Insurers Consolidate, Hospitals Struggle Financially

Insurers Consolidate, Hospitals Struggle Financially: Syracuse, New York

Community Report No. 05, Winter 2001 -- Aaron Katz, Robert E. Hurley, Leslie A. Jackson, Timothy K. Lake, Ashley C. Short, James D. Reschovsky

In October 2000, a research team visited Syracuse, N.Y., to examine the community's health system, the changes taking place within it and the effects of those changes on consumers. The Center for Studying Health System Change (HSC), through its Community Tracking Study, conducted interviews with more than 60 leaders in the local health care market. Syracuse was one of 12 communities tracked by HSC every two years through site visits and surveys. Individual community reports were published for each round of site visits. The first two visits to Syracuse, in 1996 and 1998, established baseline and initial trend data against which subsequent changes would be measured. The Syracuse market encompassed Cayuga, Madison, Onondaga and Oswego counties.

Following a burst of competitive activity in 1997-1998 driven by expectations of managed care growth, the Syracuse health care market had settled into a tense equilibrium. Consolidation among local insurers had diminished fears that aggressive managed care would gain traction. A succession of health plan departures and mergers left indemnity insurer Excellus Blue Cross Blue Shield controlling approximately 40 percent of the Syracuse market, creating a new stabilizing force. Nonetheless, hospitals were under financial strain from reduced payment rates, operational difficulties and substantial long-term debt.

Other notable developments in Syracuse included the following: the largest local hospital system filed for bankruptcy under mounting financial pressure while it and others pursued cost reductions; physicians grew increasingly worried about the growing leverage of Excellus; and New York State continued to broaden access to health insurance and bolster the local safety net.

Health Plan Shakeout Leaves One Dominant Indemnity Insurer

Even the modest presence and influence of managed care in the Syracuse market appeared to be fading. In a market where hospital rate regulation and employer disinterest had long blocked managed care growth, Syracuse remained a stronghold of indemnity insurance. Since 1998, plans offering tight managed care products had scaled back their operations in Syracuse, exited the market entirely or been absorbed by Excellus.

The most striking development came in late 2000, when Excellus announced its intention to acquire Univera, the largest health maintenance organization (HMO) in Syracuse, with 130,000 members. Univera had been formed in the late 1990s through a merger of HealthCarePlan of Buffalo and PHP, the latter a product of the national HMO movement that began in the 1970s. The Excellus-Univera deal would bring an estimated 40 percent of the Syracuse market under a single insurer.

Even before the Excellus-Univera transaction was announced, plan exits and reorganizations had narrowed managed care options in Syracuse. CIGNA withdrew its HMO product from the market, staying mainly to serve looser products for major national accounts. Kaiser departed the Northeast entirely. North Medical Community Health Plan, a local HMO developed by a physician-entrepreneur, sold out to Excellus amid deepening financial problems. United Healthcare combined its central New York operations with those in New York City and downgraded Syracuse to a submarket. And Aetna's effort to launch an HMO product had stalled, reportedly because the firm could not assemble an adequate provider network.

The Syracuse market appeared to have accepted insurer consolidation as a counterbalance to the competitive pressures unleashed by New York State's 1996 deregulation of hospital rates. This shift from one form of stability to another came easily, given the state's regulatory tradition and the general distrust of outside, for-profit health plans.

Managed care penetration in the Syracuse market -- including preferred provider organizations (PPOs), which state law had prohibited until the late 1990s -- was below 40 percent. Moreover, the area's moderate HMO enrollment was migrating toward point-of-service (POS) and PPO products. The weakness of managed care in Syracuse was illustrated by the experience of Blue Cross Blue Shield of Central New York, an Excellus subsidiary that had grown roughly 20 percent since the Excellus acquisition two years earlier, mainly in its indemnity and PPO/POS products.

Neither purchasers nor consumers had shown much appetite for HMOs or other restrictive managed care products. Unlike employers in neighboring Rochester and Buffalo who had long backed community-rated HMOs, Syracuse employers favored open-network products and had launched few initiatives to influence either costs or quality. More than two-thirds of Excellus's business was in traditional indemnity products, which offered the advantages of a broad-network PPO -- wide choice and open access -- with few drawbacks from the consumer perspective. With considerable leverage over providers, Excellus had shown little interest in pushing risk downstream to promote managed care incentives.

Hospitals Struggle Under Growing Financial Pressures

The financial condition of Syracuse hospitals had deteriorated over the previous two years, culminating in the February 2001 bankruptcy filing by the market's largest hospital system. The 566-bed Crouse Hospital sought Chapter 11 bankruptcy protection after facing declining payments from both public and private payers and accumulating more than $90 million in long-term debt. Crouse had recently joined forces with Community General Hospital in an attempt to achieve operational efficiencies. Under a parent holding company called the Health Alliance of Central New York, the two hospitals had launched several cost-cutting efforts to address mounting losses. However, the institutions did not merge their assets and continued operating as distinct facilities under their original names, without consolidating clinical services. In its bankruptcy filing, Crouse maintained that no services would be closed and patient care would continue uninterrupted during restructuring, viewing the move as necessary to gain relief from creditors while reorganizing its finances.

