Economic Downturn Slows Phoenix's Once-Booming Health Care Market

Originally published by the Center for Studying Health System Change (HSC) as Community Report No. 8, July 2011.

Economic Downturn Reshapes Phoenix Health Care Market

In July 2010, researchers from the Center for Studying Health System Change (HSC) visited the Phoenix metropolitan area as part of the Community Tracking Study (CTS) to examine how health care was organized, financed, and delivered in the community. The team 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.

The Phoenix metropolitan area, encompassing Maricopa and Pinal counties, is a sprawling region of more than 14,000 square miles with roughly 4.4 million residents, nearly a third Latino. After more than a decade of rapid population growth and economic expansion, the area's health care market had adopted a far more cautious outlook as the effects of the great recession lingered. Job losses, the subsequent erosion of employer-sponsored health insurance, and a high rate of home foreclosures had taken a toll on many Phoenix residents and the health care organizations that served them.

State Budget Crisis and Public Coverage Reductions

Against a backdrop of provider caution and shifting market dynamics, state-level developments were reshaping the health care landscape. Arizona was grappling with a widening gap between declining tax revenues and rising public program costs. The ongoing state budget crisis led to an enrollment freeze for most childless adults in Arizona's innovative Medicaid program, which had previously extended coverage to low-income residents without children at incomes up to 100 percent of poverty, or $10,830 for a single person in 2010. This freeze, combined with other reductions in public health coverage, threatened to push the area's already high uninsurance rate even higher.

State laws enacted in recent years had reportedly prompted many immigrant families to either leave Arizona or avoid interaction with public agencies, health care providers, and programs. Safety net providers were working to maintain services despite growing financial pressure, though the combination of budget cuts, rising demand from newly uninsured residents, and the departure of immigrant families from the system created a complex and uncertain operating environment.

Hospitals and Physicians Rethink Expansion

Hospitals remained in reasonably sound financial condition, but concerns about the future were growing. Many had scaled back or delayed expansion plans that had seemed prudent during the boom years. At the same time, hospitals and physicians were increasingly pursuing closer collaborations, either through contractual arrangements or employment relationships. This represented a sharp departure for the historically highly independent medical profession in the Phoenix area, where physician autonomy had long been a defining characteristic of the market.

Despite this trend toward tighter alignment, physician independence remained strong in Phoenix compared with many other markets. The movement toward hospital employment of physicians was occurring, but at a measured pace that reflected both the area's cultural traditions and practical considerations about how best to organize care delivery in an uncertain economic environment.

Health Plan Competition Without Innovation

The health plan market remained relatively fragmented, which sustained some degree of price competition as employers regularly switched carriers in pursuit of even modest savings on premiums. However, health plans showed limited innovation in either payment methods or quality improvement initiatives. The primary strategy for managing costs centered on developing products with increased patient cost sharing, such as higher deductibles and copayments, rather than pursuing more ambitious approaches to changing how care was delivered or paid for.

Employers, particularly small firms, continued searching for ways to reduce health insurance premiums. The economic pressures of the recession had made cost containment an even higher priority, but the tools available to employers in the Phoenix market were largely limited to shifting more financial responsibility to employees rather than fundamentally restructuring how health care was purchased or delivered.

Looking Ahead to Health Reform

The Phoenix health care market was approaching national health reform with a mixture of anticipation and uncertainty. The potential expansion of Medicaid eligibility under the Affordable Care Act could bring coverage to many currently uninsured residents, but the state's fiscal difficulties raised questions about Arizona's ability and willingness to participate fully in expanded coverage programs. Providers were beginning to consider how payment reform initiatives, including accountable care organizations and bundled payment models, might affect their operations, but concrete planning remained limited in the face of so many unanswered questions about how reform would be implemented at the state level.

Sources and Further Reading

Katz, Aaron, Robert A. Berenson, Gary Claxton, et al., "Economic Downturn Slows Phoenix's Once-Booming Health Care Market," Community Report No. 8, Center for Studying Health System Change (July 2011).

Center for Studying Health System Change, Community Tracking Study site visit reports and data.