onsolidation of health care organizations in the Cleveland area has accelerated during the past two years. Hospitals have been rapidly forming or joining hospital systems, and small systems are being acquired by or affiliating with larger systems. Many of these large new entities are aimed at a broader market -- northeast Ohio or even multistate regions. It is expected that eventually all hospitals in the area will be aligned in one of three or four large systems. Physicians also have been joining larger groups, and these groups are aligning with the emerging hospital systems. Because large numbers of physicians in the area were already salaried employees of hospitals or large group practices, such close alignments are not a new phenomenon in this market. Many of the medium and large primary care practices that were once free-standing have been acquired by larger hospital-affiliated entities. Hospitals also have been creating and affiliating with health plans.
While most of this activity has involved local organizations, large national insurers and hospital companies have begun to enter the market during the past year, to the consternation of most local providers and some community interest groups. Still, most hospitals (except those recently purchased by national for-profit entities) remain under local ownership and are not-for-profit. A smaller number of the health plans are locally owned, while many are regional or national organizations.
Three large provider organizations play central roles in the evolving Cleveland-area health system. They are organized around University Hospitals, the Cleveland Clinic and the Columbia/HCA-Sisters of Charity System. In addition, several smaller systems occupy particular geographic or service niches, and most of these are affiliated in some fashion with one of the three systems.
The University Hospitals Health System (UHHS) is centered around the 536-bed University Hospitals campus in Cleveland. It also includes the 122-bed Geauga Community Hospital and the 110-bed Bedford Community Hospital, as well as an extensive network of primary care and specialty physicians housed in two large physician groups, University MedNet, which was acquired in 1989, and University Primary Care Physicians, formed in 1994. In addition, UHHS has a managed care organization, QualChoice, with 87,500 members. All of these entities are owned by UHHS.
The Cleveland Clinic's system must be viewed through two lenses:
The Cleveland Clinic is a large multispecialty group practice of salaried physicians with an international reputation for excellence. The Clinic is a physician-driven organization that owns a 921-bed hospital. It recently completed the purchase of Marymount Hospital and is finalizing a long-term lease with Lakewood Hospital. More recently, the Clinic announced plans to merge with two smaller hospital systems, the 769-bed Meridia System and the 602-bed Fairview Health System. The Meridia System, located in Cuyahoga County, was the result of an earlier merger of five area hospitals. Previously, it was closely aligned with Ohio Blue Cross & Blue Shield. The Fairview Health System encompasses Fairview Hospital and Lutheran Hospital and an array of ambulatory care satellites throughout Cleveland's west side.
The Cleveland Clinic was also the principal organizer, along with the public MetroHealth system, of the Cleveland Health Network, the most extensive provider network in the Cleveland area. CHN describes itself as a physician- driven, contractual affiliation of nine hospitals and their associated physician-hospital organizations:
The third evolving system is the Columbia/HCA-Sisters of Charity system. This includes the three hospitals involved in a joint venture between Columbia/HCA and Sisters of Charity -- Timken Mercy, St. Vincent's and St. John's Westshore -- as well as the recently announced purchase of St. Luke's Hospital. This group collectively constitutes 1,240 beds located in Cuyahoga and Stark counties.
Other systems include:
The principal physician groups are all operating with, owned by or aligned with the major provider systems. The Cleveland Clinic is an 800-member multispecialty group practice of salaried physicians. UHHS owns two major physician groups: the 140-member University Primary Care Physicians Group and the 115-member University MedNet multispecialty group practice. In addition, UHHS is affiliated with the 150-member University Suburban group. At MetroHealth, approximately 320 physicians are salaried. As noted, small practices still persist on the west side of Cleveland and in the suburban counties.
ORGANIZATION CHANGE: PROVIDERS
The considerable consolidation of the past three years typically has been initiated by providers and has had horizontal (i.e., hospital to hospital) and vertical (i.e., hospital to physician group) elements. Dominant providers have sought to strengthen their market power by purchasing smaller hospitals and physician groups. For example, University Hospitals acquired Geauga and Bedford Community hospitals and the MedNet physicians group, and the Cleveland Clinic acquired Marymount Hospital.
To a lesser extent, several smaller providers have sought to increase their market power by merging with each other. The Meridia System did this in 1984, as did Fairview and Lutheran in 1986 and, more recently, St. Joseph's and Lorain Community Hospital. Several of these systems subsequently formed partnerships with a larger system. For example, the Fairview and Meridia systems each negotiated separate deals with the Cleveland Clinic in 1996.
A third level of consolidation involves the entry of two for-profit hospital chains in the Cleveland market in 1994. As noted above, Columbia/HCA entered into a three-hospital joint venture with the Sisters of Charity system, and shortly thereafter added a fourth hospital. PHS has acquired five area hospitals.
This consolidation trend appears likely to continue. Some respondents speculate, for example, that PHS may seek additional hospital acquisitions. PHS, University Hospitals, Columbia/HCA and the Cleveland Clinic all reportedly tendered offers for the Meridia System in mid-1996 before its acquisition by the Cleveland Clinic was announced.
The alignment of most suburban and rural hospitals with one or another of the emerging large Cleveland-based systems is another important phenomenon. These affiliations span a wide variety of relatively nonexclusive agreements, typically around referral relationships that are designed to give the Cleveland-based sponsor greater geographic reach and to convey brand- name support via specialty referral networks for the suburban institutions. The suburban and rural hospitals are receptive to working with these large city hospitals because they believe they need these partnerships to participate in managed care and to survive in an increasingly competitive environment. So far, most of these alignments appear to be high-level organizational relationships that have not had significant effects at the clinical or operational level.
