Nestled in the Commonwealth of Virginia between Salem and Vinton is the city of Roanoke, whose population
Question:
Nestled in the Commonwealth of Virginia between Salem and Vinton is the city of Roanoke, whose population was approximately 98,000 in 2010.1 The metropolitan area population was about 309,000.1 Bisected by the Roanoke River and circled by the Blue Ridge Mountain Parkway, Roanoke is the commercial and cultural hub of western Virginia and southern West Virginia.1,2 The community that became Roanoke was established in 1852.1 Early economic development of Roanoke resulted from its importance as the junction point for the Shenandoah Valley Railroad and the Norfolk and Western Railway.2 These railroads were essential for transporting coal from western Virginia and West Virginia.2 Roanokes service area includes a regional airport, shopping malls, a regional hub for United Parcel Service, and manufacturing plants for General Electric, Yokohama tires, and Dynax, a maker of friction-based automobile parts.2,3
CARILION CLINICCarilion Clinic employs almost 12% of Roanokes population. The Clinic includes 9 freestanding hospitals, 7 urgent care centers, and 220 (and increasing) practice centers, and it employs over 650 physicians in more than 70 specialties.4 The Clinic has 1,026 licensed beds, not including 60 neonatal intensive care unit beds.4 The Clinic had 48,659 admissions in fiscal year 201415.4 The Clinics joint ventures and related companies include the following: Carilion Clinic Physicians, LLC (real estate holding company) Carilion Emergency Services, Inc. Carilion Behavioral Health, Inc.
In March 2010, the same month and year the Affordable Care Act became law, the Clinic was ordered by the Federal Trade Commission to divest itself of an outpatient surgical center and an imaging center.5 Both had been acquired as it sought to re-create The Mayo Clinic medical delivery model. Led by Edward G. Murphy, M.D., from 1998 to 2011, Carilion Health System became Carilion Clinic, a vertically integrated healthcare system. During Murphys tenure the system expanded to include graduate and undergraduate medical education programs, a school of medicine (through a partnership with Virginia Polytechnic Institute and State University Virginia Tech), and, perhaps most impressively, Carilion established an accountable care organization in partnership with Aetna insurance company.4,5 Dr. Murphys total compensation was almost $2.3 million in 2007. Nancy Agee, the Clinics chief operating officer at the time, earned the next highest salary of about $800,000.6 When Murphy resigned in 2011, Ms. Agee was promoted to president and CEO. In fiscal 2014, Carilion Clinic net revenue was $1.5 billion.5 Agees salary was $1.9 million.7
CONTROVERSY IN ROANOKEDespite its philanthropic mission and positive effect on Roanoke, Carilion Clinic has not always enjoyed a good relationship with its community. (Carilion Clinics mission, vision, and values are shown in Appendix 1.)
In May 1988, the U.S. Justice Departments Antitrust Division sought to prevent the merger of Roanokes two hospitals: Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. The lawsuit sought to block the merger because of the monopoly it alleged would result. Less than one year after the suit was filed, the Fourth Circuit U.S. Court of Appeals found for defendants Memorial Roanoke Hospital and Community Hospital of Roanoke Valley. [T]he merger between defendant hospitals would not constitute an unreasonable restraint of trade under the Sherman Act 1. The merger would strengthen the competition between the hospitals in the area because defendant hospitals could offer more competitive prices and services.8 In the two appeals that followed, courts found for defendant hospitals, which then merged and were named Carilion Health System. The decision provided a legal basis for what is now the Carilion Clinic.