Meanwhile, Syracuse's other major hospitals had also experienced financial difficulties, eroding their long-standing spirit of collaboration as each institution focused on strengthening its bottom line. Although area hospitals continued cooperating on quality and disease management issues through the Hospital Executive Council, these activities had become less pressing while competitive pressures intensified. The 1996 deregulation of hospital rates and expectations of growing HMO penetration and provider risk-sharing had prompted Syracuse hospitals to prepare cautiously in 1997-1998 by cutting costs and exploring alliances. Two years later, however, these efforts had produced little structural change, and hospitals remained preoccupied with internal operational concerns.

Like Crouse and Community General, the city's two other major hospitals -- St. Joseph's Hospital and University Hospital -- had not pursued major initiatives to expand market share, revenue or bargaining power since 1998. Instead, facing budget deficits and Medicare payment cuts, they concentrated on reducing costs, trimming outpatient services and programs, and enhancing inpatient capacity in historically strong clinical areas. St. Joseph's, for example, cut operating costs in its outpatient clinics serving many low-income individuals to keep them open, while University Hospital reduced staff by 300 full-time equivalents (FTEs) over recent years, helping it avoid red ink in 1999.

Medicare payment reductions hit Syracuse hospitals especially hard because of a growing shortage of nurses. All four hospitals reported significant nursing vacancies, which limited both inpatient and outpatient capacity and constrained their ability to generate revenue. An ongoing emergency room diversion program -- routing ambulances to hospitals with available beds -- grew more important as staffing problems eroded hospital capacity. This program stood as a notable remnant of the hospitals' collaborative approach to community health.

As in the past, some local observers believed Syracuse had too many hospitals, and the Crouse/Community General alliance had not dramatically altered this situation. Whether a hospital closure would actually occur, and if so which hospital would close, remained a matter of disagreement. Five smaller community hospitals served the suburban counties outside Syracuse. Neither these facilities nor the four urban hospitals had pursued formal alliances to strengthen referral networks or expand market share, as had occurred in other markets. The suburban hospitals, as sole community providers with considerable insurer leverage, and the city hospitals, satisfied with existing referral patterns, had little incentive to consolidate.

Physicians Cast About for Direction and Leverage

Many physicians were left feeling economically vulnerable in Syracuse's highly consolidated insurance market. Anticipating the growth of managed care and heightened competition, physicians had formed multispecialty independent practice associations (IPAs) in the late 1990s, hoping to gain leverage with health plans and hospitals. Over the preceding two years, however, one IPA folded and the two remaining ones struggled due to low HMO enrollment and Excellus's refusal to contract with IPAs. As these organizations faltered, physicians faced growing unease in a market dominated by a single insurer -- particularly because provider payment rates had not kept pace with recent premium increases and, in some instances, had been cut substantially.

Syracuse remained a market dominated by solo or small-group practices, with most physicians affiliated with one of the four hospitals. Some consolidation had occurred within individual specialties. One group, Hematology-Oncology Associates of Central New York, had grown to 12 specialists, while Syracuse Orthopedics Specialists reportedly had 17 orthopedists, representing about 30 to 40 percent of the market. Cardiologists, however, had not consolidated and remained scattered among small practices, unlike other markets where these specialists organized into large, powerful groups.

Formal physician-hospital integration efforts in Syracuse appeared stagnant or deteriorating. Some hospitals had reduced their ownership of primary care practices and pulled back from arrangements once expected to lead toward integrated delivery systems. Joint contracting with physicians was rare, and although some hospitals provided management services to affiliated physicians, these services did not figure prominently in overall market strategies. Still, insurer consolidation could renew interest in developing unified negotiating strategies between hospitals and their affiliated physicians.

One area of competitive activity among Syracuse physicians was the development of ambulatory surgery centers (ASCs). Following the relaxation of state certificate-of-need rules, a number of physicians invested in these centers to carve out a new market niche. Hospitals saw ASC growth as a threat that could divert patients from their own freestanding centers or outpatient departments. Health plans, notably Excellus, raised concerns about the potential for costly overcapacity.

Employers Face Steep Premium Increases

Syracuse had long enjoyed lower health insurance premiums than many other markets, but rates had risen 15 percent for two consecutive years, confronting employers with rapidly escalating costs. Employer resistance to premium increases had been muted, partly because of the tight labor market and partly because Syracuse employers had historically taken a passive role in shaping the local health care system. Moreover, cost containment efforts were less effective in an environment where hospitals were pushing for -- and receiving -- rate increases after a period of flat or no growth.

