Syracuse Faces Rising Health Costs; Hospital Competition Grows

Hospital Competition Grows as Crouse Hospital Recovers

Crouse Hospital's emergence from bankruptcy and its efforts to regain lost market share stirred hospital competition in the Syracuse area. After years of operating losses and a failed merger attempt, Crouse Hospital -- the largest of the area's four hospitals -- emerged from bankruptcy in 2003. By 2004, all four hospitals in the market were profitable, and each had maintained a distinct service niche.

Crouse Hospital provided more than half of the area's obstetrical and neonatal care. Neighboring University Hospital-Upstate University Hospital at Syracuse offered high-end specialty care, such as cardiac surgery typical of a teaching hospital. St. Joseph's Hospital Health Center concentrated on cardiac care services. Community General Hospital of Greater Syracuse offered a range of general acute care services and recently invested in obstetrics and a new facility for physical medicine rehabilitation to complement its orthopedic services. Community General also established a collaborative program with St. Joseph's Hospital Health Center for cardiac care.

Competition among the area hospitals intensified as Crouse Hospital worked to regain lost market share. During its financial troubles, Crouse lost market share to other hospitals, particularly St. Joseph's Hospital Health Center and University Hospital. Physicians concerned about the bankruptcy sought admitting privileges or shifted a larger share of their admissions to competing facilities. Market observers expected that Crouse's newly appointed CEO, Paul Kronenberg -- a longstanding and highly regarded physician from the hospital medical staff -- would solidify physicians' trust in the hospital's recovery and help reclaim lost ground.

Despite its recent financial gains, Crouse Hospital faced longer-term challenges because of its aging physical plant, debt payments, and lagging investments in information technology. Given the physical proximity and complementary service niches of Crouse Hospital and University Hospital, expectations for a potential merger persisted despite union opposition and cultural differences between the two organizations. A consultant recommended the development of shared services rather than a full-scale merger. While there was skepticism about whether significant collaboration would occur, some were optimistic that concerns about Gov. George Pataki's newly formed commission to evaluate hospital capacity reduction and closures would fuel cooperation.

Higher Utilization Rates Spur Cost Growth

In recent years, health care costs in Syracuse had been driven up by increased utilization, attributed primarily to physicians who pursued new revenue through ownership of ambulatory surgery centers and diagnostic imaging equipment. As care shifted to physician-owned facilities, outpatient services at Crouse Hospital and Community General Hospital declined. As an illustration of the growth in diagnostic imaging, MRI utilization in Syracuse was twice that of Rochester, N.Y., and compared with similar communities, Syracuse had the largest number of MRI machines in the state.

However, the pace of development of new physician-owned facilities and acquisition of new equipment had slowed over the prior two years. Some market observers suggested that the market may have reached saturation -- a natural limit on the number of facilities the market could support given population size and demand for health services. Rather than adding new services, large physician practices reportedly were refining current service offerings.

Meanwhile, Excellus BlueCross BlueShield, the not-for-profit insurer with roughly 70 percent market share, had refrained from aggressively curbing cost growth by squeezing provider payment rates or managing utilization to avoid antagonizing physicians. Maintaining a broad provider network remained Excellus' key competitive strategy against significant market entry by national health plans such as Aetna and UnitedHealthcare. However, physicians continued to distrust Excellus, likely because of its potential market clout.

Excellus recently settled a lawsuit filed by the Medical Society of New York against area health plans, which claimed that health plans made it difficult for physicians to understand billing and payment practices. As Excellus consolidated acquisitions, it worked to standardize its claims billing processes to a resource-based relative value system (RBRVS), although different products used different claims coding procedures. As part of the settlement, Excellus agreed to display its fees, policies, and procedures on its website, and physicians gained the right to opt out of new products that resulted in fee changes.

Community-Based Efforts to Reduce Health Care Costs

The Syracuse economy was slowly recovering from recession, yet continued to face rising health care costs. The area's manufacturing sector continued to erode, with the international acquisitions of Niagara Mohawk and Carrier in particular moving jobs out of the area. And although Destiny USA -- expected to be the biggest mall in America with theme attractions and a sports complex -- promised new jobs, these positions would be mostly minimum wage, replacing higher-paying manufacturing jobs.

