UNHEALTHY COMPETITION: A HOSPITAL SYSTEM CEO AND NORTH CAROLINA'S TREASURER BICKER OVER PRICING, COST SHIFTING AND GROWTH--WITH HUGE IMPLICATIONS FOR EASTERN NORTH CAROLINA.

AuthorMildenberg, David
PositionCover story

When Michael Waldrum became CEO of Vidant Health in 2015, he knew it would be tough. The Greenville-based health care system's 29-county market struggles with unusually high levels of obesity, diabetes and poverty. If the large region was a state, its median income level would rank second-lowest in the U.S., ahead of Mississippi. While the system dominates its region's medical business, about 75% of revenue comes from government-led Medicare and Medicaid programs that Waldrum insists provide slim or no profit. "The bottom line is that we make a pretty skinny margin and, at times, none at all."

It's no wonder, then, that the new CEO faced a community fearful that his recent experience overseeing the sale of a big hospital system in Arizona would be repeated in Greenville. "There was a lot of fear that Mike Waldrum is coming to eastern North Carolina to sell Vidant," he says, which he calls absolutely untrue. "My job is to do what I need to do to make this company successful."

What Waldrum didn't anticipate was that an elected official with a zealous desire to drive down health care costs would make his job much more challenging, while unnerving the entire N.C. hospital industry. A historically cozy relationship between North Carolina politicians and the state's hospitals loosened after Dale Folwell became state treasurer in 2017. Echoing comments made during his election campaign, Folwell vows to cut health care costs for the state and its 720,000 employees and retirees by pushing down prices that he considers excessive. Resulting savings would enable highway patrollers, teachers, prison guards and other public employees to spend less on health care, while putting a dent in the state's $32 billion of unfunded retiree health liabilities, he says.

Whether fearless or foolhardy, the treasurer is taking aim at one of the state's most powerful industries. Hospitals are the biggest employers in many N.C. cities and led by boards of civic leaders, giving them significant influence with state lawmakers. Two decades of consolidation have left North Carolina dominated by nine not-for-profit hospital systems, each posting annual revenue topping $1 billion. There were 10 until Feb. 1, when Nashville, Tenn.-based HCA Healthcare bought Mission Health for $1.5 billion, marking the biggest investment by a publicly traded hospital company in state history. Outgoing Mission Health CEO Ron Paulus, who is joining HCA as a strategic adviser, concluded that annual revenue of $1.8 billion and operating profit of $64 million in 2018 wasn't sufficient to be competitive over the long term.

While Paulus' grow-or-die attitude isn't shared by Waldrum and some other N.C. hospital CEOs, the appetite for expansion is accelerating. Reflecting its ambitions, Atrium Health changed its name last year from Carolinas HealthCare System and bought Macon, Ga.-based Navicent Health. Atrium's proposed combination with UNC Health Care fell through last year after state leaders, including Folwell, criticized the plan for being anti-competitive and disadvantageous to UNC. But the pressures prompting Atrium CEO Gene Woods and former UNC CEO Bill Roper--and their boards--to favor a collaboration aren't going away.

Ravenous competitors anxious to grab others' turf isn't farfetched. "It's only a matter of time before HCA starts looking for expansions elsewhere in North Carolina," says state Rep. Donny Lambeth, a Winston-Salem Republican who is a former Wake Forest Baptist Health executive. HCA's annual revenue of about $47 billion dwarfs the combined total of the 10 largest N.C. systems. While Waldrum says Vidant hasn't talked with HCA about a potential merger, he predicts that out-of-state investment in N.C. hospitals will accelerate in the next decade.

Some hospital systems enter battle in stronger shape. The financial stars in North Carolina are Duke University Health System, which draws an international clientele, and Novant Health, which has growing market shares in Charlotte...

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