecture was new. Behind the facade, the 145-bed hospital--40 beds originally--is thoroughly modern. It has won awards for pneumonia care and its new cancer center. Visitors enter through a new wing. Here in the geographic heart of North Carolina, they wait in the lobby for word on friends and relatives.

Randolph is an independent hospital in a state dominated by health-care empires--six have headquarters within a two-hour drive. "The risks and rewards run higher," says Robert Morrison, president and CEO. "You work without a net financially."

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Ninety miles away in Charlotte stands Carolinas Medical Center, flagship of Carolinas HealthCare System, the state's largest and nation's third-largest, with 4,300 beds in two states. Around the 861-bed medical center, clinics and doctors' offices make up a medical city within a city.

Michael Tarwater, CEO of Carolinas HealthCare, enjoys pointing out that, on average, 32 babies are born at Carolinas Medical Center each day. The hospital is one of 15 in a system that had $2.3 billion in revenue last year. Despite his system's size, he faces some of the same woes as Morrison. Carolinas wrote off $115 million in unpaid bills last year, about 5% of revenue. Randolph took an even bigger hit in proportion to its size--about $12 million in uncollectible bills, nearly 13% of its revenue.

It's possible that health care, once almost entirely a local endeavor, soon will be delivered only by networks such as Carolinas HealthCare. Many say that wouldn't be so bad. Large systems offer economies of scale, huge patient volumes that enable them to spot best practices quickly and the ability to offer technology that small hospitals only dream of. Another wave of consolidation might spark cost cutting, they say, especially if the state were to deregulate hospitals. The Federal Trade Commission, for one, says opening health care to market forces would make hospitals lower charges.

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But some hospital administrators doubt the public is ready for the tough choices competition entails--such as rationing care to those who can't pay. Regulation, they say, will remain necessary. "If you don't care who you hurt, then you can get rid of it," Tarwater says.

Those who expect a new wave of finance-driven consolidation point to the deal in which Winston-Salem-based Novant will lease and run Brunswick Community Hospital, south of Wilmington, starting this month. "In the next round, there'll be fewer and fewer independent hospitals and a few large hospitals dominating each state," says David McRae, president and CEO of University Health Systems of Eastern Carolina in Greenville, which covers 29 counties.

Morrison disagrees, but then his hospital is financially sound. Unlike many of the 157 others in the state, Randolph has operated in the black since 1993, when he took over. It earned $4.5 million in 2005, a healthy 4.8% operating margin, by excelling at procedures that don't require big-city expenditures for staffing and equipment.

On one point, though, both sides agree. A perfect storm is brewing, for systems and independent hospitals. Factory layoffs, rising insurance costs and other factors last year added 400,000 North Carolinians to more than a million already uninsured. That's nearly 17% of the population. For those still holding jobs, businesses will pay about $7,000 per employee for medical coverage this year, says Will Sneeden, Hewitt Associates health-care practice director in the human-resources consultant's Charlotte office. That cost, he says, could double in seven years. Meanwhile, the baby-boom generation is nearing age 65, when medical needs escalate sharply.

Morrison pores over financial charts that show increasing medical costs and a rising tide of uninsured people nationwide. If those lines don't change, he says, the outcome will be dire. "The system as we know it currently will crash and burn. It is in the process of self-destructing."

A saloon, barbershop and fruit stand were on the first floor, and a 45-bed hospital was above. Founded in 1903, Presbyterian Hospital, now part of Novant, spent some of its formative years renting rooms in a Charlotte hotel. In 1918, it moved east of downtown, where it's based now. Another local hospital--Charlotte Memorial, now Carolinas Medical Center--was chartered in 1938.

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Through the '60s, hospitals near one another competed mostly by word of mouth. Charlotte Memorial served a disproportionate number of the poor, while Presbyterian catered to the affluent and insured. An axiom spread: "I'd rather die in the ambulance on the way to Presbyterian than stop at Charlotte Memorial." In...