July 31, 2008

Novant Plants Its Flag on Hospital Giants’ Turf

By Sabine Vollmer, The News & Observer, Raleigh, N.C.

Jul. 31--Knock, knock. Who's there?

It's Novant Health trying to get into the Triangle.

That's no joke.

The state's second-largest hospital chain is trying to shake up the competitive landscape in one of North Carolina's most attractive health-care markets. The Triangle's three established hospital systems -- UNC Health Care, Duke University Health System and WakeMed -- aren't laughing.

Novant runs eight hospitals in the Charlotte and Triad regions and one on the coast. The chain last week announced plans to build a $110 million, 46-bed hospital in Holly Springs, a community in fast-growing western Wake County.

Novant executives insist they have eyes only for Holly Springs, and the nonprofit health-services chain will face a tough fight to win state regulators' approval.

But this market's established medical providers have reason to be nervous about a potential Novant foray into the Triangle, said Steve Graybill, a senior benefits consultant for Mercer Human Resource Consulting in Charlotte.

"They are a strong operator," Graybill said. "I don't think [they] ... enter a market without plans to grow. They may look to expand further, acquire somebody."

Drawn by jobs, moderately priced housing and a mild climate, thousands of newcomers move into Triangle subdivisions every year. Wake County, home of some of the fastest-growing communities in the nation, is alluring to medical-service providers looking to attract new patients with health insurance.

Even as the broader economy slows, the region's hospitals continue to expand to meet increasing demand, providing a major bright spot in the region's commercial development. Expansions or new facilities are under construction in Clayton, Smithfield, Raleigh, Durham and Chapel Hill.

One factor that state regulators will consider in reviewing Novant's bid is the effect on medical costs.

In health care, more competition creates more choices for consumers, but it doesn't necessarily lower costs. In areas where available medical services outstrip demand, costs tend to rise, said Alwyn Cassil of the Center for Studying Health System Change, a Washington think tank. "If it's there, it's going to get used, whether it's needed or not."

Based in Winston-Salem, about two hours west of Raleigh, Novant has aggressively expanded in the past decade. In addition to its hospitals, the chain owns nursing homes, physicians practices and medical diagnostic facilities from southern Virginia to northern South Carolina.

Two years ago, an invitation from Holly Springs leaders turned Novant's attention to the western edge of Wake County.

About 30 physicians in Durham, Cary and other cities are affiliated with Novant. They are prepared to refer patients to the Holly Springs hospital should state regulators approve the project.

They're looking for an alternative to the existing providers, said Carl Amato, a Novant executive who works with doctors and community leaders in areas where the chain is expanding.

What Holly Springs community leaders sought when they called Novant was better medical care that was closer and had convenient parking, Amato said.

WakeMed offered expansions at its facilities in Cary and Apex. Rex proposed an outpatient facility in Holly Springs. Only Novant was willing to propose a hospital in town, complete with maternity, intensive-care and inpatient surgery beds, an emergency room and outpatient care.

In a bid to keep Novant out of the Triangle, WakeMed wants state regulators to focus on the northeastern corridor of the county and its proposal to build a women's hospital in North Raleigh. Rex, for now, seems more comfortable joining Novant than fighting it.

Rex is working with Novant to move Franklin Regional Medical Center to the northeastern edge of Wake County. In Holly Springs, Novant isn't a competitor, Rex spokeswoman Melody Hunter-Pillion said.

For services the hospital cannot provide, Novant will seek partnerships with existing providers, said Mark Billings, who is driving Novant's efforts to build the Holly Springs hospital. "We'll be looking to collaborate with other providers to keep the care as close to home as possible."

But as the community grows, Novant plans to add facilities and services, Billings said.

It's a strategy Novant has followed in other markets, said Graybill, the Mercer consultant.

In 2003, Novant set its sights on Wilmington, where beach houses and condominiums were springing up. New Hanover Regional Medical Center rejected a $625 million buyout offer.

Three years later, Novant took over Brunswick Community Hospital in Supply, a coastal community 25 miles from Wilmington.

Last year, state regulators approved Novant's plan to replace the Supply hospital with a new one nearby, over the objections of New Hanover Regional Medical Center. A few months later, Novant bought three urgent care centers in Brunswick County.

In November, the chain added MedQuest, a national provider of diagnostic imaging services with a facility in Durham. Four months ago, it bought a 27 percent stake in seven hospitals that a Florida chain owns in the Carolinas.

Plans to build three hospitals in the Charlotte and Winston-Salem areas are in the making.

Rapid expansion saddled Novant with about $1.4 billion in debt. But debt-rating agency Fitch affirmed that Novant's financial health is strong.

"They've consistently shown growth, and they pay attention to their expenses," said Jeff Schaub, senior director of Finch's not-for-profit health care group.

Novant has been prudent, Mercer's Graybill said. But time will tell how it will do in the Triangle.

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