HSC Conference Focusing on the Nation's Health Care System Finds It Is in Tremendous Turmoil

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.

HSC Conference Focusing on the Nation's Health Care System Finds It Is in Tremendous Turmoil

Conference Executive Summary | November 19, 1999

The U.S. health care industry was undergoing enormous upheaval, with the consumer revolt against managed care compelling many health care organizations to fundamentally rethink -- and in some instances dismantle -- strategies they had pursued in recent years. Those were the central findings from research presented at an HSC conference titled "Update on the Nation's Health Care System: Results from Tracking 12 Communities, 1997-1999." HSC researchers and outside collaborators examined the major changes observed across markets over the preceding two years and took a deep look at two subjects of particular interest: the evolving strategies of specialty physicians and the changing role of Blue Cross and Blue Shield plans.

HSC, a nonpartisan research organization funded solely by The Robert Wood Johnson Foundation, conducted biennial surveys of households, physicians, and employers in 60 nationally representative communities and carried out in-depth site visits in 12 of those communities.

Overview of Market Change, 1997-1999

The preceding two years had seen a notable retreat from tightly managed insurance products. Employers, particularly those operating in labor-short markets, moved to accommodate consumers' demands for broad provider networks and ready access to specialist care. A strong economy and modest premium increases during this interval reinforced the trend.

Meanwhile, slower-than-expected growth in HMO enrollment in certain local markets created difficulties for providers who had invested heavily in building managed care infrastructure that never materialized at the anticipated scale. The expansion of global capitation also stalled, as plans remained reluctant to shift financial risk to providers -- many of whom had struggled to manage that risk adequately. Numerous providers themselves grew more cautious about accepting risk-sharing arrangements.

Health plans and hospitals alike were pulling back from vertical integration, a costly strategy that required them to operate well beyond their core competencies. HSC president Paul B. Ginsburg noted that because vertical integration worked best when insurance products offered limited provider choice, it was poorly suited to the current environment of broad-network demand. Jeff Goldsmith, Ph.D., president of Health Futures, described organizations that had restructured for closed-panel products as now "trying to play tennis in hockey gear, and it's not a pretty picture."

Industry consolidation had pushed many organizations toward regional and national scope. But while health plan mergers continued at a rapid clip, hospital merger activity had slowed considerably -- partly because some markets had already consolidated to just two or three hospital systems, and partly because the competitive threat once posed by Columbia/HCA had receded. Most hospital mergers aimed to extend geographic reach within a community and strengthen negotiating position with insurers. To date, consolidation had done little to reduce excess capacity or eliminate service duplication. Goldsmith characterized the wave of mergers as "a flight from competition" -- an effort to accumulate market power rather than compete on cost or quality.

Specialists Jockey for Position

Specialist physicians, who controlled a substantial share of health care spending, were responding to competitive pressures with strategies designed to enhance their leverage -- strategies that increasingly put them at odds with local hospitals. Jon B. Christianson of the University of Minnesota reported that these activities had escalated dramatically. In seven of the 12 markets visited by HSC, respondents noted significant growth in freestanding surgical centers that competed directly with hospitals. In Cleveland, for example, the number of such centers doubled from seven to 12 in just two years.

In other markets, single-specialty groups were merging to create what amounted to geographic monopolies within their specialties, a tactic designed to improve their standing with managed care plans while staying on the right side of antitrust law. Factors working in specialists' favor included the decline of gatekeeping, continuing demand for broad provider networks, and some hospitals' interest in equity partnerships. Working against them were further Medicare reimbursement cuts, persistent difficulties in forming sustainable physician organizations, and mounting cost pressures of uncertain duration.

Being 'Blue' in Today's Market

Blue Cross and Blue Shield plans, which provided coverage for roughly one in four Americans, continued to play a distinctive role in the health care system -- and that role was evolving. Despite perceptions that Blues plans struggled in a managed care environment, they remained dominant or major competitors in all 12 HSC study sites. Their strong position was largely built on extensive PPO and indemnity business, even in markets where they also operated thriving HMOs.

Many of the Blues' historical advantages and disadvantages were eroding. Originally established as collaborative efforts with local hospitals, they had carried a community mission and a unique regulatory framework. In exchange for special tax treatment, most had served as insurers of last resort. By the late 1990s, most had shed their insurer-of-last-resort obligations, and the special federal tax exemption they once enjoyed had been largely eliminated in 1986. Even so, respondents said Blues plans still faced implicit expectations to serve a community benefit role, which could complicate mergers and conversions to for-profit status.

Looking Ahead

Conference presenters agreed that the retreat from past strategies had left many health care organizations without a clear vision for the future. Consumers were becoming an increasingly powerful force, and organizations that responded to the growing desire for better, more accessible health information -- potentially through internet technology -- would be best positioned going forward. As the industry continued to evolve rapidly and face conflicting pressures from plans, providers, consumers, purchasers, and regulators, finding a single approach that satisfied all stakeholders appeared unlikely.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.

Commonwealth Fund -- Research on health care coverage.