In early May, WakeMed Health and Hospitals made headlines by offering to buy Rex Hospital from the University of North Carolina Health Care System. WakeMed is Wake County’s largest hospital network and Rex is its second. UNC officials initially said that Rex was not for sale, but have since formed a committee to study the issue. Among other reasons, WakeMed is seeking Rex in order to stop what it views as unfair competition from a government-owned entity in Wake County.
The controversy over the bid sheds light on something that has been largely ignored—the rapid growth of the university’s health care system. What started in the 1940s as a state-run medical school that added on a teaching hospital has morphed into a semi-autonomous medical/hospital/research apparatus that stretches throughout a significant part of the state. UNC claims it is just fulfilling its three-part mission of research, teaching, and service. But the rapid growth—and other controversial activities, like the health care system’s recent transfer of $20 million to UNC-Chapel Hill and its more than $700 million in unrestricted reserves—raise several important questions. For instance, what are the limits to that mission, if there are any, and what is the proper role of the university system—and the state government of North Carolina—in health care?
Other issues raised by the potential purchase include the relative lack of transparency in the UNC Health Care System (including potential conflicts of interest surrounding system CEO Bill Roper) and Rex’s complex relationship with the rest of the UNC system, which allows it to act as a private company when beneficial and as a public entity when that is most advantageous.
The 2000 purchase of a controlling interest in Rex Healthcare marked a major shift in the direction of the UNC system. Prior to that, UNC Health Care had been limited to the main campus in Chapel Hill and a number of research centers. The acquisition of Rex, which the Raleigh News & Observer acknowledges is being used “as a foundation for [UNC Health Care’s] expansion strategy,” meant that the University of North Carolina system was no longer merely a university system.
The State’s Health Care System
The UNC Health Care System (UNCHCS) came into being in 1998 when, by an act of the General Assembly, UNC Hospitals (the various hospitals in Chapel Hill) and the clinical programs of the UNC School of Medicine merged. Since then, UNC Health Care has been expanding rapidly, building and purchasing an array of hospitals and clinics.
And that expansion has not been limited to Rex (which is now composed of the main hospital in Raleigh, five branch campuses, four “wellness centers,” two “rehab & nursing centers,” two cancer centers, and an assortment of small practices). Various other expansions of the UNC system include the purchase of a third hospital system in Chatham County in 2008, the construction of the women’s and children’s hospitals in 2002, the construction of a new hospital in Hillsborough, and taking over the management of Pardee hospital in Hendersonville.
On reflection—and considering that this overview is by no means a complete picture of the scope of UNCHCS—the UNC Health Care System’s growth could be described more accurately as “mission explosion” than mission creep.
And there are no plans to stop.
“I don’t have a specific demarcation line,” said UNCHCS vice president of public affairs Karen McCall when asked by the Pope Center where the growth will end. Expansion, she said, is crucial to meeting UNCHCS’s three-part mission.
“As the state of North Carolina continues to grow, so too will the UNC Health Care System,” McCall pledged, “so that we will be able to continue to fulfill each of the three parts of our mission.”
Another recent bold, even brazen, assertion of UNCHCS’s independence was the system’s transfer of $20 million to the University of North Carolina at Chapel Hill, ostensibly to help ease budget cuts. This is in direct contradiction to the decisions made in the much-wrangled-over and recently passed state budget and, more broadly, the democratic process.
WakeMed officials complain that UNC Health Care is growing rapidly because of government handouts. For example, UNCHCS is receiving $18 million this year (fiscal 2011-2012) from the state for indigent care, or the medical treatment of those who can’t pay. From fiscal year 2008 to fiscal year 2011, the state subsidy to the UNC health care system for indigent care ranged from $36 million to $47 million. WakeMed and other private hospitals do not receive similar subsidies.
In addition to drawing attention to the expansion and financial advantages of the UNC system, WakeMed’s proposed takeover has brought to light a number of transparency issues within UNC Health Care.
Although it is a state agency, and most state agencies are subject to audits by the state auditor, the UNC Health Care System is not audited as a unit. The system as a whole issues an unaudited statement of revenues and expenses, and its individual hospitals are audited by the state, but not the system itself. According to McCall, “the system is not audited as a whole because the UNC Physicians and Associates [the billing office in charge of paying doctors in the system] is a part of UNC-Chapel Hill and falls under their audit. This was the recommendation of the state auditor.”
This leaves significant gaps in transparency. For example, in last year’s state auditor’s report of UNC Hospitals (the primary locus of the UNC Health Care System which includes a number of individual hospitals in Chapel Hill), it is unclear what $62.4 million was spent on.
This amount is listed in the auditor’s report as “Health Care System Assessments.” Dennis Patterson of the state auditor’s office told the Pope Center that those assessments are “primarily a transfer to the UNC Health Care System Enterprise Fund.” He explained: “Our understanding is that the Enterprise Fund is used to finance research and other needs related to health care initiatives, but we do not audit the Enterprise Fund, so we cannot say specifically where those funds are expended.”