Employers had faced a fifth year of double-digit premium increases. Two years earlier, heightened price competition among insurers helped moderate premium increases. HealthNow, a subsidiary of Buffalo-based BlueCross BlueShield of Western New York, entered the market with premiums reportedly 10 to 15 percent lower than competitors and gained enrollment from some small and mid-size employers. However, its provider network did not match the breadth of Excellus BlueCross BlueShield. New leadership at HealthNow's parent company was unwilling to weather additional losses required for the Syracuse expansion and raised premiums 33 percent on average for 2005. As a result, HealthNow lost most of its previous membership gains, stopped advertising, and reduced staffing at its Syracuse office.

In light of the high costs of health care in Syracuse, the Metropolitan Development Association sponsored efforts to establish a community-wide health capacity planning process. Eighteen months of discussions among hospitals, doctors, and insurers led to a consensus to form a new organization called the Health Care Planning Organization, which would examine health services use and capacity planning. Representation was carefully constructed to ensure that employers had a majority of the board's seats and that hospitals and physicians each had double the representation of Excellus. In addition, Excellus was restricted to funding no more than a third of total costs for the planning effort.

Employers Prompt Clinical IT and Data Sharing Efforts

Physicians' adoption of information technology and clinical data sharing capabilities had been relatively slow in the Syracuse market. Physicians with IT were largely focused on data sharing and services within their own group and had no direct data link to the hospitals where they practiced or to other medical groups. Two medical groups, Syracuse Orthopedic Specialists and Family Care Medical Group, had electronic medical records and were discussing establishing a direct link with Community General Hospital so that medical information from hospital services could be transmitted to a shared electronic record.

In contrast, Syracuse hospitals were more actively developing IT capabilities, although some reported that physicians did not take advantage of remote access to their information systems. St. Joseph's Hospital Health Center had the highest physician use of its information system because the hospital did not maintain paper records more than 24 hours after patient discharge. St. Joseph's also implemented electronic sign-off of records and dedicated staff to assist physicians in using the system.

The Manufacturer's Association of Central New York (MACNY) formed a health care committee to develop recommendations for lowering costs through improving quality and patient safety. MACNY's committee recommended development of data-sharing capabilities and a community-wide health information exchange, to be built around MetroNet, a hardwire cable connecting major institutions in Syracuse that was reportedly underutilized.

In a separate effort, Onondaga County launched a medical record initiative giving county employees privacy-protected access to benefit and medical information such as medications, allergies, and family history. After five months, more than 700 of roughly 5,000 employees and retirees had enrolled. However, infrastructure for providers had not been developed to allow importing laboratory or diagnostic imaging results, and no privacy agreement had been reached with providers to allow access to the medical record. Without a data link to physicians' records, county employees typically printed out information at home and brought it to the doctor's office.

Both the MACNY and Onondaga County efforts faced an uphill struggle in a market where providers resisted outside IT efforts. Physicians were reluctant to adopt new technology because of high initial investment and ongoing support costs, concerns that existing software was not mature enough and lacked interoperability, and reluctance to abandon systems that met their current billing needs. Some hospitals also viewed the community-wide health information exchange unfavorably, preferring their own systems as a way to strengthen physicians' hospital affiliations and gain competitive advantage.

Safety Net Strained as Outpatient Capacity Shrinks

The safety net for low-income people in Syracuse remained centered on the Syracuse Community Health Center's 13 outpatient care locations and the four local hospitals, although some hospitals had reduced outpatient safety net capacity in recent years. Crouse Hospital discontinued several outpatient clinics during its bankruptcy restructuring. Community General shed some outpatient services. Upstate University Hospital closed a site on the Onondaga Nation reservation, which Syracuse Community Health Center now operated. Excellus BlueCross BlueShield discontinued two outpatient clinics known as Lifetime Health Medical Group that were losing money; these clinics had served about 20,000 patients, including many considered indigent.

