Local Providers Fortify Their Position:

In November 1998, researchers visited Indianapolis, Indiana, to study the community's health system, its evolution and the consequences for consumers. More than 40 health care market leaders were interviewed as part of the Community Tracking Study by the Center for Studying Health System Change (HSC) and The Lewin Group. Indianapolis was among 12 communities tracked by HSC biennially through site visits and surveys. The first visit in November 1996 created the baseline for monitoring changes. The Indianapolis market covered a nine-county region.

Provider Systems Tighten Their Grip

In 1996, five hospital-based systems dominated Indianapolis. All were not-for-profit, and they owned the market's most successful health plans as well as most of the area's primary care practices. Managed care enrollment was limited, and employers and policy makers were largely passive in the health care arena. The 1997 merger of two systems further solidified provider dominance, and the health plans owned by these systems continued outperforming their rivals.

Several trends were reshaping the market:

• Provider systems were positioning themselves in response to the 1997 merger, competing for managed care contracts with the newly consolidated entity.
• Single-specialty physician groups were consolidating, while physician-hospital organizations (PHOs) were losing their role as contracting vehicles.
• Providers were growing increasingly resistant to accepting financial risk under managed care contracts.
• Both public and private sector decision makers were paying closer attention to managed care plan performance.

The Clarian Merger Reshapes Hospital Competition

Several hospital systems had strengthened their already formidable market positions over the prior two years, partly to increase bargaining leverage with health plans and stimulate revenue growth. The most consequential development was the 1997 merger of Methodist Hospital of Indiana and Indiana University Medical Center (along with its affiliate, Riley Hospital for Children) to create Clarian Health Partners. The new entity controlled 1,400 acute care beds -- 23 percent of all acute care capacity in the Indianapolis market.

Administrative functions were combined rapidly in the months following the merger, but integration of medical groups proved more difficult. In some specialties, the academic culture of medical school faculty clashed with the more entrepreneurial orientation of Methodist physicians. The merger also generated controversy: competing systems worried about the new entity's market power, while community advocacy groups raised concerns about potential effects on the poor and uninsured. Wishard Hospital, a publicly owned institution closely affiliated with the University's medical school faculty, was the area's principal provider of indigent care, and the merger raised questions about the future of that relationship and about access to Riley Hospital's pediatric services.

Other systems responded with their own strategic moves. St. Vincent's Hospitals expanded its subspecialty pediatric services and acquired Lifelines Children's Hospital, reportedly in reaction to Clarian's decision to raise prices at Riley Hospital. St. Vincent's parent organization, the Daughters of Charity, created Central Indiana Health System, a collaborative group of Indiana hospitals seeking growth through mergers and affiliations. Community Hospitals and Health Services extended its reach outside metropolitan Indianapolis by acquiring Community Hospital of Anderson and Madison, and it entered merger discussions with St. Francis Hospitals and Health Centers, which operated two facilities in southeast Indianapolis.

Specialist Consolidation Accelerates

A wave of single-specialty practice mergers had strengthened some specialists' bargaining position with health plans and provider systems. Small, single-specialty practices remained the norm, but the pace of consolidation was markedly faster than in 1996. In a merger that attracted considerable local attention, the market's two largest cardiology groups combined in January 1999 to form Care Group, encompassing 87 cardiologists, six related subspecialists and 52 primary care physicians -- reportedly one of the largest cardiology organizations in the country. Additional single-specialty mergers were noted in radiology, sports medicine, neurology, urology and orthopedics.

SpecPrime, a 350-physician multispecialty network affiliated with Community Hospitals, represented an alternative approach, contracting with several HMOs on a capitated, full-risk basis. Most observers viewed SpecPrime as an exception rather than a harbinger of broader change in specialty care delivery.

Primary care physician practices had seen less organizational change. Most remained owned by or closely affiliated with provider systems. Several systems and plans that had aggressively acquired primary care practices in the early 1990s were now questioning the strategy's wisdom. Anthem Blue Cross and Blue Shield, for instance, sold its 250-member primary care physician arm, the American Health Network, back to its member physicians.

Provider-Owned Health Plans Maintain Dominance

Health plans owned by local provider systems, already dominant in 1996, had grown even stronger -- a pattern that stood in contrast to other parts of the country where many provider-owned plans were struggling. In general, Indianapolis's provider-owned plans offering HMO and PPO products had performed well financially, while plans owned by Anthem and Maxicare posted losses. PPO products continued to dominate the market, although commercial HMO enrollment had risen from 19 to 23 percent. Medicaid managed care penetration grew from 35 to 41 percent, while Medicare risk plan enrollment inched up from 4 to just 6 percent.