When asked about the $62.4 million (and the $28 million the year before labeled the same way), vice president 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.” In other words, more expansion. But how much money was distributed to which locations is unclear, and without an audit of the entire system, it may never be clear.
Among other issues that could use more sunlight is the money that UNC Health Care CEO Bill Roper makes as a board member of two private companies. Roper receives more than $750,000 from the two companies each year—$483,949 from Colorado-based DaVita, Inc., and $272,789 from New Jersey-based Medco Health Solutions. This is in addition to Roper’s $717,600 annual compensation from UNC. These positions pose a number of potential conflicts of interest—because both companies sell medical services—but the only places that information on Roper’s board pay is publicly available are Securities and Exchange Commission documents. Those documents are “voluminous, written by lawyers, and difficult to decipher by those inexperienced in digesting them,” wrote the Triangle Business Journal’s Jason deBruyn in the June 3, 2011, issue that broke the story about Roper’s multiple compensations.
A Closer Look at Rex
To return to Rex Hospital, whose proposed purchase started the recent discussions, that hospital’s finances are particularly obscure. Rex has an odd organizational structure, which allows it to escape scrutiny. Rex is a not-for-profit private entity controlled by a public entity. “We purchased the right to be the sole member of their board,” explained McCall.
So, this arrangement allows Rex to define itself as a 501(3)(c)—a private, not-for-profit organization—when propitious, and as a public entity when that designation is most opportune, according to WakeMed chief financial officer Mike DeVaughn. He said “they currently claim for public records request purposes that they aren’t subject to them [the requests] because they are a private 501(3) entity.”
UNC’s McCall told the Pope Center that this was not the case. Instead, UNC had already “provided over 500,000 pages of documents to WakeMed, including records for all financial transactions between UNC Health Care and Rex Healthcare and extensive documentation of our indigent care expenditures.” She said the sheer volume of requests made by WakeMed made them difficult to process in a timely fashion.
Less controversial is that Rex’s private status allows it to avoid having to comply with the Umstead Act, a North Carolina law prohibiting state entities from competing with private ones. “Rex Healthcare is a private, not-for-profit hospital,” explained Karen McCall. “Therefore, it does not fall under the auspices of the Umstead Act.”
But for other intents and purposes it is public. According to McCall, “the IRS ruled in 2000 that Rex does not have to file a [form] 990,” a report comparable to a 1040 that private non-profits usually are required to supply to the IRS and make available to the public. There is “no other hospital that gets the luxury [of not filing 990’s],” said WakeMed’s DeVaughn.
Public or private, Rex—and, by extension, the UNC Health Care System—is certainly growing. At a June 9 presentation by UNCHCS CEO Bill Roper to the UNC board of governors, Roper proclaimed “the sale of Rex would jeopardize our ability to serve the people of North Carolina … [due to] lack of resources to maintain or expand medical training to Charlotte or Asheville [and an] inability to cross-subsidize research and education missions.” That statement reinforces other evidence that UNC Health Care System has major expansion plans and that Rex is a key enabler of those plans.
The fact that Rex is not a teaching hospital also shows that UNCHCS is becoming increasingly divorced from its primary goals of teaching and research, the proper aims of a university system. According to WakeMed’s DeVaughn, there is no research or teaching going on at Rex. McCall disputed this, saying, “Numerous UNC clinical trials and training of radiation oncology therapists occurs at Rex.” Even though that may be the case, it seems clear that Rex’s primary function is neither teaching nor research. It is not accredited as a teaching hospital by the Accrediting Council for Graduate Medical Education (ACGME, the group in charge of such things), and training radiation oncology therapists represents a narrow category of teaching. Moreover, private hospitals such as WakeMed (which, incidentally, is an accredited teaching hospital) also conduct research and clinical trials. Ownership by the state appears to add little to these functions.
Necessary and Proper?
Now that we’ve taken a look at the UNC Health Care System, let’s return to the question of the proper role of the state in the health care industry. The 1998 law creating UNCHCS lays out the three-part mission of the system, but does not specify any limits on that mission.
It should. And, if UNCHCS is going to continue to compete with private providers, it should not receive special subsidies from the state government, as it does now. This gives it an unfair advantage that it is using to gobble up (and potentially monopolize) the state’s health care resources.
The state government should also move to make the UNC Health Care System—and Rex, especially—more transparent.
Moreover, the University of North Carolina system should be a university system, not a state-run health care system or a social welfare program. As such, providing care should be secondary to its teaching and research missions. Other organizations are willing and eager to carry out the role of providing health care. Consequently, as Rex is only secondarily engaged in teaching and research, its sale would not harm UNC’s legitimate functions very much.