Ownership Changes Set Market in Flux:

In December 1998, researchers visited Phoenix, Arizona, to examine the community's health system, its recent changes and how those shifts were affecting 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. Phoenix was one of 12 communities that HSC tracked biennially through site visits and surveys. The first visit in December 1996 provided baseline data. The Phoenix market included Maricopa and Pinal counties.

Rapid Growth Draws Competition and Volatility

Phoenix had experienced some of the fastest population growth in the country, attracting new health plans, spurring facility construction and fostering the development of geographic submarkets for health care. In 1996, two major hospital systems had considered but rejected a merger, the area's public health care system was in financial crisis, physicians were beginning to consolidate and national for-profit health plans were becoming increasingly dominant.

Since that initial visit, major upheaval had hit the hospital sector as the two systems that previously explored merging pursued separate strategic affiliations instead. For-profit plans had cemented their position, and while the public system had weathered its financial crisis, its long-term direction remained unclear. Other notable developments included:

• The market's largest not-for-profit provider system had been dramatically reconfigured through a series of divestitures and a proposed acquisition by a national chain.
• National physician practice management companies (PPMCs) had failed locally, but physicians were pursuing other organizational and entrepreneurial opportunities.
• A tobacco tax had created an important new funding source for indigent care.

Samaritan's Reconfiguration Reshapes the Hospital Market

Locally based Samaritan Health System, the state's largest health care system, had undergone sweeping changes after its proposed merger with Mercy Healthcare Arizona, owned by Catholic Healthcare West (CHW), fell apart in 1997. In 1996, Samaritan controlled hospitals throughout the metro area, including its 582-bed Good Samaritan Regional Medical Center in central Phoenix, three suburban hospitals, two rural facilities and two skilled nursing facilities. It also owned Arizona Physicians IPA, the largest plan contracting with the state's prepaid Medicaid program (AHCCCS), and co-sponsored HealthPartners Health Plans, the only locally owned commercial plan.

When the Mercy deal collapsed, Samaritan moved to shed peripheral assets and concentrate on its acute care business. It sold Maryvale Samaritan Medical Center to Vanguard Health System and its two rural hospitals to other buyers. It sold both its health plans to United Healthcare. Then, in 1998, Samaritan announced its intent to be acquired by Lutheran Health System, a not-for-profit chain based in Fargo, North Dakota, which already owned two hospitals in southeast Phoenix.

If completed, the Samaritan-Lutheran merger would make a national hospital system the dominant inpatient provider in Phoenix for the first time. The announcement triggered a cascade of secondary effects. Samaritan withdrew its bid for financially troubled Chandler Regional Hospital, allowing CHW to acquire it and gain a foothold in the fast-growing East Valley. United Healthcare's acquisition of HealthPartners put 218,000 plan members in play as other systems positioned to negotiate for that business. United's purchase of Arizona Physicians IPA raised concerns about the future of the AHCCCS program.

Other hospital systems faced their own challenges. Tenet Healthcare, with four local hospitals, announced plans to exit Phoenix in keeping with a national decision to leave markets where it lacked substantial share. Phoenix Children's Hospital, leasing space on Samaritan's downtown campus, was evaluating affiliations with CHW or greater independence. The Mayo Clinic opened a newly constructed hospital in Scottsdale. Collectively, these developments pointed to continued turbulence in the hospital market and a growing emphasis on suburban submarkets.

Health Plan Competition Shifts Across All Sectors

Phoenix's health plan market was in transition across Medicare, Medicaid and commercial sectors. In Medicare, the capitation rate had historically been high, fueling competition focused on benefits and provider choice. HMO enrollees typically paid no premiums and received extensive benefits including health club memberships. That competition persisted, but anticipated payment reductions under the Balanced Budget Act of 1997 and a proposed competitive bidding pilot threatened to reshape the landscape. If implemented, competitive bidding could fundamentally alter how plans competed for Medicare enrollees.

In the commercial market, national for-profit plans had essentially taken over. The only remaining local plan was Blue Cross and Blue Shield; United Healthcare now led the commercial HMO market after purchasing HealthPartners. PacifiCare increased its position through its acquisition of FHP International. The Mayo Clinic had launched its own plan to compete commercially but expected to grow gradually.

Medicaid plan participation in AHCCCS had also shifted. Blue Cross Blue Shield and Intergroup dropped out, while United Healthcare entered through its Arizona Physicians IPA acquisition -- the IPA with the largest AHCCCS enrollment in Phoenix and several innovation awards. Though United pledged continued AHCCCS participation, observers worried the commitment might not survive if the contract proved unprofitable.