M-Plan, owned by Clarian, held the largest HMO enrollment share, growing from 122,000 to 175,000 members between 1996 and 1998. Anthem lost roughly equivalent enrollment from both its PPO and HMO products, with many attributing the erosion to the company's preoccupation with regional and national expansion at the expense of local market attention. M-Plan was pursuing a merger with HealthPoint, another provider-owned plan, that would create a 600,000-member entity with a statewide network. National for-profit plans, apart from Maxicare with its 81,000 commercial and Medicaid enrollees, played a relatively minor role locally. CIGNA entered through its purchase of HealthSource Indiana but its ability to grow share was uncertain.

PHOs Lose Their Centrality in Contracting

Providers were increasingly resistant to absorbing financial risk from health plans, and their reliance on PHOs as contracting vehicles was diminishing as a result. In 1996, provider systems had frequently used affiliated PHOs to secure full-risk, globally capitated contracts, believing they could control costs and generate profits under such arrangements. By 1998, that assumption was being revisited. Many providers insisted that high-cost components like pharmaceuticals be carved out of capitation payments and that plans retain some portion of financial risk. Physicians were bypassing PHOs to contract directly with health plans, recapturing administrative fees previously absorbed by the PHO layer. Hospitals also saw advantages in direct plan contracting, believing they could negotiate better inpatient reimbursement than they obtained under global capitation, where physician demands often came at the hospital's expense.

Employers Organize Through the Roundtable

Employers were beginning to take a more active role, not through joint purchasing but through a collaborative group called the Roundtable. Formed in 1997 by Eli Lilly and several other major Indianapolis employers, the Roundtable issued a common request for information (RFI) to health plans -- all but one HMO agreed to participate -- and contracted with a vendor to conduct health status assessments of selected managed care and fee-for-service employees. Roundtable members also signaled their expectation that Indianapolis HMOs achieve NCQA accreditation.

This represented a meaningful increase in employer engagement. In 1996, employers had been a relatively disorganized force. Since then, health plan premiums had begun climbing after several years of stability, with 1999 increases expected to reach 6 to 8 percent for large employers and 10 to 15 percent for small ones. The Roundtable could eventually serve as a platform for disease management initiatives, performance reporting and even joint purchasing, though no such plans were announced.

State Policy Makers Turn Attention to Managed Care

The Indiana legislature had become considerably more active in the health care arena, particularly regarding managed care oversight. New requirements addressed grievance resolution, provider access, formulary use and distribution, coverage of new technologies and annual submission of standardized data to the state. The Department of Insurance was directed to review HMO data annually using NCQA's HEDIS measures and release them publicly in a report card format. A new governor more interested in health care issues, concerns from influential legislators and the nationwide wave of anti-managed care legislation all contributed to this shift.

Changes to Indiana's Medicaid program were also underway, mainly to incorporate the federal Children's Health Insurance Program (CHIP). Initial CHIP enrollment, which began in June 1998, had been disappointing, prompting plans for expanded outreach and enrollment efforts.

New Programs Serve the Uninsured

The Health and Hospital Corporation (HHC) of Marion County remained the dominant provider of indigent care through its flagship facility, Wishard Hospital. Supported by $50 million in annual real estate tax levies and disproportionate share funding, Wishard had expanded its capacity, opened three new community health centers since 1996 and renovated its physical plant. Visit volumes at these centers had grown substantially even though the uninsured population in Indianapolis remained relatively constant.

In 1997, Wishard launched the Wishard Advantage managed care program for the uninsured, offering a benefit package similar to Indiana's Medicaid managed care program. Uninsured Marion County residents and their families at or below 200 percent of poverty were eligible, with those below 150 percent receiving free care and others paying monthly fees on a sliding scale. The results were striking: inpatient use reportedly dropped from 800 to 400 days per thousand annually, and emergency room visits fell by 30 percent. By October 1998, the program had enrolled 18,800 people.

The creation of Clarian had initially raised concerns about disruption to Wishard's operations and its relationship with medical school faculty. Those fears had not materialized. Instead, the merger prompted Wishard to re-evaluate its physician relationships and explore new organizational strategies and partnerships.

Issues to Track

Large provider systems in Indianapolis had maintained and even expanded their influence over the prior two years. The physician market was consolidating at a measured pace as specialists sought greater negotiating leverage. Policy makers had become more active, particularly around managed care oversight, and large employers had begun working collaboratively through the Roundtable to influence plan performance. Key questions ahead included whether additional provider mergers would reshape physician-plan relationships, whether growing employer and regulatory pressure would push plans toward more aggressive quality competition, whether locally owned provider-sponsored plans would continue to dominate or eventually be sold to national companies seeking market entry, and whether Wishard's innovative managed care program for the uninsured would prove to be a sustainable model.

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.
• Christianson, J.B., West, T. and Barraclough, M.L.E., "Local Providers Fortify Their Position: Indianapolis, Indiana," Community Report No. 07, Winter 1999, Center for Studying Health System Change.