Collaboration and Competition Coexist

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.

Syracuse, NY

Caroline Rossi Steinberg, Linda T. Kohn, June Eichner, Loel S. Solomon

In June 1998, a research team visited Syracuse, New York, to study the local health care system, document how it was evolving, and assess the impact on consumers. More than 40 leaders across the health care market were interviewed by Health System Change and The Lewin Group as part of the Community Tracking Study. Syracuse was one of 12 communities that HSC tracked every two years through site visits and surveys. A baseline visit in May 1996 had established the initial picture against which changes would be measured. The Syracuse market encompassed Onondaga, Cayuga, Madison, and Oswego counties.

By 1998, the Syracuse health care landscape looked markedly different from two years earlier, though the changes did not unfold the way most local stakeholders had predicted. In 1996, there was widespread concern that several looming forces -- the end of hospital rate setting, the advent of mandatory Medicaid managed care, a new purchasing coalition, and the arrival of national managed care companies -- would undermine the collaborative character that had long defined Syracuse's health system. In reality, none of these anticipated disruptions had the expected impact, either because they were delayed or because the market responded differently than expected. The collaborative spirit remained intact.

Collaborative Structures Remain

The cooperative tradition that defined Syracuse's health system in 1996 continued to thrive. The Hospital Executive Council (HEC), a long-standing group of hospital leaders, kept pursuing joint projects that benefited the four major hospitals or the community as a whole, particularly in areas where no single institution had staked out exclusive territory. Representatives from three health plans formed a quality committee to develop guidelines and programs for managing asthma, diabetes, and other chronic conditions. The local health department had also strengthened partnerships with Medicaid HMOs to coordinate service delivery between health plans and the public health sector, and was working to extend similar arrangements to commercial managed care organizations.

Despite these cooperative efforts, competition was intensifying within the physician, hospital, and health plan sectors. Finding common ground was reportedly growing more difficult as individual organizations positioned themselves for a changing market.

Physician-Led IPAs Replace Hospital-Driven PHOs

A change in New York State regulations removed a major obstacle to the growth of independent practitioner associations (IPAs). Before 1996, an IPA in the state could contract with only one managed care organization. The revised rules allowed IPAs to contract with multiple plans, making them a far more attractive vehicle for physicians to organize collectively and negotiate with health plans.

During the 1996 visit, most hospitals were developing physician-hospital organizations (PHOs) to link physicians with hospital systems. By 1998, IPAs had supplanted PHOs as the dominant organizational model. Where PHOs had been hospital-driven, the new IPAs put physicians in the leading role. Roughly 90 percent of physicians in Onondaga County belonged to one of four major IPAs, which ranged in size from 300 to more than 800 physicians. Each IPA had a primary hospital affiliation, but these ties were typically not legally binding -- creating the possibility that large blocks of physicians could shift their allegiances.

The IPAs were broad and overlapping. Physicians participated in multiple IPAs, health plans contracted with multiple IPAs, and individual physicians still maintained their own direct contracts with plans. Though IPA agreements technically required primary care physicians to limit themselves to one IPA, this provision was not being enforced, leading to confusion about which contract governed a particular patient encounter. Most IPAs did not restrict specialist membership, though several planned to tighten specialist panels in the future.

Capitated payment had been uncommon in Syracuse in 1996, but by 1998, physicians in IPAs were beginning to accept financial risk through their IPA structures. Arrangements varied: some covered primary care only, some extended to all professional services, and others involved shared risk for hospital care. Most individual physicians continued to be paid fee-for-service, with risk held at the IPA level. One IPA, however, was already capitating individual primary care physicians and subcapitating specialty care, supported by a contract with a national physician management firm that provided the data infrastructure and expertise to manage these arrangements.

Hospital Consolidation Produces Three Systems

An affiliation between two of the four leading Syracuse hospitals was underway. Two local studies had projected significant overcapacity in the near future, and bilateral merger discussions had taken place among various pairs of hospitals. The result was a plan to bring Community General Hospital and Crouse Health together as separate corporations under a single holding company. The combined entity expected to benefit from complementary service areas, economies of scale, and a stronger contracting position with health plans. Together, the two hospitals accounted for just over half of all Syracuse-area hospital admissions in 1997.

