Local Organizations Retain Market Dominance:

In June 1998, a research team visited Cleveland, Ohio, to examine the community's health system, the changes underway, and how those changes were affecting consumers. The team interviewed more than 50 leaders across the health care market as part of the Community Tracking Study conducted by Health System Change (HSC) and The Lewin Group. Cleveland was one of 12 communities tracked by HSC every two years through site visits and surveys, with individual community reports published after each round. The first site visit, in June 1996, had established baseline data against which subsequent changes could be measured. The Cleveland market encompassed the city and its suburbs.

When researchers first visited in 1996, Cleveland's health care market appeared to be in upheaval. Several high-profile mergers had occurred or were anticipated. The cooperative relationships that had long characterized provider interactions in the community were giving way to competition, driven by the entry of two for-profit hospital systems. Local providers and health plans seemed to be under threat. But change in Cleveland did not unfold as expected. The proposed merger between Blue Cross and Blue Shield of Ohio and Columbia/HCA fell apart. The three major local, not-for-profit institutions -- the Cleveland Clinic, University Hospitals Health System (UHHS), and Medical Mutual of Ohio (the former Blue Cross and Blue Shield Plan) -- held onto their dominant positions.

After a period of active dealmaking, the focus appeared to have shifted toward internal organizational matters. The key changes shaping the health system at that point included growing market concentration in the hospital sector, hospital expansion of high-end medical services, stiff price competition and internal administrative challenges for health plans, and a lack of aggressive purchasing strategies among employers.

Threat to Local Entities Subsides

Cleveland remained a market where business leaders and local provider organizations maintained close ties through overlapping board memberships. These relationships exerted significant influence over the direction of health system change. Since the 1996 site visit, the three dominant local institutions -- the Cleveland Clinic, UHHS, and the renamed Medical Mutual of Ohio -- had kept their grip on the market, while organizations lacking local roots had lost ground.

In the hospital sector, the arrival of two for-profit chains -- Columbia/HCA and Primary Health Systems (PHS) -- had spurred the two leading not-for-profit systems to expand their market share through acquisitions and affiliations. Even as hospital competition intensified, several institutions maintained collaborative forums, including Cleveland's hospital association and Cleveland Health Quality Choice (CHQC), a communitywide quality measurement initiative.

The anticipated merger between Blue Cross and Blue Shield of Ohio and Columbia/HCA had been expected to reshape the market dramatically. Instead, the deal collapsed in March 1997, the same month the national Blue Cross and Blue Shield Association revoked the plan's Blues trademark. The plan, renamed Medical Mutual of Ohio, posted a $95 million loss for 1996. But from 1997 onward, Medical Mutual staged a successful recovery, holding onto its market share, key partnerships, and its standing as the dominant local insurer.

Medical Mutual reportedly pursued aggressive pricing to defend its position. The plan also reshuffled its leadership team, promoting internal staff and rehiring former employees. It preserved its close partnership with the Chamber of Commerce's small-business purchasing group and renegotiated its contract with the Cleveland Clinic. The plan's ability to hold its market position over the previous two years served as further evidence that local relationships and institutional identity carried real weight in Cleveland's health care market. Its recovery was aided by the fact that Anthem, the Indianapolis-based insurer that acquired the Blues trademark in the market, failed to gain the market share many had predicted.

Market Concentration Increasing

Both the Cleveland Clinic and University Hospitals had extended their reach throughout northeastern Ohio, building additional primary and tertiary care capacity with their owned and affiliated providers. While both systems grew, the Cleveland Clinic had clearly outpaced its rival in market share, controlling 40 percent of hospital beds in Cuyahoga County and 30 percent in the broader six-county Primary Metropolitan Statistical Area (PMSA). UHHS held an 11 percent market share in both Cuyahoga County and the PMSA.

Since 1996, the Cleveland Clinic had merged with the four-hospital Meridia Health System and the two-hospital Fairview Health System, and acquired Health Hill Hospital, a pediatric facility. It continued to build its Cleveland Health Network (CHN), which brought together nine owned and 16 affiliated hospitals under a super physician-hospital organization (PHO). By that point, CHN had reportedly negotiated 40 contracts with 20 payers.

Most physicians not affiliated with one of the major hospital systems remained in small groups. These doctors expressed anxiety about their futures and growing unease about the increasing consolidation and influence of the hospital sector. Despite this, there was little evidence of physicians organizing independently from hospitals. A few independent physician organizations existed, including some multispecialty group practices, but none was regarded as a significant market force. Change could have been on the horizon, though -- at least two physician practice management companies had entered the market and might have served as organizers for independent physicians.

While the two local not-for-profit systems expanded, the two for-profit chains -- Caritas (the Columbia/HCA and Sisters of Charity partnership) and PHS -- lost ground. Columbia/HCA had initially tried to build a statewide provider presence just as the Cleveland Clinic and UHHS were strengthening their local footprint. Columbia/HCA then became consumed by its national crisis and the failure of its planned Blues merger. PHS, meanwhile, was weighed down by the financially troubled Mount Sinai Medical Center, struggling with heavy debt and physician departures to UHHS and other hospitals.

Despite concerns raised in 1996, there were no reports that these for-profit systems had cut charity care. Both continued to serve large numbers of low-income patients and appeared to have maintained charity care at relatively steady levels. MetroHealth, Cuyahoga County's public hospital, remained the leading provider of charity care and Medicaid services, maintaining a close partnership with the Cleveland Clinic as a lead member of CHN.

Mergers Drive Expansion of Specialty Services

Two years earlier, Cleveland had already been viewed as a specialty-oriented health care market with substantial excess hospital capacity. That characterization had only become more accurate. Providers continued investing in specialized services to attract patients, with little visible effort to reduce costs or improve efficiency. Ohio's certificate-of-need legislation had expired, opening the door for new construction and technology investments by hospitals.

