Wake Medical Center is hard to miss. It rises tall and pale from the grassy embankment along the Beltline, the asphalt loop that rings Raleigh, N.C.
The massive, 652-bed complex has grown since the hospital converted to a private, not-for-profit from a public hospital last year. With legal restrictions loosened, WakeMed is pursuing patients beyond the Beltline and has even formed its own HMO.
Not much farther along the Beltline lies 160-bed Raleigh Community Hospital, once the only for-profit hospital in town. It was Columbia/HCA Healthcare Corp.'s foothold in a fast-growing market until two months ago when it was sold to Duke University in Durham for $185 million -- the school's first big step into Raleigh's healthcare landscape.
As the big players get bigger, North Carolina's most competitive market is exploding, with a population of 1 million that's growing by 10% a year.
The metropolitan statistical area boasts 14 hospitals with an average occupancy rate of 61.9%, according to SMG Marketing Group, a Chicago-based healthcare information and marketing consulting company. The average number of patient days per 1,000 residents is 1,149, higher than the national average of 1,038. Profit margins for these hospitals top 12%, nearly double the national average (See chart, p. 60).
Hospitals, physicians and managed-care companies all want a piece of this rapidly growing stretch of Interstate 40, and the competition is creating more and better services.
Fueling the growth is Research Triangle Park, the 6,800-acre business village between Raleigh and Durham that 130 companies call home. Blue chips such as IBM and Glaxo Wellcome, the pharmaceutical giant, have major research facilities there. The park employs a total of 37,000 people and is still growing.
"The most competition in the state is here in the Triangle," says Jeff Copeland, vice president of healthcare services development for Blue Cross and Blue Shield of North Carolina, the state's largest insurer. "You've got two huge academic medical centers 12 miles apart."
"The people who live here don't understand the quality of the healthcare they have for an area of this size," says Michael Israel, chief executive officer of Duke University Medical Center and vice chancellor for health affairs. "We have services equivalent to any community in the world, and that's remarkable."
The Triangle population is mostly young, middle class and highly educated -- an attractive group to providers busily expanding services for young mothers and children.
This new generation of North Carolinians also includes a large group of immigrants from mature managed-care markets. Unlike many natives, these transplants generally support managed care.
Many of these newcomers have landed in Cary, an affluent Raleigh suburb of 85,000 people that is nestled between the city and the research park. Cary, the state's fastest-growing town, has become a battlefield for large providers who want a loyal following of healthy patients.
Size does matter in such a competitive climate, and growth is not limited to the exploding population or the economy.
As Joseph Bauers, the Blues' director of institutional networks, puts it: "We're going through in a couple of years what other states went through in 15 years. It's a tough market."
A piece of the action. When the dust settles in Durham, Raleigh's sister city to the northwest, Duke University will have a huge piece of the local healthcare pie.
Last month, 888-bed Duke University Medical Center assumed management of 216-bed Durham Regional Hospital, a contract it had sought for nearly two years. The Durham County Commission approved the 20-year, $142 million lease deal in June, giving Duke control of 100% of the private, acute-care beds in Durham County.
That, coupled with Duke's recent acquisition of Raleigh Community Hospital in adjacent Wake County, gives the academic powerhouse a healthy slice of the market.
"Academic medicine affects the entire area," Israel says. "If you spoke with a number of corporations in the Triangle, they will say the universities are the key aspects. Outside of a few areas in the United States, Raleigh-Durham is lucky to have such good medical resources."
Earlier this year, Duke trustees voted to spin off Duke University Health System into a wholly owned, not-for-profit subsidiary of the university with its own board of directors. The new structure includes all the clinical components but excludes academic groups, such as the faculty.
"Managed care was a factor," Israel says. "It forced us and lots of other academic medical centers to look at themselves and make changes. The managed-care companies aren't lacking for options here. They can exclude you if they want to."
The purpose of the new governance structure, Duke officials say, is to give the organization more flexibility to purchase other healthcare organizations or form joint ventures with them -- and they're already taking advantage of it.
Duke has made some important nonhospital purchases, including a merger with Triangle Hospice and a 50% share in St. Joseph's of the Pines, an assisted-living company.
Duke also owns a home infusion company and recently picked up United Methodist Retirement Homes, which has three facilities.
