Cleveland Hospital Systems Expand Despite Weak Economy

The strategies and expansion plans of Cleveland's two largest health systems -- Cleveland Clinic and University Hospitals (UH) -- along with the lingering effects of a weak economy, continued to shape the community's health care market in 2010. The two dominant systems competed primarily by attracting well-insured suburban patients, expanding profitable specialty service lines, and winning physician loyalty, fueling ongoing consolidation in both the hospital and physician sectors. While practitioners and hospitals outside these organized systems still existed, market observers viewed their independence as precarious.

Economic Challenges and Population Decline

The greater Cleveland metropolitan area's population had fallen to approximately 2.1 million, dropping nearly 2 percent since 2004. The local economy bore the weight of a prolonged downturn, including factory closings and the loss of well-paying manufacturing jobs that had come with generous health benefits. As younger residents relocated for employment opportunities, the area's population skewed increasingly toward those 65 and older. Cleveland had never fully recovered from the 2001 recession, with unemployment consistently and significantly exceeding the national average.

The recession and high unemployment strained consumers, employers, and health care providers alike. Providers shouldered more uncompensated care costs as people lost jobs and insurance. Yet many viewed health care as one of the region's strongest economic sectors, hoping that growth in medical care and research might contribute to an economic revival. Others questioned whether the ongoing competition between Cleveland Clinic and UH would drive costs higher through excess capacity if the systems could not draw more patients from outside the metropolitan area.

Big Systems Get Bigger

Cleveland Clinic and University Hospitals dominated the market, both pursuing strategies to gain market share in what one observer described as a 'grow or die' environment. Cleveland Clinic operated its large downtown campus along with nine other hospitals in northeast Ohio and more than 50 outpatient facilities. Consistent with its national and international reputation, the Clinic also maintained facilities in Florida, Las Vegas, and Toronto, with a new clinic and hospital planned for Abu Dhabi.

University Hospitals operated UH Case Medical Center downtown -- including Ireland Cancer Center, Rainbow Babies and Children's Hospital, and MacDonald Women's Hospital -- along with community hospitals, affiliations with suburban community hospitals, and nearly 20 outpatient centers. Cleveland Clinic was reportedly the region's largest employer with over 30,000 workers, and UH the second largest private employer with approximately 17,000 employees. Both systems maintained strong financial performance despite rising uncompensated care costs and flat or declining patient volume.

Both systems continued expanding their downtown campuses while increasing their suburban footprint through acquisitions of community hospitals, ambulatory centers, and physician practices. Cleveland Clinic acquired Medina Hospital and expanded facilities at Hillcrest Hospital. UH was opening Ahuja Medical Center in suburban Beachwood with an initial 144 beds, designed for expansion to 600. Both systems were also concentrating service lines at high-volume sites to limit duplication and working to become more tightly integrated through electronic medical records, quality initiatives, and direct physician employment.

Independent Hospitals and Physician Dynamics

Independent hospitals in the Cleveland area were finding it increasingly difficult to remain unaffiliated. The two dominant systems' expansion and physician acquisition strategies put competitive pressure on smaller facilities. Some independent hospitals had formed affiliations or partnerships to improve their bargaining position with insurers and access to capital, but the long-term viability of the independent hospital model in this market was questionable.

Both Cleveland Clinic and UH actively recruited independent physicians, offering employment with competitive salaries, benefits, and relief from the administrative burdens of running a private practice. This trend accelerated as younger physicians increasingly preferred employment over independent practice, and as the economics of small private practice became more challenging. The shift toward hospital employment of physicians raised concerns about potential cost increases as hospitals gained greater control over referral patterns and the ability to charge facility fees for services previously provided in lower-cost office settings.

Insurance Market and Employer Cost Shifting

The Cleveland insurance market included Anthem Blue Cross and Blue Shield of Ohio (a WellPoint subsidiary), Medical Mutual (which had previously held the BCBS trademark), Kaiser Foundation Health Plan, and national plans including UnitedHealth Group, Aetna, and CIGNA. Plans competed primarily on price and customer service, with employers continuing to shift costs to workers through higher deductibles, copayments, and greater premium-sharing. High-deductible health plans were growing in popularity as employers sought to control premium growth.

Safety Net Under Pressure

The safety net for lower-income Cleveland residents was anchored by the MetroHealth System, owned by Cuyahoga County, along with several strong community-based clinics. Federal stimulus funds provided short-term protection, but the safety net faced longer-term threats from ongoing state budget difficulties and the weak local economy. The community had invested in improving access to care for vulnerable populations, but sustaining these efforts would depend on economic recovery and adequate public funding.

Looking ahead, several issues warranted monitoring: whether the expansion strategies of Cleveland Clinic and UH would prove financially sustainable given population decline and payer mix challenges; how health reform would affect coverage and provider dynamics; whether independent providers could maintain viable practices; and whether the safety net could weather ongoing fiscal pressures while maintaining access to care for the community's most vulnerable residents.

Sources and Further Reading

Based on HSC Community Tracking Study site visit to the Cleveland metropolitan area, March 2010. Researchers interviewed more than 45 health care leaders including representatives of major hospital systems, physician groups, insurers, employers, benefits consultants, community health centers, and state and local health agencies.