Competition Intensifies After Proposed Merger Fails:

In January 1999, researchers visited Greenville, South Carolina, to study the community's health system, its evolution and the consequences for consumers. More than 30 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. Greenville was one of 12 communities HSC tracked biennially through site visits and surveys. The initial visit in January 1997 established the baseline for monitoring changes. The Greenville market covered a five-county area including Greenville, Spartanburg, Anderson, Cherokee and Pickens counties.

Failed Merger Fuels Ongoing Hospital Rivalry

Fierce competition among hospital-based systems continued to define the Greenville health care market after a proposed three-hospital merger collapsed in the face of public opposition in 1997. Hospitals continued to compete within three historically distinct submarkets centered on Greenville, Spartanburg and Anderson counties. However, some systems were now also targeting an area of rapid economic growth between Greenville and Spartanburg, outside their traditional territories. Hospital systems were building the infrastructure to accept risk and manage the physician practices they had aggressively acquired. But in a tight labor market, employers were more focused on offering broad provider networks than on constraining costs, and HMO enrollment growth had been slower than anticipated.

Key trends shaping the market included:

• Health plans' interest in risk-based contracts with providers had waned.
• Hospital systems had moved physicians to productivity-based payment and expanded clinical care management programs.
• Safety net improvements had been made, but significant gaps in access persisted.

A Booming Economy Shapes a Fragmented Market

The Greenville market, spanning the upstate region of South Carolina, was marked by notable economic expansion. Multinational companies including BMW and Michelin were contributing to a growing economic base that created a tight labor market. Population had increased 8.5 percent between 1990 and 1997, and unemployment sat at just 1.8 percent. The market was organized around three concentrated and distinct health care submarkets centered in Greenville, Spartanburg and Anderson counties, with some overlap in the area between Greenville and Spartanburg where economic growth was fastest.

Greenville Hospital System (GHS) dominated its home county, controlling 75 percent of inpatient services and serving as the area's sole teaching hospital. St. Francis Health System was GHS's chief local rival, with a long-standing competitive relationship that included GHS offering plan discounts for networks that excluded St. Francis. In Spartanburg County, Spartanburg Regional Healthcare System accounted for 70 percent of inpatient care, while Mary Black Memorial Hospital (owned by national chain Quorum Health Group) competed alongside it. Anderson Area Medical Center was the sole system serving Anderson County.

In 1995, GHS, Spartanburg Regional and Anderson Area Medical Center proposed merging into a single system called AGS that would span the market's three major counties. The new entity sought operating economies, information system efficiencies and stronger negotiating leverage with insurers. But community opposition emerged, fueled by fears of a GHS-controlled monopoly. A marketing campaign spearheaded by St. Francis intensified public distrust, and a 1996 referendum saw 75 percent of voters reject the merger proposal. Though nonbinding, the message was decisive enough that GHS pulled out of the deal.

Hospital Competition Intensifies Across Submarkets

After the AGS merger collapsed, hospitals moved to solidify their positions both within their home submarkets and across the broader region. St. Francis broadened its subspecialty services and marketed itself as a patient-friendly alternative offering a range of services comparable to GHS. It recently received state certificate-of-need (CON) approval for open-heart surgery -- a prerequisite that Blue Cross Blue Shield and CIGNA/Healthsource had set for including St. Francis in their networks. Despite this, both plans continued to exclude St. Francis because of the steep discounts GHS offered.

GHS and its former AGS partners continued collaborating on some activities begun in anticipation of the merger, including joint ownership of a health plan called HealthFirst. At the same time, Spartanburg Regional and Anderson Area Medical moved to strengthen their tertiary care capabilities -- Anderson applied for a CON to perform open-heart surgery, and Spartanburg was building a cancer center.

Competition for the growing area between Greenville and Spartanburg had become especially intense. GHS was completing a large ambulatory surgery and physician office complex on property surrounding St. Francis's women's hospital. Spartanburg Regional established pediatric and orthopedic practices and family care centers in the area. Mary Black placed OB/GYN practices there. Hospitals also built urgent care centers and marketed occupational health services to employers in this demographically attractive corridor.

Two additional developments pointed to potential further market shifts. The Franciscan Sisters of the Poor Health System, owner of St. Francis, announced it was leaving the health care business following losses in other markets, putting St. Francis up for sale. A change in ownership could significantly alter competitive dynamics in Greenville County. Separately, Spartanburg Regional agreed to explore joint ventures with Charlotte-based Carolina Medical System, potentially giving an organization from an adjacent market an important foothold in the area.

Risk Contracting Retreats, Fee-for-Service Persists

In 1997, HMO enrollment was limited but expected to grow. National plans including CIGNA/HealthSource and Aetna had established strong local presences, and a transition toward more restrictive provider networks and risk-based contracts was anticipated. Two years later, HMO enrollment had grown more modestly than expected. Greenville continued to have the lowest HMO penetration of any community HSC tracked. Employers, seeking to attract workers in a tight labor market, remained reluctant to push employees into restrictive products.