Duke's medical center is moving quickly to form an integrated healthcare network -- one of the first in the area. Just under 20% of the hospitals in the MSA belong to networks. That's less than half the national average, 41.4%
"If you go back to look at the medical center before it was a health system, you would see this Duke blue dot in Durham," Israel says. "We had everything on-campus, and the patients were traveling here.
"Today, the system has three hospitals and joint ventures with other hospitals in a 17-county area," he says. "People here believe we've done a relatively good job of integrating vertically and horizontally."
Duke also has an affiliation with an 800-physician clinic and 17 owned physician practices. The university recently formed its own independent practice association, PrimaHealth, which includes 1,000 physicians.
"We have an outreach program that works with physicians so patients don't have to leave their communities," Israel says.
Cautious flirtation. Other hospitals have been cautious in their flirtations with physicians. Raleigh got a late start on practice acquisitions, giving the market a chance to see the problems elsewhere.
Durham Regional owns two small practices with a total of two physicians.
"One of the smartest things we ever did is not get into the physician practice business," says Don Brady, head of community relations at Durham Regional. "If you talk with hospitals around the country that have bought practices, it's a difficult thing to manage. We have about 400 doctors on our medical staff, and there's no reason for us to own a practice in this market."
In fact, the market is saturated with physicians, providers say. The competition among physicians means hospitals don't need to gobble up profitable practices.
"There is an abundance of physicians in this market," Brady says. "You can imagine with two medical schools so close that it's not a problem."
Attracting quality physicians to the area is not an issue, either, says Becky Christian, a spokeswoman for WakeMed.
"The Raleigh area is a wonderful and attractive place to live," she says. "It's a great place to raise a family. It's not a hard sell. But it's more difficult for us at our affiliated hospitals in outlying areas."
WakeMed owns one physician practice.
"Our basic strategy has been not to buy them but to partner and collaborate with them," Christian says. "But we purposely didn't purchase physician practices. We felt physicians would be happier in the long term if they retained control. That sets us apart from others in the market."
Managed-care catalyst. Despite a late start, managed care has become the catalyst for sweeping changes in North Carolina.
"It's been a steep learning curve for all health plans," Bauers says. "Four years ago, you could count your managed-care members on your hands. In December 1994, 5% of Blue Cross' members were enrolled in managed-care plans. In December 1997, 43% of Blue Cross members were in managed care. Our overall membership hasn't changed, but the composition has changed."
Raleigh-Durham is leading the charge, with 42% of its population enrolled in HMOs -- more than double the statewide percentage.
"People are more receptive to managed care in the Triangle area," Copeland says. "There are more outsiders here who are accustomed to employers offering services. That's still a foreign concept in East and West Carolina."
Because these experienced patients demanded access to more providers, the market went from exclusive deals between one hospital and one HMO to contracts between multiple providers and plans.
"It's a buyer's market from an insurer's point of view," Brady says. "We compete against other facilities for contracts. Prior to two years ago, we were the single hospital for Kaiser Permanente in this market. Then they signed a contract with UNC Hospitals (in nearby Chapel Hill), and we lost 7% of our patient days.
"But there are some wins," he says. "We later signed a big deal with Blue Cross. It's very competitive."
Milo Brunick, director of managed-care contracting at WakeMed, agrees.
"We're seeing a switch in strategy," Brunick says. "Most of the plans in the area have us as part of their network. Plans that we weren't part of, we are now part of. We're starting to see the benefit of those patients coming."
Providers weren't hit too hard by the entree of managed care, because of the state's rigorous certificate-of-need law, Christian says.
"Because North Carolina is a CON state, we weren't way over capacity like some other markets," she says. "We didn't take the hits in occupancy the way other markets did when managed care came in."
What makes the competition colorful is the fact that the larger hospitals are starting their own HMOs.
WakeMed owns a 51% interest in Generations HMO, and UNC Hospitals owns the remaining 49%. Duke has a joint venture with New York Life Insurance called WellPath Community Health Plans, the fastest-growing managed-care company in the state, the university claims.
"They (providers) are our customers but our competitors, too," Bauers says. "That creates some interesting dynamics. It's hard to tell if it's an academic interest or a purely business interest. Most of those providers had been our customers for so long. We had Duke employees for 50 years."
