Highly Consolidated Market Poses Cost Control Challenges

Community Report No. 06 | Lansing, Mich. | Winter 2001 | By Kelly Devers, Jon B. Christianson, Laurie E. Felland, Suzanne Felt-Lisk, Liza Rudell, and J. Lee Hargraves

In October 2000, HSC researchers conducted their third round of site visits to Lansing, Michigan, interviewing more than 85 leaders across the local health care market. Lansing was one of 12 communities monitored biennially through site visits and surveys as part of the Community Tracking Study. The Lansing market, covering Ingham, Clinton and Eaton counties, had become one of the most concentrated health care markets in the study.

A single health plan and one hospital system had come to control much of Lansing's health care delivery. Blue Cross and Blue Shield of Michigan (BCBSM) covered roughly 70 percent of the commercially insured population. Sparrow Health System, formed through the 1997 merger of two local hospitals, held more than 60 percent of the hospital market and also owned Physicians Health Plan of Mid-Michigan (PHP), the market's second major insurer.

Hospitals Compete in Clinical Service Lines

Since 1998, both Sparrow Health System and Ingham Regional Medical Center (IRMC) had invested heavily in building new tertiary care facilities and expanding clinical service offerings. Each system targeted these investments at establishing community recognition as the highest-quality provider to build patient loyalty and strengthen profitability.

Sparrow had launched a cardiovascular surgery program, added a Level I trauma unit and established a neurosurgical care unit. IRMC, backed by capital from its parent organization McLaren Health Care Corporation, countered with a $21 million women and children's center targeting obstetrics, gynecology and pediatric patients. IRMC also created the Great Lakes Cancer Institute in partnership with Michigan State University, combining cancer research, treatment services and teaching programs. The arrangement pulled MSU's clinical faculty practice and oncology fellowship away from Sparrow to IRMC.

Most observers viewed the growing competition between the two systems favorably, noting that it extended beyond clinical services to include community outreach, prevention programs and charity care. Some respondents, however, voiced concern about the long-term impact of this service-line arms race on overall costs and the availability of more basic medical services.

Ambulatory Surgery Centers Spark Renewed Debate

Three freestanding ambulatory surgery centers (ASCs) opened by physician entrepreneurs between 1996 and 1998 had already generated controversy, and a March 2000 ruling by Michigan's state insurance commissioner reignited the dispute. Supporters argued that freestanding ASCs delivered lower costs, higher patient satisfaction and comparable quality to hospital-based facilities. Opponents, including General Motors and BCBSM, maintained that the centers duplicated existing hospital capacity and would drive up total spending.

The insurance commissioner found that BCBSM's refusal to contract with freestanding ASCs applied inequitable access and quality standards. Under review were new BCBSM criteria that could potentially open the door for freestanding ASCs to participate in BCBSM indemnity products, a development that would likely increase competition for ambulatory surgery services in the Lansing market.

Physicians Seek Greater Leverage

Physicians in the highly concentrated Lansing market pursued several approaches to strengthen their bargaining position relative to health plans and hospitals. Smaller single-specialty groups consolidated into practices of roughly 10 physicians. Larger groups, including the Thoracic and Cardiovascular Institute and Mid-Michigan Physicians, lost consolidation momentum as they dealt with declining Medicare reimbursement and the demands of upgrading information systems.

Many physician groups renegotiated or exited capitated contracts with health plans after determining that extensive risk-sharing arrangements were unprofitable. Physicians also maintained participation in both Sparrow's and IRMC's physician-hospital organizations as another avenue for leveraging their collective bargaining strength.

Employers Face Premium Increases with Limited Options

Since 1998, employers had experienced double-digit annual premium increases and responded with only modest adjustments. The high degree of market consolidation among both hospitals and health plans left employers with few competitive alternatives and limited negotiating power. These dynamics raised serious questions about whether meaningful cost containment was achievable in a market this concentrated.

Sources and Further Reading

This report was originally published as Community Report No. 06 by the Center for Studying Health System Change as part of the Community Tracking Study, funded by the Robert Wood Johnson Foundation.