Should Universities Crowd Out Private Health Systems?

Here’s a disturbing news item from North Carolina: The state university system uses its well-regarded medical school and its generous taxpayer subsidies to purchase, compete with, and potentially crowd out private non-profit hospitals and health systems. This is the story that Duke Cheston, a writer for the Pope Center for Higher Education Policy, tells in a carefully reported article for the Pope Center’s website. Cheston narrates the alarming growth of the University of North Carolina Health Care System (UNCHCS) from the 1940s, when it was merely a medical school with an affiliated teaching hospital at the public university’s main campus in Chapel Hill, to today’s “semi-autonomous medical/hospital/research apparatus that stretches throughout a significant part of the state.” UNCHCS is now a $2 billion-a-year-behemoth, with an apparent goal of limitless expansion well beyond the teaching and research that constitute the typical mission of medical schools.

Cheston’s article appears in the context of a May 12 bid by WakeMed Health & Hospitals, a private non-profit hospital facility in Raleigh, N.C., about 25 miles from Chapel Hill, to buy Rex Healthcare, another Raleigh hospital whose controlling interest is held by UNCHCS. Rex and WakeMed, a former public hospital operated by Wake County, N.C., that went private in 1997, are cross-town rivals, holding 33 percent and 46 percent of the hospital market share in Raleigh respectively. UNCHCS at first declared that Rex was not for sale, but in July it announced that it would consider WakeMed’s $750 million offer. Although WakeMed is clearly the larger entity in Wake County, WakeMed says that UNCHCS, by reason of direct and indirect state subsidies, is able to compete unfairly with the self-supporting WakeMed, which receives no government aid beyond reimbursement for Medicare and Medicaid patients. Furthermore, Wakefield reports that it delivers 80 percent of the uncompensated charity care delivered to Wake County’s indigent and deadbeat patients—even though Rex is part of a state entity with a self-described public-service mission. WakeMed and Rex had discussed a merger in 1999, but the talks ground to a halt when UNCHCS bought its controlling interest in Rex in 2000.

The morphing of university medical schools and their teaching hospitals into vast hospital/HMO complexes is hardly limited to North Carolina. As early as 1969 Harvard University’s health service merged with a Massachusetts HMO to form Harvard Pilgrim Health Care, a $2.6 billion operation that spans three New England states and now has only a nominal relationship with Harvard. BJC HealthCare, which operates 13 hospitals and a variety of clinics, hospices, and health-service operations in Missouri and southern Illinois was formed in 1993, when Barnes-Jewish Hospital, the largest hospital in Missouri and the major teaching hospital for Washington University, merged with Christian Health services to form a network of large urban hospital facilities and smaller suburban hospitals. The Mayo Clinic, originally affiliated with the University of Minnesota and now proprietor of its own freestanding medical school in Rochester, Minn., operates a similar network of 70 Midwestern hospitals and clinics. UNCHCS came into existence by legislative act in 1998, when the University of North Carolina’s affiliated hospitals merged with various clinical programs operated by its medical school.

Sprawling medical/HMO complexes drawing on the research, faculty talent, infrastructure, and prestige associated with major universities can make obvious economic sense and prove beneficial to patients. But when the major university is operated by a tax-supported entity, as is UNCHCS (other public examples are the UCLA Health System in California and the University of Michigan Health System), problems of unfair competition with private non-profits seems inevitable. This fiscal year (2010-2011) UNCHCS received $18 million from the state of North Carolina to subsidize indigent care—a subsidy not available to its private competitors. The amount, reflecting the state’s current $2.4 billion budget shortfall, is significantly less than the $36 million to $46 million it has received in previous years yet hardly insubstantial. In addition, according to Cheston, UNC’s medical school and other health schools will receive $217 million this year from the state, part of which will undoubtedly benefit UNCHCS.

It also seems only fair to ask how such medical complexes serve the goals of teaching and research to which university medical schools are supposed to be dedicated. Cheston points out, for example, that Rex, a chain of six Raleigh-area hospitals plus some “wellness”centers, rehab centers, and other facilities, is not even a teaching hospital accredited by the Accrediting Council for Graduate Medical Education (although UNC says it does run clinical trials and operate a program for radiation oncologists at Rex)—in contrast to WakeMed, which has been an accredited affiliate of UNC since the 1960s. The Rex acquisition seemed to have been a pure case of UNCHCS’s expansion for expansion’s sake. It was followed in 2008 by UNCHCS’s 2008 takeover of a hospital system in Chatham County, N.C., its construction of a new hospital in Hillsborough, N.C., and its taking over the management of Pardee Hospital in Hendersonville, N.C. As Cheston pointed out, the latest audit of the UNC Hospitals (the core facilities of UNCHCS in Chapel Hill) contains a $62.4 million spending entry murkily labeled “Healthcare System Assessments.” When asked about the $62.4 million (and the $28 million the year before labeled the same way), [UNC] vice president [Karen] McCall responded that the money would go ‘to build the clinical and academic programs we develop throughout the system to serve the people of NC.’” Cheston’s comment: “In other words, more expansion.”

Lack of fiscal transparency is another hallmark of UNCHCS. There is no official state audit of the system as a whole. Instead there are only individual audits of the individual participating hospitals and an unofficial audit issued by UNCHCS itself. It is thus difficult to get a clear picture of how UNCHCS spends its money (the $62.4 million is an example) or accounts for its revenues as a whole. Rex’s finances are particularly obscure. Although owned by a state entity, UNCHCS, Rex styles itself a private non-profit under Section 501(c)(3) of the Internal Revenue Code. The designation allows it to bypass North Carolina’s Ulmstead Act, which forbids state entities from competing with the private sector. Yet McCall told Cheston that Rex obtained a ruling from the IRS that as a public entity it does not have to file a Form 990, the tax return that federal law requires nonprofits, including hospitals, to file and that contains a good deal of information, available to the public, about revenue sources and expenditures.

It’s not surprising, then, that WakeMed is complaining about unfair competition from a behemoth public entity with special advantages not available to private nonprofits. What is surprising—and disconcerting—is that there seem to be no legislative brakes on UNCHCS’s potential capacity to drive private nonprofits such as WakeMed out of business over the long run, or simply to absorb them, as it did with Rex. “Service” to the public is one of UNCHC’s legislative missions, as it is with other publicly created university-based health systems, but surely “service” isn’t supposed to be a mandate for taking over all the health care in the state.

Charlotte Allen

Charlotte Allen blogs for the Los Angeles Times and writes frequently about cultural trends for the Weekly Standard.

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