Market Concentration Increases but Power Held in Check:

In October 1998, a team of researchers visited Lansing, Michigan, to study the community's health system, its evolution and the effects on local consumers. More than 40 health care market leaders were interviewed as part of the Community Tracking Study conducted by the Center for Studying Health System Change (HSC) and The Lewin Group. Lansing was one of 12 communities that HSC followed biennially through site visits and surveys. Community reports were published after each round. The initial visit in October 1996 had established baseline data for tracking subsequent changes. The Lansing market comprised Ingham, Clinton and Eaton counties.

A Concentrated Market Grows More So

Lansing's health care market had long been heavily concentrated, and that concentration had deepened over the prior two years. Hospital mergers left only two systems serving the community, and the departure of a health plan cemented the strength of the two remaining insurers. These few organizations, together with the area's three large local employers, maintained a balance of power, while unions and an active local health department served as counterweights.

In 1996, tensions ran high among these major players. Purchasers were pressing to reduce health care costs, and a controversial proposal to merge a local hospital with Columbia/HCA had divided the community. Key developments since that first visit included:

• Hospital mergers had strengthened the remaining systems while removing excess capacity from the market.
• Physicians' attempts to build independent market power had been largely blocked.
• Public release of cost and quality data had stirred controversy, though purchasers continued using such data internally to hold organizations accountable.
• The county health department maintained its leadership in collaborative efforts to reach underserved populations.

Two Hospital Mergers Reshape Competition

Two mergers completed since HSC's 1996 visit had reduced Lansing's hospital sector to just two systems. Sparrow Health System absorbed St. Lawrence Hospital in late 1997, uniting two local institutions. Ingham Regional Medical Center (IRMC), after a failed attempt to partner with Columbia/HCA, merged with the McLaren Health Care Corporation, a regional system headquartered in Flint. The result was a pair of financially robust competitors operating in a market with noticeably less inpatient capacity.

The Sparrow-St. Lawrence combination was widely anticipated and viewed as a success. St. Lawrence had been struggling financially and its physical plant was deteriorating from underinvestment. Its parent, Mercy Health Services, wanted to maintain a Catholic presence in the community and had explored partnerships with both Sparrow and IRMC. Sparrow, the stronger system, offered the best option. St. Lawrence's strengths in behavioral health, aging services and its west-side location complemented Sparrow's capabilities. Most St. Lawrence physicians reportedly migrated to Sparrow, where many already held privileges, although some chose IRMC instead. St. Lawrence closed its inpatient medical and surgical services but continued operating an emergency department and maintaining beds for psychiatric, substance abuse and hospice care.

The IRMC-McLaren merger followed a more contentious path. IRMC had initially pursued a partnership with Columbia/HCA, which would have brought the first for-profit general acute care hospital to Michigan. Four powerful market actors -- the United Auto Workers (UAW), General Motors (GM), Sparrow and Blue Cross and Blue Shield of Michigan (BCBSM) -- opposed the deal. Extensive press coverage and public concern about community accountability ensued. The state Attorney General ultimately sued, and a Michigan court ruled that commingling assets from a not-for-profit and a for-profit entity was illegal, blocking the merger as structured. BCBSM reportedly suggested several alternative partners, including McLaren, which was seeking regional expansion and could provide IRMC with needed capital. The affiliation made IRMC a wholly owned McLaren subsidiary, and the community responded favorably. IRMC subsequently improved its financial performance, gained market share and undertook significant capital improvements.

Competition between the two remaining hospital systems had reportedly intensified even as both operated at high occupancy due to reduced overall capacity. Physicians reported growing pressure from hospitals to align with one system or the other through physician-hospital organizations. Both systems were exploring the development of exclusive network products -- Sparrow's Physicians Health Plan (PHP) was considering Sparrow-only offerings, while McLaren was working with BCBSM on an exclusive network arrangement.

Physicians Struggle to Build Independent Power

Lansing's physicians were uneasy about the growing concentration of power among hospitals and health plans, but their efforts to establish an independent base had been largely unsuccessful. At the time of the first site visit, several physician entrepreneurs had opened ambulatory surgery centers. GM, however, regarded these facilities as unnecessary duplication of hospital capacity and barred its health plans from including them in their networks. The major plans followed suit, with the exception of PHP, which contracted with a Sparrow-owned center. As a result, the ambulatory centers were effectively cut off from most of Lansing's privately insured patients.

A more ambitious physician initiative also fell short. In 1997, the Thoracic Cardiovascular Institute (TCI), a group of thoracic and vascular surgeons and cardiologists, negotiated a capitated contract with Blue Care Network (BCN) that would have made TCI the exclusive provider of cardiovascular care, placing hospitals and supporting specialists in the position of negotiating rates with TCI rather than BCN. Sparrow and a group of competing specialists reportedly fought the arrangement, and new BCN management withdrew from the contract.

With these entrepreneurial ventures stymied, physicians were adopting a defensive strategy of consolidating into larger group practices. The goal was to ensure continued patient flow if exclusive network arrangements gained traction -- by having colleagues in their practices who could admit patients to both hospitals. As one physician put it, he could wake up one day to find that Michigan State University had shifted its enrollment to a different plan, costing him half his patients overnight.

A New PPO Product Reshuffles Market Positions

BCBSM held a commanding position in Lansing, controlling well over half the commercially insured market statewide through its deep ties to auto manufacturers and the UAW. Historically, the insurer had not been considered particularly innovative. The introduction of Community Blue, a preferred provider organization (PPO), marked a departure. The new product shifted enrollment from BCBSM's traditional fee-for-service plan to a less restrictive and significantly less expensive option featuring a broad provider network, out-of-network coverage and expanded preventive services. BCBSM achieved the lower price point by paying hospitals managed care contract rates rather than its traditional, higher rates.

