Intense Competition and Rising Costs Dominate Cleveland's Health Care Market

Originally published as Community Report No. 2 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.

Intense Competition and Rising Costs Dominate Cleveland's Health Care Market

In September 2002, HSC researchers visited Cleveland to study the community's health system and the effects of market changes on consumers. The research team interviewed more than 100 market leaders as part of the Community Tracking Study. Cleveland was one of 12 communities HSC monitored every two years through site visits and every three years through surveys. The Cleveland market encompassed Cuyahoga, Lake, Lorain, Medina, Ashtabula, and Geauga counties.

Since the mid-1990s, Cleveland's hospitals had consolidated into two dominant systems -- the Cleveland Clinic Health System (CCHS) and University Hospitals Health System (UHHS). Unlike many communities, no strong counterbalancing force from health plans or employers existed to check the systems' market power, which contributed to steadily rising costs. Meanwhile, the economic downturn prompted employers to pass on a larger share of health care expenses to workers, who generally accepted the additional costs because job security seemed more urgent than fighting over benefits.

Provider Systems Seek Higher Payment and Consumer Loyalty

Following a wave of mergers and hospital closures in the 1990s, the Cleveland market was highly consolidated. The Cleveland Clinic owned 10 hospitals with more than 3,000 beds in the metropolitan area, while University Hospitals fully or partly owned seven hospitals with more than 1,500 beds. Together, they accounted for the majority of hospital capacity. Only three independent hospitals remained in Cuyahoga County. Over the preceding two years, both systems had used their leverage to win higher payment rates and more favorable contract terms from health plans. Risk-based contracts with managed care plans -- once expected to become standard -- had nearly vanished. The systems also negotiated master contracts bundling hospital and physician components, presenting plans with a united front that made it difficult to resist demands for rate increases.

Vigorous competition between the two systems continued, though the nature of the rivalry shifted. The bricks-and-mortar expansion campaign of 2000, during which both systems built new suburban family health centers and ambulatory surgery centers, had given way to a marketing war of billboards, TV, and radio ads touting quality and service. With new suburban facilities now open, some showed signs of underuse, raising questions about excess capacity and its potential contribution to rising costs. The two systems also competed in medical research: after years of contentious negotiations, University Hospitals and Case Western Reserve University agreed to a 50-year commitment to combine research efforts, even as Case Western also affiliated with the Cleveland Clinic to establish a new medical school focused on training physician researchers.

Physicians Under Pressure

The two hospital systems increasingly pressured physicians to admit patients exclusively to either CCHS or UHHS facilities, reducing the hospital options available to both physicians and their patients. Meanwhile, rising malpractice insurance premiums were causing some physicians to close practices, relocate, or limit care to lower-risk patients. Malpractice costs were a growing concern that added financial strain on top of already challenging practice conditions.

Employers Shift Costs to Workers

With limited leverage over providers and few options for controlling costs, Cleveland employers began shifting more of the burden to employees through higher deductibles, copayments, and premium contributions. Workers in the region generally accepted these increases, prioritizing job security during the economic downturn over pushing back on health benefit changes. Health plans, for their part, offered a muted response to rising costs. Without strong employer pressure, plans found it difficult to resist provider demands for higher payment rates, and most passed the increases through to purchasers.

Safety Net Gains and Budget Threats

Cleveland's health care safety net was stronger than it had been in previous years, but observers questioned whether the progress could survive the state budget crisis and potential Medicaid reductions. Emergency room crowding remained a persistent problem, reflecting both capacity constraints and the reliance of uninsured and underinsured populations on emergency departments for routine care. The intersection of tight state budgets and rising demand for safety net services posed a serious threat to the gains that had been achieved.

Sources and Further Reading

HSC Community Tracking Study site visits, Cleveland, 1996-2002. | Felt-Lisk, Suzanne, et al., Community Report No. 2, Center for Studying Health System Change, Winter 2003. | HSC Community Tracking Study Household Survey data on Cleveland consumers' access to care, 2000.