Although Syracuse Community Health Center absorbed some of this reduction in outpatient capacity -- in some cases by taking over the operation of discontinued clinics -- the health center was strained because of increased demand, a general rise in the number of uninsured people, and cuts in grant funding. The health center experienced cash-flow problems and a resulting lack of reserves, making it difficult to invest in needed equipment and supplies or address longer-term needs like IT systems. Its patients reportedly were experiencing longer waiting times for care.

Obtaining specialty care for low-income patients was viewed as extremely difficult in Syracuse and may have grown somewhat worse. Outpatient psychiatric services were among the specialty care services most often cited as being in short supply, and inpatient psychiatric care for children and adolescents became virtually unavailable after the closure of Four Winds Hospital in 2004. Access to dental care for low-income persons continued to be a problem despite recent increases in Medicaid reimbursement rates for dental care and the opening of new dental clinics geared toward Medicaid enrollees.

Medicaid Budget Remains Stable But Concerns Grow

Despite ongoing budget concerns at both the state and local level, New York's generous public coverage programs had been maintained, providing stability to the safety net in Syracuse. The programs included Medicaid and the State Children's Health Insurance Program (SCHIP, known as Child Health Plus in New York), as well as Family Health Plus, a Medicaid expansion program covering uninsured parents earning less than 150 percent of the federal poverty level and childless adults earning less than 100 percent of poverty who did not otherwise qualify for Medicaid. Enrollment in public coverage continued to grow, aided in part by a simplified renewal process for Medicaid and Family Health Plus.

However, public program enrollment increases were also contributing to budget problems at the local level. County governments in New York were responsible for up to about one-fourth of Medicaid costs. Higher than expected increases in Medicaid costs and large enrollment increases for Family Health Plus had forced Onondaga County to spend down reserves and raise local taxes. To cover increased costs, Onondaga County increased its sales tax by 1 percentage point.

Although public coverage programs had been maintained, Gov. Pataki proposed an overhaul of the state's Medicaid program. The plan, known as the Federal-State Health Reform Partnership (F-SHRP), was proposed as an amendment to the state's Section 1115 Medicaid waiver that would see increases in federal revenue of $500 million for each of the next three years in exchange for longer-term cost containment. The proposal would limit and eventually reduce local jurisdictions' share in Medicaid program costs, and by 2008 the state would take over administrative responsibility entirely. F-SHRP also emphasized reducing excess capacity in hospitals and nursing homes, shifting long-term care from institutional to community-based settings, and investment in information technology.

Issues to Track

As premiums continued to grow in the double digits in Syracuse, several new community-wide efforts had been launched to address long-term health care cost concerns. And although Crouse Hospital had emerged from bankruptcy, concerns about its future remained. Key questions going forward included whether the Health Care Planning Organization could reach consensus among its divergent stakeholders on capacity planning issues, whether Crouse Hospital could address longer-term financial concerns including its aged infrastructure and debt obligations, to what extent hospitals' use of information technology as a competitive strategy and physicians' slow adoption would affect employer-led IT initiatives, and how, if at all, the state would reform its Medicaid program and what effect changes would have on an increasingly strained safety net and access to care for low-income people in the Syracuse market.

Sources and Further Reading

This Community Report (No. 9, October 2005) was authored by Sally Trude, Gloria J. Bazzoli, Jon B. Christianson, Jennifer Coughlan, Peter J. Cunningham, and Andrea Staiti and published by the Center for Studying Health System Change (HSC). The findings were based on site visits conducted in June 2005 as part of the Community Tracking Study, in which HSC researchers interviewed more than 65 leaders in the Syracuse health care market. Syracuse is one of 12 communities tracked by HSC every two years through site visits. The Syracuse market encompasses Onondaga, Oswego, and Madison counties.

Background data: Syracuse had a population of 735,920 (2003 estimates), with 12.4 percent of persons aged 65 or older, median family income of $27,043, 15 percent of persons living in poverty, and 7 percent of persons without health insurance. The area had 2.6 staffed hospital beds per 1,000 population, 2.1 physicians per 1,000 population, and HMO penetration of 13 percent.

Centers for Medicare and Medicaid Services — Federal agency overseeing Medicaid and Medicare programs.

New York State Department of Health — State health department overseeing Medicaid and public health programs.

Commonwealth Fund — Research on local health system performance and safety net access.