Rising Costs Pressure Employers, Consumers in Northern New Jersey Health Care Market

Originally published as Community Report No. 4 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.

Rising Costs Pressure Employers, Consumers in Northern New Jersey Health Care Market

In October 2002, HSC researchers visited northern New Jersey to study the community's health system and how market changes were affecting consumers. The research team interviewed nearly 80 leaders as part of the Community Tracking Study. Northern New Jersey was one of 12 communities HSC tracked through biennial site visits and triennial surveys, with earlier rounds in 1997, 1999, and 2001 establishing the baseline. The market covered the Newark primary metropolitan statistical area, including Essex, Morris, Sussex, Union, and Warren counties.

Rapidly rising health care costs continued to permeate the northern New Jersey market, driven by escalating hospital payment rates, increasing utilization of services, and growing pharmaceutical expenses. A medical malpractice insurance crisis added to the pressure, prompting physicians to seek higher payment rates from health plans to offset soaring malpractice premiums. Health plans had fewer options to control costs, and employers confronted steep premium increases, but strong union influence and employee preferences for less restrictive insurance products limited how aggressively employers could respond.

Hospital Financial Health Shows Dramatic Improvement

After several years of red ink, New Jersey hospitals had turned a corner financially. The state hospital association reported combined earnings of $320 million for 2000 and 2001, a stark reversal from the collective loss of $429 million in 1998 and 1999. In northern New Jersey, the two largest hospital systems -- predominantly suburban St. Barnabas Health System (nine hospitals) and Atlantic Health System (four hospitals) -- had each moved from losses in 1998-1999 to profitability in 2000-2001. Consolidation and the resulting gains in negotiating leverage were key factors: systems used the must-have status of flagship hospitals like St. Barnabas Medical Center and Morristown Memorial Hospital to secure rate increases across all hospitals in their networks.

Urban safety net hospitals, including state-owned University Hospital and Cathedral Health System in Newark, also saw improved financial performance, aided in part by increased state charity care funding and more patients covered by Medicaid. But their financial health remained more fragile than that of suburban institutions, and the state's budget crisis threatened to undermine the gains through potential cuts to safety net funding.

Malpractice Crisis Adds Pressure on Physicians

A new medical malpractice insurance crisis had emerged as a major factor in the market. Rapidly rising malpractice premiums were squeezing physicians' margins and prompting some to seek higher payment rates from health plans to offset the financial pressure. The malpractice situation was particularly acute in certain specialties, adding to an already challenging practice environment in the region.

Health Plans Challenged to Control Costs

Health plans found themselves in a difficult position. They were challenged to control rising utilization while simultaneously moving back toward fee-for-service payment arrangements for primary care physicians, which threatened to weaken the financial incentives that had helped restrain service use under managed care. Plans had limited tools to push back against hospital demands for higher payments, and the competitive market made it difficult for any single plan to take a tough stance without risking provider defections.

Employers See Few Options

Employers confronted steep health insurance premium increases but had limited options for managing the impact. Strong union influence in the northern New Jersey market constrained employers' ability to shift costs to workers or switch to more restrictive plan designs. Employee preferences for broad-network PPO products further limited the potential for benefit restructuring. Employers were caught between the desire to control costs and the practical constraints of labor relations and employee expectations in a market where workers had come to expect generous health benefits.

Safety Net Under Budget Pressure

Unprecedented demand had halted growth in public insurance coverage, and a $5 billion state budget deficit raised the prospect of rollbacks in public programs. Safety net support remained strong but was threatened by the combination of fiscal constraints and rising need. The intersection of state budget pressure, growing uninsurance, and increasing demand for safety net services created a precarious situation for the most vulnerable populations in the region.

Sources and Further Reading

HSC Community Tracking Study site visits, Northern New Jersey, 1997-2002. | Draper, Debra A., et al., Community Report No. 4, Center for Studying Health System Change, Winter 2003. | New Jersey Hospital Association financial data. | HSC Community Tracking Study Household Survey data on Northern New Jersey consumers' access to care, 2001.