Early results showed Community Blue further strengthening BCBSM's already dominant position. Michigan State University converted all its non-Medicare Blues enrollment to Community Blue. PHP lost enrollment and was forced to reduce its rates to stay competitive. Several other purchasers, including the Chamber of Commerce, also converted. The net effect was that BCBSM shifted large blocks of business to lower hospital payment rates without having to renegotiate directly with hospitals -- a development that prompted the hospitals to seek recourse through the state hospital association.

Purchaser Coalition Regroups Around Public Health Goals

In 1996, purchasers had appeared poised to assume a more active leadership role through the Capital Area Health Alliance (CAHA), a local coalition that brought together the three large employers -- GM, Michigan State University and the state government -- with providers and other stakeholders. That coalition frayed as purchaser members began pressuring local providers to drive down costs. CAHA nearly disbanded before reorganizing around a new focus on public health objectives, including wellness promotion and universal health care access. Membership expanded from 70 to 108, with seats added for the Ingham County Health Department, health plans and unions. The state withdrew from CAHA, and the three large employers pursued their cost and quality objectives independently -- the state and the university working together, GM operating on its own.

One issue united all CAHA constituencies: preserving GM's presence in Lansing. The automaker was considering whether to rebuild its aging local plants or relocate, putting roughly 13,000 GM jobs and an estimated 21,000 supporting positions at risk. Demonstrating that Lansing offered a favorable business environment -- including reasonable health care costs -- was central to the community's retention strategy.

Data as a Tool for Accountability

Information remained a powerful mechanism for holding Lansing's health care organizations to standards of cost, quality and community benefit, though efforts to share such data publicly had become contentious. The three large employers had been analyzing claims data to compare hospital costs since 1996, and those efforts led to rate reductions and spurred additional analysis of cost and quality indicators across hospitals.

Shortly after the 1996 site visit, employers uncovered a substantial payment differential in what BCBSM paid the two hospital systems, with Sparrow's rates significantly exceeding IRMC's. Publication of this finding proved controversial, ultimately leading to reduced hospital reimbursement and lower BCBSM premiums across the market. Sparrow objected to both the process and the outcome, becoming distrustful of further collaborative information initiatives. Subsequent CAHA efforts to collect cost and quality data heightened hospital concerns about inadequate risk adjustment and limited patient samples. Since then, hospitals had begun producing their own data using medical record-based systems to improve accuracy and enable risk adjustment. The large employers and hospitals continued sharing information among themselves but no longer released it publicly -- a shift that cut smaller employers off from comparative data they could have used in purchasing decisions.

Health Department Leads Access Initiatives

The Ingham County Health Department continued to play a pivotal role in identifying public health gaps and mobilizing community leaders to address them. The newly implemented Ingham Health Plan tapped federal Medicaid matching dollars to bring $1.8 million in new funding into the community, providing coordinated preventive, primary, specialty and ancillary care to roughly 7,500 uninsured individuals with incomes up to 140 percent of poverty level. While the program did not cover inpatient care, funding flowed through hospitals as disproportionate share payments. Sparrow had elected not to participate, which reduced available federal funding and limited the program's reach -- participation by Sparrow would have brought an additional $1.6 million and extended coverage to 3,500 more individuals.

Building on this foundation, the health department also secured grants from The Robert Wood Johnson Foundation and the W.K. Kellogg Foundation for two additional access initiatives: Access to Health, which would bring together hospitals, businesses, insurers and consumers to assess needs and recommend financing and delivery solutions for the uninsured; and Ingham Community Voices, which would fund outreach and develop supporting information systems.

Medicaid Managed Care Faces Mounting Challenges

Mandatory Medicaid managed care enrollment was scheduled for completion in the Lansing area by January 1999, but health plans were struggling to manage this population effectively. Three plans enrolled Medicaid beneficiaries locally: PHP, The Wellness Plan and the McLaren Medicaid plan. Care Choices, the Mercy plan, had agreed to exit the Medicaid market as part of the Sparrow-St. Lawrence merger terms. Despite financial losses in 1997, the remaining plans had not yet withdrawn.

Plans faced several specific difficulties: marketing restrictions and automatic assignment rules made it harder to target healthier enrollees; rates were considered too low given expanded benefit requirements and higher-than-anticipated administrative costs; the absence of beneficiary copayments complicated efforts to manage emergency room utilization; and many specialists resisted participating because of Medicaid's low fee schedule. The Wellness Plan was in severe difficulty, and PHP had signaled it might drop its Medicaid product if losses continued. If both plans withdrew, the state would likely lack sufficient capacity to sustain Medicaid managed care in Ingham County.

Issues to Track

Lansing's market continued to be shaped by a small number of large, powerful local organizations. Hospital mergers had created two strong competitors and sharply polarized the market. Physicians, unable to carve out effective independent leverage, were organizing defensively. The county health department maintained its leadership in expanding access for the uninsured. Key questions going forward included what impact hospital concentration would have on costs, quality and access; whether physicians would find new ways to increase their bargaining power; how care systems for the poor would evolve given the health department's initiatives and plans' struggles with Medicaid managed care; and whether GM's decisions about its Lansing plants would reshape the local economy and health system.

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.
• Steinberg, C.R., Ginsburg, P.B. and Eichner, J., "Market Concentration Increases but Power Held in Check: Lansing, Michigan," Community Report No. 05, Winter 1999, Center for Studying Health System Change.