Syracuse employers had demonstrated little interest in quality improvement initiatives or other strategies that might shape the market. They generally preferred to leave it to their health plan or third-party administrator to negotiate with providers and monitor quality. Their reluctance stemmed from several factors: a lack of local leadership, since many large employers were divisions of national corporations headquartered elsewhere; the prevalence of small, service-sector businesses; and the influence of unions over the structure and scope of employee health benefits.

Syracuse employers typically offered indemnity plans or managed care products with open networks, often PPO or POS products. HMO rates had once been comparable to those for these looser products, but some employers reported that recent HMO premium increases had made HMOs more expensive. Employers had not yet made major changes to benefit or cost-sharing structures in response to rate hikes, except in prescription drugs. Formularies had been rare in this market until 1998, but rising drug costs led some employers to increase copayments, move to three-tier benefit structures or even mandate the use of generics. Some employers also raised general cost-sharing amounts, from $5 per office visit to $10, for example.

State Shifts Regulatory Focus, Expands Coverage

New York State maintained its longstanding commitment to programs that expanded access to health insurance and strengthened the local safety net through public insurance expansions and direct subsidies for charity care. Efforts in Syracuse to enroll children and adults in Medicaid and Child Health Plus, New York's State Children's Health Insurance Program (SCHIP), had been largely innovative and effective.

Syracuse had organized an impressive program of outreach and decentralized enrollment for Medicaid managed care and Child Health Plus, which predated the federal SCHIP program by several years. These efforts involved all four major hospitals, local public health agencies and many nontraditional organizations -- including schools, churches and community groups. Ironically, these enrollment drives had channeled many Medicaid-eligible children into Child Health Plus. Federal and state authorities were now pressing to identify and transfer these children back into Medicaid, raising concerns that some children could lose coverage in the transition.

Despite this challenge, the rollout of Child Health Plus and mandatory Medicaid managed care in Onondaga and Oswego counties, beginning in 1999, had gone smoothly. Four health plans participated in both programs, including two commercial insurers (Excellus and United) and two plans serving only public clients (Total Care and Fidelis).

The safety net, comprising the four Syracuse hospitals and Syracuse Community Health Center (CHC), was reasonably stable and growing modestly thanks to Child Health Plus and Medicaid managed care. Funding pools for charity care and graduate medical education, created in 1996 and expanded in 1998 under the Health Care Reform Act (HCRA) of 2000, had cushioned some of the effects that market disruption might otherwise have had on care for the uninsured. Syracuse CHC had aggressively pursued innovative program expansions and new revenue streams, and Total Care, its affiliated health plan, was expanding into at least two neighboring counties through contracts with private clinics, increasing regional safety net capacity. On the other hand, hospitals needing to shore up their finances had been forced to cut services in outpatient clinics used by uninsured patients.

HCRA 2000 created two additional programs to extend subsidized coverage to more populations. Healthy New York, launched in January 2001, subsidized coverage in the individual and small-group markets through reinsurance pools that would cover individuals' medical costs above a certain threshold, keeping premiums lower. Family Health Plus -- slated to start in early 2001 pending federal approval -- would expand Medicaid eligibility to adults ages 19 to 64.

Governor George Pataki's administration had brought a strong emphasis on nonregulatory solutions to health care issues, beginning with hospital rate deregulation. This policy shift triggered a brief period of heightened competition and consolidation, but market forces and a new focus on managed care oversight had ended that phase. The state departments of Insurance and Health shared -- and sometimes competed over -- responsibility for overseeing health plans and providers, including the new external review program and proposed regulations for IPAs and risk-bearing provider organizations. New York also invested considerable resources in producing and disseminating information about health plans and providers to the public, though observers remained uncertain about the goals and outcomes of these information initiatives.

Issues to Track

Insurer consolidation had replaced hospital regulation as the primary stabilizing force in Syracuse, a market that experienced considerable competitive activity for a brief period in 1997-1998. To manage rising premiums -- driven by the insurance underwriting cycle and the absence of aggressive managed care -- purchasers had been content to make marginal adjustments to benefit packages rather than take broader action to reshape the system. Hospitals had not pursued major competitive strategies, focusing instead on near-term efforts to close budget gaps. After a brief flirtation with greater integration, physicians were now focused on the power of payers, especially Excellus, to determine their financial futures. Meanwhile, New York State continued expanding public programs to increase access for the uninsured and strengthen the safety net.

As the Syracuse market continued to evolve, several questions merited close attention: What effects would the Excellus-Univera merger have on consumers, provider networks and other health plans? Would continuing financial pressures force any of Syracuse's four hospitals to close? Would providers organize to increase their market clout and demand higher payment rates? How would employers cope with rising health plan premiums? And would New York's new insurance expansions continue the successes of the Medicaid and Child Health Plus programs?

Sources and Further Reading

CMS — National Health Expenditure Data — Official data on U.S. health spending trends.

Kaiser Family Foundation — Health Costs — Analysis of health care costs and spending.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care costs and system performance.