While the remaining hospitals did not view the affiliation as an immediate threat, at least one health plan observer noted that Crouse's recent operational improvements, low cost position, and effective leadership could make the new combined organization a formidable competitor positioned to capture volume at the expense of its rivals.

Premium Increases and Regional Expansion by Health Plans

After several years of aggressive competition and flat premiums, managed care plans in Syracuse were working to recover operating losses. A price war -- the origins of which were disputed -- had widened the gap between HMO and indemnity plan costs and boosted HMO enrollment. But the competition came at a steep price: multiple health plans posted substantial financial losses and responded with rate increases of 9 to 16 percent in 1998, with further increases projected for 1999.

The price war reshaped a market that had been dominated by strong local players. Physicians Health Plan (PHP), the historically dominant local HMO founded by four Syracuse hospitals, was weakened by underwriting losses and management distraction from merger talks. PHP's announced merger with Health Care Plan of Buffalo would make it a regional entity, potentially diluting its local character but strengthening its financial position. Blue Cross and Blue Shield of Central New York merged with Rochester and Utica-Watertown plans, creating a larger organization that was pricing managed care products more competitively and lowering physician payment rates.

National health plans -- including CIGNA, United HealthCare, Kaiser Permanente, and Aetna/U.S. Healthcare -- entered the Syracuse market through acquisitions. Their growth had been limited, however, by internal merger-related challenges and difficulties developing effective local marketing strategies. Meanwhile, the Purchasing Coalition of Central New York, which had generated considerable attention in 1996, fell short of its enrollment goals, covering only 20,000 lives against a target of 50,000.

The premium increases were eroding the cost advantage that had drawn employers and employees into managed care. Some employers were seeing enrollment shift back toward traditional benefit plans. At the same time, health plans introduced tighter network products that could help cost-conscious employers avoid some of the price increases, though these products initially appealed mainly to smaller employers.

Deregulation, Medicaid Managed Care, and Consumer Protections

Hospital rate deregulation, implemented in 1997, had produced more moderate effects than anticipated. Both hospitals and health plans entered the new rate negotiation process without strong information systems or management experience in negotiating. Syracuse hospitals took preemptive steps to cut costs, but did not undercut competitors in the initial negotiation cycles. Health plans claimed they were paying more for hospital services than under the old regulated system; hospitals said they were receiving less. Rural hospitals, as the only providers in their areas, generally had more negotiating leverage.

Mandatory Medicaid managed care, expected to be a major market driver in 1996, had stalled. New York State delayed statewide implementation due to administrative complexity and was focusing initial efforts on New York City. In Syracuse, voluntary Medicaid managed care enrollment had actually declined after the state cut payment rates, prompting several plans to exit the Medicaid market.

New York State had enacted one of the nation's most comprehensive managed care consumer protection laws, covering information disclosure, appeals and grievance procedures, due process, medical necessity determinations, and direct access to specialists. Local respondents reported that these protections had not dramatically changed plan operations because Syracuse plans had not engaged in the restrictive practices the legislation targeted. The new regulations did, however, increase administrative burdens on health plans.

Hospital rate deregulation had an indirect effect on plan products by enabling the emergence of PPO offerings, which had not been viable under the old system. National carriers introduced PPO products, and point-of-service plans also gained popularity. United HealthCare launched an open-access plan with no gatekeeping requirements, and Blue Cross offered a triple-option product allowing employees to choose among different benefit levels and network configurations. Despite all the managed care activity, HMO penetration in Syracuse stood at only 19 percent, up from 14 percent in 1996.

Issues to Track

Although change in Syracuse had not followed the predicted script, the market looked substantially different from two years prior. New physician organizations had formed, the balance of power among providers and plans was shifting, and referral patterns were becoming more defined. Key questions for future tracking included: What impact would physician organizations have on the Syracuse market? Would competition overtake the community's collaborative traditions? How would deregulation and new regulations reshape the market? How would employers and employees respond to premium increases -- would more restrictive managed care products gain traction? And ultimately, how would all of these changes affect the residents of Syracuse?

Sources and Further Reading

HSC Community Tracking Study, including Household, Physician, and Employer Surveys conducted in 1996 and 1997.

Related HSC publications: "Public Health Departments Adapt to Medicaid Managed Care," Issue Brief No. 16, November 1998; "Health System Change in Syracuse, New York," Case Study, July 1997; "Monitoring Market Change: Findings from the Community Tracking Study," Health Services Research, April 2000.