Changes in the physician sector have occurred along two lines:
The Cleveland area historically has been characterized by large groups of salaried physicians, employed either by large multispecialty groups (the Cleveland Clinic, MedNet) or by hospitals (MetroHealth, University Hospitals). More recently, the large provider systems, as well as some less dominant hospitals, have been aligning with large numbers of additional physicians.
University Hospitals has actively pursued ownership of physician practices. The University Primary Care Physician group houses the primary care practices purchased by the system, and University MedNet is a 115-physician practice owned by UHHS. In addition, University Suburban is a large multispecialty group practice closely affiliated with but not owned by UHHS. The current head of University MedNet was recently named to the newly created position of senior vice president of system development to lead the further integration of these physicians into the UHHS clinical enterprise. Physicians in each of these groups admit many of their patients to University Hospitals.
As noted, the Cleveland Clinic has pursued development of the Cleveland Health Network (CHN), which is governed by representatives of the nine participating hospitals and their affiliated physician-hospital networks (PHOs). Described by some as a super-PHO, CHN identifies itself as a physician-led and physician-driven organization that was formed to contract with managed care plans. It is currently a highly decentralized organization.
Other provider groups, like Meridia, have also purchased physician practices. A number of observers commented that the price of physician practices has risen -- beyond their value according to some -- as demand has increased. Respondents also described a postsale pattern of declining productivity and older physicians cashing out. At least two hospitals reported losing medical staff to a larger system, which further diminished their competitive position and ability to align their medical staff with the institutions' strategy.
Traditional fee-for-service plans are still strong in Cleveland's insurance market, with more recent growth in PPO and POS products. Overall, HMO penetration is about 19 percent.14 The largest and most influential health plans are: Ohio Blue Cross & Blue Shield, Blue Cross Anthem, Kaiser Permanente and United Health Care.
The number of plans has grown recently as large national carriers, including Aetna, Prudential and Cigna, have entered the market. Additional entrants are expected to pursue new opportunities in Medicaid managed care and Medicare risk-contracting. Cleveland is still a relatively high-cost, high-utilization market with opportunities for profit, and there are few policy or regulatory barriers to entry. The Medicaid managed care market is currently dominated by two local plans, Personal Physician Care and Total Health Care. Most plans offer a wide range of PPO, POS, HMO and indemnity products.
Managed care plans typically have loose, overlapping and geographically extensive networks that include 20 or more hospitals. Almost all networks include either University Hospitals Health System, the Cleveland Clinic or both. Networks also typically include one of the high-volume hospitals for maternity care, such as Meridia Hillcrest or Fairview, as well as smaller acute care institutions. Provider selection generally consists of targeting a small subset of hospitals for exclusion rather than identifying specific institutions for inclusion. Providers are pressuring plans to include all components of the newly merged systems in their networks, rather than the individual components with which they previously contracted. Networks generally appear to be expanding rather than contracting, although at least one large plan is reportedly planning to begin deselecting physicians who are infrequently used by its enrollees. Discounted fee-for-service is still the dominant form of provider payment in the managed care market, and there is little risk-bearing by providers and limited capitation.
Although its share has declined in the past 10 years, Ohio Blue Cross & Blue Shield dominates the insurance market with a wide range of products. It is closely aligned with the Council of Small Enterprises. In recent years, Blue Cross has experienced financial difficulties and has crossed swords with University Hospitals and the Cleveland Clinic at different times. Blue Cross has been at the center of several major attempts at vertical integration of providers and insurers.
The attempted purchase of Ohio Blue Cross & Blue Shield by Columbia/HCA on the heels of the for-profit hospital company's joint venture with the Sisters of Charity system last year generated considerable controversy. This potentially powerful vertical integration, which presumably would have directed the care of large numbers of Blue Cross members to Columbia/HCA-owned hospitals, was opposed by a coalition of organized labor and other groups, and was reviewed by Ohio's insurance commissioner, attorney general and the courts. The national Blue Cross and Blue Shield sued Ohio Blue Cross & Blue Shield to disallow its use of the valuable Blue Cross shield trademark. In November 1996, a district court ruled in favor of the national association, and ordered the Ohio Blues to stop using the trademark immediately.
Anthem, a Blue Cross entity with a strong base in the Indianapolis and Cincinnati areas, entered the Cleveland market in the mid-1980s. Earlier this year, Anthem announced plans to expand by purchasing Blue Cross of New Jersey. Like other large plans, Anthem markets a wide range of products, including a PPO, POS, exclusive provider organization (EPO), HMO and a recently approved Medicare managed care plan. Anthem may receive a boost from the district court decision in the Ohio Blues case, and it is poised to step in as the bearer of the trademark shield in Ohio.
Kaiser Permanente is a mixed-model (group and independent practitioner association or IPA) HMO. Its core product is a closed-group HMO, although PPO and POS options were recently added. Kaiser has an exclusive relationship with the Ohio Permanente Medical Group of salaried physicians and recently affiliated with the Cleveland Clinic, where it leases beds, and began developing relationships with nonsalaried community physicians.
ORGANIZATIONAL CHANGE: HEALTH PLANS
Health plans have been less involved than hospitals and physician groups with local ownership changes, with one important exception. Ohio Blue Cross & Blue Shield has explored vertical integration with providers on at least three occasions:
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