Competition Revs Up the Indianapolis Health Care Market

Originally published as Community Report No. 1 by the Center for Studying Health System Change (HSC), Winter 2003. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

In September 2002, HSC researchers visited Indianapolis to examine how the community's health system was evolving and what these changes meant for consumers. As part of the Community Tracking Study, the team interviewed more than 100 market leaders. Indianapolis was one of 12 communities HSC tracked through biennial site visits and triennial surveys, with earlier rounds in 1996, 1998, and 2000 providing the baseline against which developments were measured. The Indianapolis market covered a nine-county region including Marion, Hamilton, Hendricks, Johnson, and five additional counties.

Long characterized by genteel competition, the Indianapolis health care market was on the verge of becoming a full-blown battleground among providers. Physician specialty groups were flexing growing leverage with the market's four hospital systems, pushing for a share of facility fees to compensate for historically stagnant professional payments. A relatively weak health plan market seemed reduced to acting as a pass-through for providers seeking higher reimbursement. Employers, stung by rising premiums and buffeted by an economic slowdown, felt increasingly powerless as provider competition escalated.

Pursuit of Profits Shakes Up Provider Market

Aggressive moves by physicians and hospital systems were disrupting what had long been a stable market divided into four hospital systems with mutually exclusive geographic territories. Since the late 1990s, single-specialty physician groups had grown in size and clout, moving aggressively to capture a larger share of revenues from inpatient and outpatient services. Local cardiovascular surgery groups initiated discussions about building heart hospitals with MedCath, a for-profit national firm. To prevent the loss of physicians and their patients, hospital systems struck partnerships with the specialists to consolidate or expand heart surgery programs. By late 2002, each of the four hospital systems was building or had opened a freestanding cardiac facility -- two as joint ventures with physicians.

The building wave extended beyond cardiology. Orthopedics Indianapolis, a large single-specialty group, announced plans for its own orthopedic hospital to supplement an existing freestanding surgery center. St. Vincent's Hospital opened a new children's hospital to compete with Clarian's Riley Children's Hospital, long the market's sole pediatric facility. Specialty groups were also building outpatient facilities independently or with hospital partners and folding more diagnostic and laboratory testing into their own practices. Some observers feared oncologists would follow the cardiac model, spurring hospitals to build additional cancer facilities with physician ownership stakes.

Hospital-to-hospital competition was also intensifying, potentially fracturing the market's traditional geographic boundaries. Several systems announced plans for new hospitals or major renovations in areas where competitors operated. Much of this construction aimed to shift flagship hospital services into faster-growing suburban areas. Ongoing friction between Indiana University physicians and Methodist Hospital -- which had merged in 1997 to form Clarian Health System -- fueled the competition further, as many Methodist-affiliated physicians migrated to rival hospitals.

Purchasers Face Rising Premiums and a Weak Economy

Employers wielded little power over the Indianapolis health care market and had few options as the economy weakened and health benefit costs surged. Insurance premiums had begun climbing at double-digit rates in the late 1990s, but with unemployment then at just 2.6 percent, businesses generally absorbed the increases to stay competitive in recruiting workers. By 2002, unemployment had jumped to 4.6 percent, giving employers more latitude to raise employee cost sharing. Faced with premium increases of roughly 15 percent in 2002 and projections of 20 percent in 2003, Indianapolis employers were boosting deductibles and copayments -- especially for prescription drugs -- and exploring consumer-driven health plan designs.

Beyond adjusting cost sharing, individual employers had not managed to harness collective purchasing power to pressure providers or plans. Since 1996, four different employer organizations had tried to improve the health care delivery system, but none had achieved lasting impact, partly because employers could not agree on shared goals. The erosion of corporate headquarters in Indianapolis -- with departures by USA Group, Ameritech, and the bankruptcy of Conseco -- made coalition-building harder still.

A Weak Health Plan Market and Anthem's Potential Power

Most health plans in Indianapolis exercised limited leverage over providers and showed little inclination toward aggressive managed care strategies. As providers competed for new revenue, they pressured plans to increase payment rates to fund an estimated $500 million in construction costs for new heart hospitals and other facilities. Without employer pushback, most plans found it difficult to resist and instead passed costs through to consumers via higher beneficiary cost sharing. Interest in HMOs, never robust in Indianapolis, continued to decline. Maxicare went bankrupt in 2000, Aetna abandoned its HMO in 2001, and Anthem's HMO enrollment shrank. The remaining major HMOs were sponsored by provider systems themselves, making it unlikely they would aggressively restrain provider payment rates.

Indianapolis-based Anthem Blue Cross Blue Shield dominated the health plan market. The insurer's local market share was relatively stable, but its growing national footprint -- having completed conversion to a publicly traded company in 2001 and acquired Blue Cross and Blue Shield plans in eight other states -- raised concerns about its potential power. Physicians intensified complaints about Anthem's business practices, alleging downcoding of claims and slow payment. Hospitals also grew more assertive: St. Francis Hospital threatened to terminate its Anthem contract over payment rates and terms, though the parties eventually reached an agreement that included quality-linked bonuses.

Safety Net Gains at Risk from Budget Cuts

Even as provider competition swept through the commercial market, Indianapolis's safety net providers had been a model of cooperation. The Health and Hospital Corporation of Marion County -- including Wishard Health Services and the Marion County Health Department -- led collaborative efforts that expanded the safety net's capacity. Aggressive outreach boosted enrollment in the state's Medicaid managed care program, Hoosier Healthwise, by 12 percent in Marion County between 2001 and 2002. The state also directed $31 million in tobacco settlement grants toward safety net improvements. However, a looming state budget crisis threatened to roll back these gains. Indiana faced a deficit estimated at $800 million to $1.5 billion, and potential Medicaid cuts could reduce the revenues that safety net providers depended upon.

Sources and Further Reading

HSC Community Tracking Study site visits, Indianapolis, 1996-2002. | Katz, Aaron, et al., Community Report No. 1, Center for Studying Health System Change, Winter 2003. | HSC Community Tracking Study Household Survey data on Indianapolis consumers' access to care, 2000.