PPMCs Fail, Single-Specialty Networks Grow

In 1996, physician consolidation in Phoenix was being driven by two trends: PPMC acquisitions of primary care practices and multispecialty groups, and the development of locally based single-specialty networks. Since then, PPMCs had collapsed locally just as they had nationally. FPA Medical Management's purchase of the long-established Thomas Davis Medical Centers led to physician departures and eventual bankruptcy in July 1998. MedPartners disposed of its Phoenix practices, and PhyCor sold its Arizona Physicians Center to Columbia/HCA. While affecting only a small share of Phoenix physicians, these failures made primary care doctors less willing to accept risk in managed care contracts.

Single-specialty networks, by contrast, continued growing at a modest pace. Locally owned and managed networks of cardiologists, general surgeons, orthopedic surgeons and oncologists were contracting with health plans in the area. In a newer development, five groups of hospitalists -- physicians specializing in managing inpatient care -- had formed and were securing plan contracts. The overall trajectory of physician consolidation had shifted toward a single-specialty focus, moving away from the primary care and multispecialty approaches that had once appeared ascendant.

Hospitals and Physicians Navigate Strained Relationships

Hospital systems in Phoenix had experienced mixed results with physician-hospital organizations (PHOs) as vehicles for partnering with physicians and gaining leverage with plans. PHOs worked best for suburban systems serving geographically bounded markets with greater contracting clout. Other PHOs fared poorly -- St. Joseph's Hospital lost roughly $3.5 million on its PHO in just two years, and two other PHOs shut down. Plans often preferred negotiating directly with physicians, physicians viewed PHOs as serving hospital interests over theirs, and high management fees were another source of dissatisfaction.

With physician reimbursement declining -- based on discounted Medicare rates that were flat or falling, particularly for procedure-based specialists -- some groups pursued joint ventures with hospitals and other entities. Three cardiologists held an equity partnership in the Arizona Heart Hospital, a new for-profit facility backed by MedCath. Lutheran agreed to a cardiac joint venture with its cardiologists after MedCath approached them about building a competing freestanding heart hospital. Hospital systems were trying to accommodate specialist demands for partnership opportunities while not ceding revenue, recognizing their dependence on specialists for admissions.

Tobacco Tax Funds Indigent Care

A 1994 ballot initiative had approved a tobacco tax with 70 percent of revenues earmarked for indigent health care. Annual revenue ranged from $125 million to $160 million, with $34 million initially appropriated for indigent care when the funds first became available in 1996. Additional revenue was subsequently directed toward Arizona's Children's Health Insurance Program, KidsCare, which began enrollment in November 1998. Tobacco tax dollars funded new primary care clinics, expanded existing health center staffing, subsidized care for medically needy patients with end-stage renal disease and supported a premium-sharing program for the working poor. Crucially, these funds represented the only state source available for health care services for undocumented immigrants.

Phoenix's uninsured population appeared to be growing. HSC's 1996 data showed 16 percent of the metropolitan population lacking coverage, while two subsequent local surveys put the figure at 25 to 27 percent. Many new jobs were concentrated in service industries that typically did not offer employer-sponsored coverage. The decoupling of Medicaid from cash assistance under welfare reform had also contributed to the increase.

County Health System Stabilizes but Faces Uncertain Future

Maricopa Integrated Health System, Phoenix's dominant safety net provider, served both AHCCCS enrollees and the uninsured. Two years earlier, the system was in financial crisis. The County Board of Supervisors contracted with Quorum Health Group, a for-profit hospital management company, which stabilized the system to month-to-month profitability. Whether this turnaround stemmed from genuine operational improvements or from staff cuts, program reductions and tougher cost-sharing for the uninsured was debated.

Even as the system stabilized, major reconfiguration loomed. The state planned to introduce competitive bidding for the Arizona Long Term Care System (ALTCS), which could cost Maricopa significant revenue. The county was exploring options including sale, affiliation with a local partner, extension of Quorum's contract or a new management arrangement. The ongoing uncertainty was a serious concern: other health systems feared being asked to absorb more uninsured care, while some observers worried that changes would leave poor and uninsured populations with reduced access.

Issues to Track

National for-profit managed care companies had solidified their hold on Phoenix's health plan market. The largest local hospital system had been dramatically reconfigured and was set to merge with a national chain. Other hospital systems in central Phoenix struggled to hold market share, while suburban systems positioned for growth. Physicians were organizing around single-specialty networks and joint ventures as their traditional income sources eroded. The safety net, bolstered by tobacco tax revenues, remained intact but the county system's uncertain future was cause for concern. Key questions going forward included how growing national chain influence would reshape the hospital and health plan markets, what impact Medicare program changes including possible competitive bidding would have, how hospitals would respond to physicians' push for entrepreneurial partnerships, and whether tobacco tax funding would prove sufficient for a growing uninsured population.

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., Lesser, C.S., Steinberg, C.R. and Eichner, J., "Ownership Changes Set Market in Flux: Phoenix, Arizona," Community Report No. 09, Spring 1999, Center for Studying Health System Change.