For the hospitals, owning an HMO is a good strategy, Brunick says.
"We don't have to be too concerned with the managed-care side," he says. "Now we have to encourage physicians and educate employers."
Risk and sympathy. Dabbling in risk may make hospitals more sympathetic to the health plans with which they do business.
"There's pressure on us, on providers, to perform (financially)," Bauers says. "Lots of providers got burned with full-risk contracts. Everyone's been learning."
The new entrants to the market are some of the biggest names in managed care -- Aetna U.S. Healthcare, United, PHP and Cigna. Cigna came into the market by acquiring a homegrown HMO, Healthsource, the state's largest.
"The general theme (in this market) is that you can't stand alone," Bauers says. "Local plans are selling to large plans. There's safety in numbers, and it increases clout in negotiations."
Gone private. Before Duke's health system remade itself into a more flexible organization, WakeMed became one of the first hospitals in the state to convert itself from a public hospital to a private not-for-profit.
"When we had public status, we couldn't do joint ventures with physicians," WakeMed's Christian says. "We couldn't do joint ventures with any private entity, because we were constrained by state law in how we invested our money."
Since it went private in April 1997, WakeMed has earned between $5 million and $10 million on its investments -- something it was unable to do as a public hospital. But more important, WakeMed can focus on serving patients outside Raleigh and Wake County.
"We couldn't put facilities or network services outside the county (when we were public)," Christian says. "Now we have lots of patients come from outside Wake County. Half our business comes from outside the county."
WakeMed has affiliations with two outlying hospitals: 88-bed Betsy Johnson Memorial Hospital in Dunn, about 30 miles south of Raleigh, and 146-bed Sampson Regional Medical Center in Clinton, roughly 60 miles south of Raleigh.
"We had a third affiliation with Raleigh Community Hospital, and there are a lot of questions as to what that means now," Christian says.
Duke also is eyeing outlying areas.
"In North Carolina, 60% of the state's population live outside the three urban areas (Raleigh-Durham, Charlotte and Winston-Salem)," says Jim Knight, an associate vice chancellor at Duke. "A good chunk of the patient body flows in from surrounding counties. What you've got are two medical schools eight miles apart, so there's an enormous amount of work going on in rural areas."
While the hospitals in Raleigh-Durham decline to refer to one another as "competitors," the battle lines have been drawn over certain lucrative services.
WakeMed, Duke and UNC all boast beefed-up pediatric services, clamoring to cater to the young population. Duke recently opened a children's health center near its main inpatient facility in Durham. Raleigh's Rex Healthcare and WakeMed have both opened medical offices in Cary, the city's bustling suburb. At its main campus, WakeMed also features a pediatric emergency room, designed to treat young patients more comfortably.
For cardiac care, WakeMed and Duke are two of the state's busiest sites. WakeMed maintains a 27-room hotel adjacent to its cardiac unit for families of patients from surrounding counties.
"The hotel is a market response," Christian says. "We want to make it easy for patients to come here, easy for physicians to treat people here."
Exit Columbia. The Research Triangle has been like the Bermuda Triangle for for-profit hospital companies.
Columbia, which owned Raleigh Community Hospital, bowed out of the market last month, agreeing to sell the facility to Duke.
Other attempts to enter the market have been thwarted or rejected. Brentwood, Tenn.-based Quorum Health Group bid on Durham Regional, but the long-term lease deal went to Duke, the only other acute-care provider in the county.
"Columbia's exit will have an impact," says Christian of WakeMed, which thought about buying the hospital before Columbia's troubles began. "It will definitely change the game."
But Don Brady of Durham Regional says the Columbia facility was too small to have had much impact on the market.
"It was a nice little upscale hospital that you didn't hear much about," he says.
If the sale does have an impact, it is unclear what that will be.
Another guaranteed change is brewing: Managed care is on the horizon for Medicare and Medicaid.
"We're still at the forefront of that contracting," says WakeMed's Brunick. "It will be a big focus for all hospitals and will really start hitting the operations of hospitals."
To anticipate the market's future, you only have to read the signs -- literally. Responding to an influx of Spanish-speaking people attracted by the robust economy and quality of life, hospitals are trying to post bilingual signs in emergency rooms.
"We're trying to translate everything into Spanish," Brady says. "We're just amazed at the demand for it."