Merger Mania Redux: the Case of the Carilion Health Care System

The Wall Street Journal published an article on how one not-for-profit hospital system came to dominate its market, and the effects of that domination on local health care.

How the System Became Dominant

The WSJ article documented how a hospital merger created a vertically-integrated health care system. Note that in the old days of "merger mania," there was a lot of buzz in the health care research and policy circles about how creating such integrated systems to benefit quality and access, and lower costs. This rationale appears below.

In 1989, the U.S. Department of Justice tried but failed to prevent a merger between nonprofit Carilion Health System and this former railroad town's other hospital. The merger, it warned in an unsuccessful antitrust lawsuit, would create a monopoly over medical care in the area.

After the 1989 merger, Carilion continued to operate Roanoke's two hospitals separately. It later consolidated the hospital boards and in 2006, transferred most of Roanoke Community Hospital's staff and services to a renovated and enlarged Roanoke Memorial Hospital.

The moves eliminated any hospital competition in Roanoke proper....

[Carilion CEO Dr Murphy] was convinced that the cost and quality of care in Roanoke could be improved if doctors worked in a more centralized system. In June 2006, he announced a seven-year, $100 million plan to transform Carilion into a multispecialty clinic, like the Mayo Clinic.

Carilion began approaching private physician groups, offering to buy their practices and pay their salaries.

We shall see what effects CEO Dr Murphy's advocacy of more centralization had.

Effects on Costs

The domination by a single vertically integrated health care system apparently lead to rising costs.

Nearly two decades later, the cost of health care in the Roanoke Valley -- a region in southwestern Virginia with a population of 300,000 -- is soaring. Health-insurance rates in Roanoke have gone from being the lowest in the state to the highest.

That's partly a reflection of Carilion's prices. Carilion charges $4,727 for a colonoscopy, four to 10 times what a local endoscopy center charges for the procedure. Carilion bills $1,606 for a neck CT scan, compared with the $675 charged by a local imaging center.

Alan Bayse, founder of a local benefits-consulting firm who has sold health insurance in the area for 30 years, says health-insurance rates in the Roanoke Valley used to be 20% lower than in Richmond, Virginia's capital, and the lowest in the state. Today, he says, they are the highest in the state and 25% higher than in Richmond, citing rate information from insurer Cigna Corp. Anthem, another health insurer, says its rates are 6% higher in Roanoke than in Richmond.

Mr. Lionberger, whose construction company has about 100 employees, says his health-care costs have risen 50% over the past three years, hampering his ability to compete with contractors from other parts of the state.

While the increasing domination by the system been associated with increased health care insurance rates, its leadership has aggressively pursued patients who failed to pay their share of its exaggerated bills.

The Roanoke City General District Court devotes one morning a week to cases filed by Carilion. In its fiscal year ended Sept. 30, Carilion says it sued 9,888 patients, garnished the wages of 5,478 people and placed liens on 3,920 homes. Carilion says the people it takes to court have the means to pay their bills.

When some patients don't pay their bills, Carilion places liens on their homes. Carilion says it doesn't track how many liens it has outstanding, but the close to 4,000 it filed in 2007 'is representative of a typical year,' Mr. Earnhart says. Carilion doesn't foreclose on homes and only collects when properties are sold, he says.

Dr. Murphy says Carilion only sues patients and places liens on their homes if it believes they have the ability to pay. 'If you're asking me if it's right in a right-and-wrong sense, it's not,' he says. But Carilion can't be blamed for the country's 'broken' health-care system, he says.

Ah, yes, the "broken" health care system made me do it, says CEO Dr Murphy.

Decreasing Access

One effect of the merger seems to be a squeeze on physicians who are not part of the integrated system, which presumably will decrease, not improve access to health care.

Some doctors who chose to remain independent say the number of patients referred to them by Carilion physicians plummeted. Carilion controls a large proportion of Roanoke's referrals because it employs a majority of doctors who make them, such as family practitioners, pediatricians and emergency physicians.

Joseph Alhadeff, an orthopedic surgeon who is a member of a private practice called Roanoke Orthopedic Center, says the number of joint replacements he performed dropped off sharply after he stopped getting such referrals from Carilion doctors, prompting him to plan to relocate to Pennsylvania. 'I spent seven years building up a practice and watched it evaporate in six months,' he says.

In fact, it appears that the integrated system was out to decrease the business of physicians not in the system.

Geoffrey Harter, an ear, nose and throat doctor at another Roanoke private practice, Jefferson Surgical Clinic, says Carilion-employed colleagues told him the hospital system asked them not to refer patients to doctors it didn't employ, calling such referrals 'leakage.' Keeping referrals within Carilion is lucrative for the hospital system because it ensures tests and procedures performed on patients take place at Carilion facilities.