VERTICAL INTEGRATION: BECOMING A CLINICMurphy was always clear about his plans for Carilion Health System. In an August 2006 interview, he stated, Right now our core business is hospital services. In the new model, the core business will be physician services; the hospital will become ancillary.21 In a 2007 interview for Health Leaders Magazine, Murphy explained, Ive been enamored of this model of healthcare delivery for a long time.21 In Fall 2006, Murphy, his staff, and the leadership board of Carilion Health System announced their plan to create a new model for Carilions management characterized by teamwork and salaried physicians and other caregivers focused on patients across the spectrum of care.22 Murphy explained: The essence of the clinic model is that hospitals stop becoming independent businesses and start becoming ancillary services to the physician practice. If hospitals eventually want to provide better and more cost-effective healthcare, its a necessary shift.22 The transformation was planned for seven years with an 18-month phase-in of its new name, Carilion Clinic. Plans for Carilion Clinic included a 5050 partnership with Virginia Tech University in Blacksburg, Virginia, to establish a private, not-for-profit clinical research institute and a new medical school. Further, from 2007 to 2012 Carilion Clinic would add four or five fellowships for physicians to support its mission.22 Ground was broken for the much-anticipated university in early 2008.23 On July 20, 2009, the Virginia State Council for Higher Education approved the Virginia Tech Carilion School of Medicine as a postsecondary institution.24 Its first class matriculated in fall 2010.24
THE WALL STREET JOURNAL EXPOSUsually, an organization is pleased if the Wall Street Journal publishes an article about it. That is, of course, unless the story ignites a firestorm that leads to separate citizen and physician coalitions working against the organization and raises the specter of a word from Carilion Clinics prehistory: monopoly.
Nonprofit Hospitals Flex Pricing Power.In Roanoke, Va., Carilions Fees Exceed Those of Competitors: The $4,727 Colonoscopy was published on the front page of the Wall Street Journal August 28, 2008 (see Appendix 3). The author, John Carreyrou, explored Carilions history, including the 1989 antitrust case, its expanding market clout, and the strides toward its goal of vertical integration. The article suggested that some of the means used were questionable.25 Carreyrou asserted that skyrocketing healthcare costs in Roanoke were partially caused by, or possibly even led by, Carilion Clinic.25 In a press release, Carilion Clinic denied monopolistic practices or exploitative pricing and claimed it faced robust competition from Lewis-Gale Medical Center located in nearby Salem, Virginia.26 (See Appendix 4, and the link to general information about Lewis-Gale Medical Center in Appendix 5.) Carilion Clinic defended its pricing practices by noting it must cross-subsidize emergency departments and care for the uninsured.26 Unsettling to some, however, was Carilions practice of suing patients for unpaid medical bills. After Carilion obtains a court judgment, a lien is placed against the patients home. A lien on real property puts a cloud on the title, which prevents the owner from conveying the property with a clear title until the lien has been satisfied. Responding in the Wall Street Journal, Murphy stated, Carilion only sues patients and places liens on their homes if it believes they have the ability to pay. If youre asking me if its right in a right-and-wrong sense, its not. But Carilion cannot be blamed for the countrys broken healthcare system.24Murphy asserted that Carilions efforts to protect its financial interests meet legal requirements, but may be morally flawed. This position appears inconsistent with Carilions mission that Patient Care Comes First.
THE BACKLASHThe August 2008 Wall Street Journal article resulted in a community uproar and fueled physicians efforts to air their concerns about Carilion, including its anticompetitive actions and unfair pricing, and their desire to have open referrals for patients from outside Carilions health network.27 Citizen and physician coalitions met in hotel conference rooms and community centers to discuss the unfair practices and behaviors of Carilion Clinic. One, the Citizens Coalition for Responsible Healthcare, sponsored a petition that read as follows:
CURRENT SITUATION IN ROANOKEAs noted, Carilion Clinic has a medical school partnership, an expanding physician practice with a robust specialty list, and its own accountable care organization, which continues to show progress and increased membership. Three decades after the hospital merger controversy began in Roanoke, Virginia, the economic and healthcare environments have changed, the population is increasing, and healthcare costs are rising.25 When the antitrust case was brought in 1988, Roanoke had among the lowest health insurance premiums in Virginia; now, they are among the highest.28,29
DISCUSSION QUESTIONS:
(1) Identify the problems Carilion Clinic faces as it seeks to become a comprehensive, vertically integrated healthcare provider.
(2) Rank these problems in terms of their difficulty of solution.
(3) Develop arguments to support Carilion Clinics efforts to become a comprehensive, vertically integrated healthcare system.
(4) Identify reasons why competition is useful and why it is not useful in terms of healthcare cost, quality, and access. (
5) Why could Mayo Clinic develop a comprehensive, vertically integrated healthcare system, whereas Carilion Clinic has had so much difficulty?
(6) Identify the advantages and disadvantages of developing specialty services internally to achieve vertical integration compared with obtaining the same services by acquiring existing providers.
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson