Capacity Expands in Unrestrained Market:

In September 1998, a research team traveled to Little Rock, Arkansas, to examine the local health system, its evolution and how those changes were affecting consumers. More than 40 market leaders were interviewed as part of the Community Tracking Study carried out by the Center for Studying Health System Change (HSC) and The Lewin Group. Little Rock was one of 12 communities that HSC tracked on a biennial basis through a mix of site visits and surveys. Individual community reports were released after each round of visits. The initial site visit in September 1996 created the baseline for tracking subsequent developments. The Little Rock market covered a four-county area encompassing Little Rock and North Little Rock.

A Traditional Market Resists Transformation

When HSC first visited in 1996, Little Rock remained a largely traditional health care market characterized by surplus facilities and services, modest health maintenance organization (HMO) enrollment and predominantly fee-for-service payment arrangements. Several developments at that time -- the arrival of national health care firms, the creation of a state employee purchasing pool and new alliances between major hospitals and health plans -- had pointed toward significant change on the horizon. By 1998, however, those anticipated shifts had largely failed to materialize. National firms had not captured meaningful local market share, and fee-for-service arrangements continued to prevail. In the absence of strong external pressures, the alliance between Arkansas Blue Cross Blue Shield, the dominant insurer, and Baptist Health System, the largest hospital system, remained the central axis of competition.

Several forces were nonetheless reshaping the local health care landscape:

• Local providers and plans were forming partnerships with national firms to strengthen their competitive position and counterbalance the powerful insurer-hospital alliance.
• Physicians were establishing freestanding ambulatory surgery centers and consolidating their practices in an effort to preserve income and professional autonomy.
• Both inpatient and outpatient capacity continued to expand despite an already existing surplus.

Few External Restraints Shape the Market

Little Rock's health care market operated under remarkably few external constraints from purchasers or state policy. In an economy dominated by small businesses, organized purchaser activity was minimal, though private employers' sensitivity to both premium hikes and restrictions on provider choice did drive competitive dynamics. The one significant buyer-side initiative in recent years was the 1995 creation of the Arkansas State Employee/Public School Personnel Insurance Board. This body consolidated state employees and public school personnel under a single procurement process covering roughly 73,000 individuals statewide, most of them concentrated in the Little Rock area. The new purchasing structure, combined with a requirement that employees bear a larger premium share for costlier plans, had accelerated managed care growth and pushed plans to compete more aggressively for enrollment.

Beyond that purchasing initiative, state government's role in shaping the local health care market remained circumscribed. Arkansas had repealed its certificate-of-need regulations for acute care services shortly after the federal mandate for such regulations was lifted. State legislators also rejected health reforms proposed in 1995, reinforcing their preference for a market-driven system over government-directed health care. In an ironic counterpoint, lawmakers simultaneously passed an expansive any-willing-provider law that would have compelled all plans -- including those shielded by the Employee Retirement Income Security Act (ERISA) -- to contract with any provider willing to accept the plan's fee schedule and terms. Courts struck down the law in 1997 and again on appeal in 1998, preventing enforcement.

Unlike most states, Arkansas had not moved to enroll its Medicaid population in HMOs, relying instead on a primary care case management (PCCM) program to improve access and control costs. The only other notable policy development was implementation of the state's own children's health insurance program, separate from the federal Children's Health Insurance Program. Since its September 1997 launch, the state program had extended coverage to approximately 36,000 children -- about one-third of projected total enrollment. While welcome, the program was unlikely to reshape market competition significantly.

National Entrants Fail to Gain a Foothold

At the time of HSC's initial visit in late 1996, the expected entry of outside firms was widely seen as a force that would transform Little Rock's health care environment. Several national companies had arrived seeking to build market share. Most prominent among them was Columbia/HCA, which entered in 1994 through its national merger with HCA, assumed control of the local Doctors Hospital and soon after acquired the market's largest medical group. In early 1997, Columbia/HCA announced plans to purchase Southwest Hospital and expand further through additional acquisitions, alarming local providers. National health plans including United HealthCare, Prudential HealthCare and Healthsource were also mounting competitive challenges to homegrown insurers, intensifying premium competition and marketing efforts.

By 1998, the feared disruption from outside entrants had not come to pass. National firms failed to wrest significant market share from local competitors, and many had either scaled back their operations or withdrawn entirely. Columbia/HCA exited Little Rock quickly after failing to achieve its growth targets, compounded by national Medicare fraud allegations that consumed the company's attention. Prudential HealthCare and CIGNA (which had purchased Healthsource) appeared to be pulling back from the market as well, though they continued offering products locally to serve national accounts. These plans reportedly struggled to leverage the local oversupply of hospital beds and lengthy stays needed to generate the profit margins their business models anticipated. United HealthCare remained a viable presence, but Arkansas Blue Cross Blue Shield held firmly to its dominant market position throughout.

Local Organizations Partner with National Firms

While national companies struggled to compete independently, local providers and plans found success by affiliating with national partners through strategic joint ventures. The Arkansas Heart Hospital, created through a partnership between local cardiologists and the national cardiac care company MedCath, Inc., continued to build its market presence after opening in early 1997. The facility had captured an estimated 10 to 20 percent of cardiac surgical volume from Little Rock's two major hospital systems. Observers speculated that the hospital's long-term viability would hinge on securing managed care contracts, though most of its volume at that point came from Medicare fee-for-service patients.

In late 1997, St. Vincent Health System, one of Little Rock's two major hospital networks, aligned with Catholic Health Initiatives, a national not-for-profit health system. The affiliation brought the financial backing St. Vincent needed to strengthen a market position that had been described as weakening at the time of HSC's first visit. With these new resources, St. Vincent capitalized on Columbia/HCA's departure by purchasing the company's Doctors Hospital and three family clinics, broadening its service mix and primary care capabilities.

Similarly, QualChoice/QCA, a local health plan owned by the University of Arkansas for Medical Sciences (UAMS), improved its standing by bringing in Tenet Healthcare Corporation and other equity partners. Tenet already had connections to the local market through its involvement in NovaSys Health Network, a statewide provider-governed network. The capital infusion gave QualChoice the resources to expand its product offerings and win new business.

The Blues-Baptist Alliance Faces New Competition

The partnership between Arkansas Blue Cross Blue Shield and Baptist Health System had been the market's most powerful force since the two organizations formed a shared equity HMO called Health Advantage in the mid-1990s. Under this arrangement, Baptist Health provided the bulk of hospital services for Health Advantage members in the Little Rock area, with limited exceptions for pediatric specialty care at Arkansas Children's Hospital and services at certain outlying hospitals. A similar arrangement governed the Blues' preferred provider organization (PPO) product. Baptist's lock on this business gave it a clear edge over competitors, while the relationship strengthened Arkansas Blue Cross Blue Shield's leverage in winning managed care contracts.

Although the Blues-Baptist alliance remained dominant, rival organizations had begun mounting credible challenges through their national partnerships. St. Vincent had improved its financial footing and market presence through its Catholic Health Initiatives affiliation. It had also refocused its managed care strategy, moving away from exclusive arrangements and toward broader contracting through the NovaSys provider network. Created in partnership with Tenet, UAMS and other equity partners in 1996, NovaSys had grown into the state's largest provider network, encompassing 70 hospitals and more than 3,000 physicians. This reach allowed St. Vincent and its partners to compete directly with the formidable provider network that Arkansas Blue Cross Blue Shield had assembled.

Tenet's parallel investment in QualChoice further tightened the ties between the plan and the NovaSys network, enabling QualChoice to secure favorable rates from NovaSys providers. This advantage allowed QualChoice to underbid competitors for the exclusive point-of-service (POS) contract covering state employees and school personnel, more than doubling its enrollment and beginning to chip away at the Blues' hold on this important book of business.

Physicians Organize to Protect Income and Autonomy

Two years earlier, most Little Rock physicians still practiced in solo or small single-specialty settings, though some had begun organizing into independent practice associations (IPAs) and larger group practices. Health plans' attempts to use profiling and reimbursement adjustments, combined with anticipated managed care growth, had fueled anxiety among physicians about erosion of both income and clinical independence.

This anxiety accelerated consolidation in the physician market. Columbia/HCA's purchase of the area's largest medical group had prompted Baptist Health and St. Vincent to begin acquiring primary care practices and establishing management service organizations (MSOs). Some specialists organized independently as well, creating new multispecialty groups and forming affiliations like the one that united all urologists in the market. By 1998, however, hospital acquisition of primary care practices appeared to be slowing amid concerns about disappointing returns on investment and limited referral gains.

Specialists, meanwhile, had continued consolidating and found new avenues to safeguard their income and clinical autonomy -- most notably by building freestanding ambulatory surgery centers. The proliferation of these facilities in Little Rock had been striking: an estimated six centers were under construction, including ventures by Arkansas Urology Associates, U.S. Orthopedics and OrthoArkansas. Additional single-specialty mergers were occurring as well, driven largely by the need to amass sufficient patient volume for these new surgical facilities.

Hospitals viewed this trend with considerable alarm. Facing potential losses in outpatient volume, both Baptist Health and St. Vincent pursued joint ventures with physicians to establish their own ambulatory surgery centers. St. Vincent, for instance, created the North River Surgery Center in partnership with a smaller local hospital, the for-profit management company HealthSouth and a group of 40 independent physicians.

Cost Control Efforts Stall

Some observers had predicted in 1996 that the arrival of outside players and the growth of managed care would drive down health care spending and curtail excess capacity. Instead, providers only added to the surplus. Beyond the proliferating ambulatory surgery centers, the major hospitals expanded inpatient capacity as well: Baptist Health and St. Vincent both built new acute care facilities in North Little Rock; a new tower at UAMS added 100 beds; and Arkansas Children's Hospital opened a 50-bed neonatal unit. These projects were driven largely by competition for patients in the growing northern suburbs. With certificate-of-need regulation for acute care services no longer in effect, capacity expansion proceeded unchecked.

Greater cost discipline through clinical management also appeared unlikely in the near term. In 1996, all major HMOs and some hospitals had launched physician-profiling programs intended to influence practice patterns and contain costs. Plans were exploring payment methods that tied reimbursement to performance indicators, and one plan had intended to use profiling data to begin removing high-cost physicians from its network. By 1998, however, plans had backed away from these initiatives in the face of physician resistance. Doctors objected to linking pay to profiling data and questioned the data's reliability. Existing information systems proved inadequate for the task.

Some plans were cautiously revisiting profiling, this time focusing on sharing comparative practice-pattern information with physicians without directly tying it to reimbursement. Arkansas Blue Cross Blue Shield was also considering a "network-within-a-network" strategy that would use profiling data to identify a subset of efficient providers for a lower-priced product, though the idea had generated mixed physician reactions.

Issues to Track

Little Rock remained a market with few external constraints. National firms had proven valuable as partners for local organizations seeking competitive leverage, but the threat that outsiders would dominate the market had dissipated. Managed care arrangements had not grown as fast as anticipated, yet providers continued positioning for these contracts while competing for the fee-for-service revenue that was still readily available. Key questions going forward included whether partnerships between local and national organizations would remain stable and mutually beneficial, whether health plans would find effective ways to implement cost controls, and how the ongoing expansion of capacity would ultimately affect the cost and quality of health care in the Little Rock market.

Sources and Further Reading

• Community Tracking Study Household, Physician and Employer Surveys, 1996-1997, Center for Studying Health System Change.
• U.S. Census Bureau, Population Estimates, 1997.
• Hirshkorn, C., Grossman, J.M., Solomon, L.S. and Andrews, C.A., "Capacity Expands in Unrestrained Market: Little Rock, Arkansas," Community Report No. 04, Winter 1999, Center for Studying Health System Change.