Los Angeles: Fragmented Health Care Market Shows Signs of Co | HSChange | HSChange

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Los Angeles: Fragmented Health Care Market Shows Signs of Coalescing

CHCF Regional Market Issue Brief — January 2013

Laurie E. Felland, Ann S. O'Malley, Divya R. Samuel, Lucy B. Stark

The California HealthCare Foundation (CHCF) commissioned HSC to carry out field research across six California communities during 2011 and 2012 as part of the broader California Health Care Almanac initiative. The goal was to evaluate how health care organization, financing, and service delivery were evolving in these regions, with particular attention to how providers and payers were gearing up for the major coverage expansions set to take effect under federal health reform.

Los Angeles stood out as a unique case. The region's sprawling geography, enormous population, and extraordinary diversity had long produced a health care market unlike any other in California. Where cities such as Sacramento or San Diego had relatively consolidated provider networks, Los Angeles remained deeply fragmented, with hundreds of hospitals, thousands of physician practices, and a patchwork of independent medical groups operating without strong organizational ties to one another.

Economic Conditions and Their Impact on Hospitals

While the Los Angeles metropolitan area benefited from a more diversified economic base than many other parts of the country during the Great Recession, the region's hospitals were not immune from the downturn's effects. Patient care revenues declined as the number of privately insured residents shrank. Employers cut back on health benefits or shed workers altogether, pushing more people into Medi-Cal or into the ranks of the uninsured. Hospitals that depended heavily on commercially insured patients for their operating margins found themselves under serious financial pressure.

At the same time, the region's safety-net providers faced surging demand. Federally qualified health centers, county facilities, and public hospital systems all reported longer wait times and strained capacity. The economic downturn had effectively shifted the region's payer mix in ways that strained both the commercial and public segments of the market simultaneously.

Market Fragmentation and Its Origins

The dense urban environment of Los Angeles fostered an unusually fragmented health care landscape. Unlike regions where a small number of large hospital systems dominate, Los Angeles contained dozens of competing hospital organizations, many operating just one or two facilities. Physician practices remained predominantly small and independent, with relatively low rates of hospital employment or formal alignment with health systems compared to national trends.

This fragmentation had consequences. Coordinating care across providers was difficult. Information sharing between hospitals and physician offices was limited. And health plans operating in the region had to maintain enormous provider directories to offer adequate network coverage across a geography that stretched for miles in every direction.

New Provider Affiliations Emerge

By the time of HSC's fieldwork, however, Los Angeles was beginning to show signs of consolidation. The combination of declining private insurance enrollment and the approaching implementation of the Affordable Care Act pushed providers to seek out new organizational relationships. Hospitals that had operated independently for decades began exploring partnerships, affiliations, and outright mergers as a strategy to attract patients, reduce costs, and position themselves for a post-reform environment that was expected to reward integrated, coordinated care delivery.

Physician groups, too, were forming new alliances. Some aligned with hospital systems in shared savings arrangements or accountable care models. Others joined together into larger multi-specialty groups to gain leverage in negotiations with health plans and to invest in the electronic health record systems and care coordination infrastructure that would be needed going forward.

Safety-Net Expansion Under Health Reform

One of the most significant developments in the Los Angeles market was the expansion of the region's safety-net system in anticipation of Medi-Cal enrollment growth. California's decision to expand Medicaid eligibility under the ACA meant that hundreds of thousands of previously uninsured Los Angeles residents would gain coverage through Medi-Cal. The county's public health system, including the Los Angeles County Department of Health Services, moved to increase its capacity by expanding clinic hours, hiring additional staff, and investing in infrastructure improvements.

Community health centers across the region also prepared for the influx of newly insured patients. Many received federal grants to build new facilities or upgrade existing ones. The expectation was that these newly covered patients would seek care in community-based settings rather than relying on hospital emergency departments, which had historically served as the de facto primary care system for many uninsured Angelenos.

Key Findings

The HSC report on Los Angeles identified several central themes. First, the region's dense urban setting had given rise to one of the most fragmented health care markets in the nation, with a large number of independent providers and limited organizational integration. Second, health reform's anticipated coverage expansions and the decline in private insurance were creating incentives for providers to form new affiliations, marking a potential turning point in the market's long history of fragmentation. Third, the region's safety-net system was actively expanding its capacity to handle the expected surge in Medi-Cal enrollment, positioning itself to serve a significantly larger patient population once ACA coverage expansions took full effect.

The Los Angeles brief was one of several regional reports produced by HSC for the California HealthCare Foundation. Companion studies examined health care markets in Sacramento, where providers collaborated to weather the economic downturn (September 2012); Fresno, where providers expanded capacity but lagged in health reform preparation (December 2012); the San Francisco Bay Area, where providers shifted allegiances as regional networks emerged (December 2012); and San Diego, where competition for well-insured patients intensified as providers expanded capacity (January 2013).

Sources and Further Reading

AHRQ — Federal health care quality research agency.

CMS — Quality Initiatives — Federal quality programs.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research.

Commonwealth Fund — Research on health care quality.