Health plans' interest in capitated contracts with providers had also diminished. Maxicare, a national plan that had established capitated hospital contracts, left the market after failing to recover from its earlier national bankruptcy. Blue Cross Blue Shield, the leading plan by market share, found that improved utilization review techniques enabled it to control costs through discounted fee-for-service more effectively than through capitation, and it was reportedly less inclined toward capitation for future contracts.

HealthFirst, the health plan formed by the former AGS partners, had established itself as a viable independent competitor -- expanding enrollment, broadening its product offerings and expecting its first profit in 1999. The hospital owners now viewed the plan primarily as an investment rather than a vehicle for shared risk. Carolina Multispecialty Associates (CMA), the physician organization that had been noted in 1997 as the most likely entity to manage full-risk capitation contracts, dissolved entirely. Specialists began leaving when risk contracting failed to materialize, and CMA shrank from 75 to 45 physicians before folding -- a striking example of failed expectations of market change in Greenville.

Hospitals Push Integration Despite Market Headwinds

Despite the retreat from risk-based contracting, hospitals had continued building the infrastructure for such arrangements. By the time of HSC's first visit, hospitals had acquired nearly 75 percent of the area's primary care physicians -- more than in any other HSC study site. Integration had been limited, however, by inadequate information systems for monitoring cost and quality.

Two years later, hospitals had made notable progress. They strengthened information systems and established profiling tools to monitor physician practice patterns, and a significant reduction in hospital length of stay across most diagnosis-related groups was attributed to these efforts. Hospitals were also transitioning physicians from salary arrangements to productivity-based payment, aligning physician financial incentives with institutional goals. Several hospitals had launched care management programs -- GHS implemented a knee and hip replacement program to reduce length of stay and improve recovery, while Spartanburg Regional developed a congestive heart failure program with nurse-initiated follow-up for discharged patients that measurably reduced readmissions.

A fundamental tension remained, however. Under per diem reimbursement from health plans, hospitals that succeeded in reducing readmissions and length of stay generated savings for the plans but reduced their own inpatient revenue. Spartanburg Regional had tried to leverage these quality improvements to negotiate better plan payment rates with limited success. Whether hospitals would continue investing in quality initiatives under these financial dynamics remained uncertain.

Safety Net Improves but Gaps Remain

In 1997, providers and social service groups noted serious gaps in the safety net, though there appeared to be little broad public concern. With no public hospital in the area, local hospital systems and community clinics were the major indigent care providers, and their capacity was severely limited. The elimination of public transportation in early 1997 due to county budget shortfalls further restricted access for low-income residents.

Over the subsequent two years, attention to the safety net increased substantially. A community health assessment sponsored by the United Way illuminated the severity of the problem and served as an important catalyst. GHS made significant new investments in indigent care as part of its effort to repair its public image after the failed AGS merger. Both GHS and St. Francis pledged funds to community clinics. Two major safety net providers -- the Greenville Community Health Center and the Greenville County Free Clinic -- relocated to renovated facilities with expanded capacity and hours. The Free Clinic added specialty services and a dental clinic, aiming to increase patient visits by 20 percent in 1999.

Access to care for Medicaid-eligible children also improved under an enhanced primary care case management program that streamlined enrollment, improved care coordination and increased physician payment. A new state program, Partners for Healthy Children, extended children's Medicaid eligibility to 150 percent of poverty for children up to age 18 and had enrolled 56,000 children by November 1998, with a target of 75,000. Despite these gains, demand for care among the poor continued to outstrip available capacity, as evidenced by long wait times at safety net providers. Lack of public transportation remained a major barrier.

Issues to Track

Apart from safety net improvements, less had changed in the Greenville market over the prior two years than many anticipated. Hospital competition continued to thrive in the wake of the failed AGS merger, with an increasing focus on the economically dynamic corridor between Greenville and Spartanburg. HMO enrollment remained minimal, and fee-for-service payment continued to dominate. Hospitals had nonetheless made progress on physician profiling, productivity-based compensation and clinical care management. Key questions ahead included how hospital competition across the market and within submarkets would evolve given anticipated ownership changes and joint venture opportunities, whether hospitals could negotiate contracts that rewarded their integration and quality improvement investments, what effect productivity-based compensation would have on physicians and their relationships with hospitals, and whether recent safety net improvements and Medicaid expansions would meaningfully narrow the access gap for the poor.

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.
• Trude, S., West, T. and McIntosh, S.A., "Competition Intensifies After Proposed Merger Fails: Greenville, South Carolina," Community Report No. 11, Spring 1999, Center for Studying Health System Change.