Dr. Murphy says Carilion uses the term 'leakage' in internal marketing discussions and that he would rather see its doctors refer patients to other Carilion doctors to optimize their care. But he says Carilion doesn't require its doctors to keep referrals in-house even though it would be legal to do so.

Meanwhile, as the integrated system grew more powerful, its leadership appeared to use other tactics that have become all too familiar to readers of Health Care Renewal

Silencing Criticism

As tension between Carilion and Roanoke's independent doctors grew in 2006, a group of 200 doctors formed an organization called the Coalition for Responsible Healthcare to protest the Carilion Clinic plan. The group posted a petition on its Web site and put up billboards around Roanoke that read: 'Carilion Clinic. Big Dream. Big Questions.' The local newspaper, the Roanoke Times, covered the controversy in a series of articles written by its health-care reporter, Jeff Sturgeon.

A few months later, in March 2007, the Roanoke Times moved Mr. Sturgeon off the health-care beat after Carilion complained repeatedly about his coverage. Carilion says it communicated its displeasure to the paper's editors, but never asked that Mr. Sturgeon be reassigned. Carilion withdrew most of its advertising from the paper, but says it did that as part of a reallocation of its ad budget.

Follow the Money

As the system became more dominant, and more profitable, more money accrued to its top leaders, particularly, of course, its current and former CEOs.

In 2001, Dr. Murphy took the nonprofit hospital system's helm. Dr. Murphy, ... has a medical degree from Harvard but doesn't practice medicine....

Fueled by large, untaxed investment gains, Carilion's profits have risen over the past five years, reaching $107 million last year. Over the same period, the total annual compensation of its chief executive, Dr. Murphy, nearly tripled to $2.07 million. His predecessor, Thomas Robertson, received a lump-sum pension from Carilion of $7.4 million in 2003, on top of more than $2 million in previous pension payouts.

Carilion says Dr. Murphy's compensation is in line with comparable health-care organizations and notes he doesn't receive car allowances, a spousal allowance or club memberships. It says Mr. Robertson's pension accrued over a 32-year career at Carilion.

Members of Carilion's board of directors also seemingly profited from their relationship with the hospital system. The WSJ documented some major financial relationships among the hospital and companies in which board members had an interest.

A large part of the clinic conversion's costs have involved the construction of a new medical campus around Roanoke Memorial Hospital that began several years earlier.

The lead contractor building the site is Swedish construction giant Skanska. But one of the project's biggest beneficiaries has been J.M. Turner & Co., which is owned by Carilion board member Jay Turner. Carilion says it paid J.M. Turner a total of $14.9 million in direct contracting work from 2004 to 2007.

Dr. Murphy says Carilion's board authorized 'arm's length work' with J.M. Turner, but adds that "a case could be made that we shouldn't award work to J.M. Turner to avoid the appearance of impropriety."

Mr. Turner isn't the only Carilion board member with a financial stake in the new medical campus. Another board member, Warner Dalhouse, has invested in a hotel being built on the campus to accommodate patients and their families. HomeTown Bank, a local bank Mr. Dalhouse founded and of which he was until recently chairman, is financing the hotel's construction. Dr. Murphy and Mr. Turner sit on HomeTown Bank's board.

Carilion and Mr. Dalhouse say he didn't make his $130,000 investment in the hotel until after Carilion sold the parcel to Texas developers in early 2006. 'I wasn't dealing with Carilion. I was dealing with the new owners of that land who had paid fair market value for it,' Mr. Dalhouse says.

Management versus Mission

The Carilion Health System's statement of mission and vision are as follows

Mission Statement

Carilion Health System exists to improve the health of the communities it serves.

Vision

- Assure accessible, affordable, high quality healthcare that meets the needs of the community
- Motivate and educate individuals to improve their health
- Champion community initiatives to reduce health risk

Yet, the investigative reporting by the WSJ has shown how the increasing domination of local health care by the Carilion Health System has made health care less accessible and less affordable, despite its leaders' proclamations to the contrary. It has "educated" the local newspaper to reduce its critical coverage of the system's activities. Thus, the bigger and more dominant the health care organization, the more mission-hostile its leadership is likely to be. Meanwhile, increasingly mission-hostile leadership tends to become increasingly lucrative for its practitioners.

I submit that if we really want better quality, more accessible, more reasonably priced health care, we need to bust the new health care "trusts." We need smaller health care organizations with ethical leadership truly devoted to the health care mission. We need organizations whose governance is representative of key constituencies; accountable to patients, health care professionals, and the public at large; open and transparent; and which upholds clear ethical principles.