The Cleveland Clinic and UHHS led the push to add new services. The Cleveland Clinic partnered with Lake West Hospital to establish a heart clinic, and with Elyria Memorial Hospital for heart and urology services. Respondents noted that the Cleveland Clinic was also investing heavily in pediatrics and oncology -- areas long considered UHHS strengths. UHHS, for its part, was partnering with Southwest General Hospital for open heart surgery, pediatrics, and cancer services, and with Lake Hospital for cancer services.

Providers had felt little pressure to consolidate their service lines. Instead, hospital mergers appeared to have propped up otherwise vulnerable facilities and fueled the spread of highly specialized services. The major provider systems viewed their investments in tertiary care at owned and partner hospitals as a strategy for building loyalty and referral relationships. Some respondents, particularly those in outlying communities, welcomed the local availability of specialized services. Others questioned whether this trend served Cleveland's interests, raising concerns that spreading specialized care too thinly could diminish quality and drive up costs.

Neither the Cleveland Clinic nor UHHS had done much to integrate services across their facilities, though both had consolidated some administrative functions. The two multihospital systems had achieved powerful market positions through sheer growth. But genuine facility integration -- more complicated than negotiating a merger and often delayed by standstill agreements in merger contracts -- remained a work in progress. At the Cleveland Clinic, integration efforts exposed cultural tensions between salaried multispecialty group practice physicians at the flagship institution and independent, entrepreneurial staff physicians at newly acquired hospitals.

Plans Face Stiff Price Competition

Clear price competition existed among health plans, driven partly by Medical Mutual's aggressive pricing to protect its market share. Premium levels had been flat or declining over the prior year. Purchasers were reportedly switching plans less often because their current insurers were willing to cut premiums to retain business. Statewide, plans had posted small negative margins in 1997, according to the Ohio Association of Health Plans. In Cleveland, several plans, including Kaiser Permanente, reported losses for the year.

Plans responded by replacing executive leadership and dropping money-losing product lines, including Medicaid. Kaiser Permanente of Ohio removed its top Cleveland executives, merged its Cleveland and Akron operations, and attempted to raise premiums by 9 percent after posting a $36 million loss in 1997. Purchaser resistance forced a much smaller actual increase. Kaiser continued to shed market share as employers moved away from traditional staff-model HMO products.

Whether premium stability could last was uncertain. Consistent with national trends, some observers predicted an upturn for 1999. Plans were trying to shift the competitive emphasis away from price toward customer service and medical management, but they remained largely undifferentiated in the eyes of purchasers. Most plans shared the same broad provider networks and were contending with similar administrative problems -- from delayed provider payments tied to new information system implementations to inaccurate patient data that forced providers to build parallel information systems.

Purchasers Content with the Status Quo

Contrary to what some observers had expected, purchasers had not ramped up their demands for tightly managed insurance products or turned to direct contracting for greater control over cost and quality. The likely reason: purchasers were already getting what they wanted -- low premium increases and broad provider networks. In 1996, some had predicted that rising Medicaid and Medicare managed care enrollment would push overall managed care penetration higher in Cleveland. Medicaid managed care enrollment in Cuyahoga County did climb from 54 percent to 88 percent of beneficiaries, and Medicare managed care penetration rose from 8 percent to 21 percent. But overall managed care penetration reached only 27 percent, a low figure compared with other markets, largely because the commercial sector was slow to convert.

Purchasers had not pursued direct contracting more aggressively, though the Health Action Council (HAC) of Ohio -- a coalition of more than 90 corporate members representing roughly 325,000 covered lives -- had moved forward with its Centers of Excellence initiative. HAC negotiated global fees for 22 procedures and conditions with five hospitals, preselecting certain facilities based on data from CHQC and other sources. Some community hospitals objected that the selection process favored large academic hospitals. Five hospitals, including the Cleveland Clinic and University Hospital, were ultimately chosen. But the initiative had generated minimal impact: only a handful of employers signed on to purchase services through the program.

Medicaid Plans Face Low Rates and Declining Enrollment

Ohio was moving ahead with mandatory managed care for most Medicaid enrollees in several parts of the state, including Cleveland. But health plans reported growing difficulty breaking even -- let alone turning a profit -- in the Medicaid market. Since 1996, Ohio had cut its reimbursement rates for Medicaid managed care plans while the number of competing plans increased. Mirroring national patterns, the Medicaid beneficiary population was shrinking, probably due to welfare reform and a strong economy.

Several Medicaid plans were experiencing financial difficulties, and some -- including United HealthCare -- had recently exited the Medicaid market. Two remaining plans, both locally managed insurers serving primarily Medicaid enrollees, were reportedly faltering as well. According to the Cleveland Plain Dealer, the state was preparing to disenroll the 35,000 Medicaid members in one of these plans, Personal Physician Care, apparently in anticipation of its liquidation.

Respondents disagreed about why Medicaid plans were struggling. Some pointed to reduced state payment rates and intensified competition. Others believed the rates were adequate and blamed poor management systems and inadequate infrastructure for plan losses. The state was expected to thin the Medicaid plan market further by implementing enrollment floors requiring plans to enroll at least 10 percent of eligible beneficiaries in each county. Disruption in care for Medicaid enrollees was not anticipated, since most plans serving Cleveland's Medicaid population included the same high-volume providers in their networks.

Issues to Track

Over the previous two years, a small number of local institutions had tightened their hold on the Cleveland market. The troubles afflicting Columbia/HCA and PHS, combined with the collapse of the proposed Blues-Columbia merger, had created openings for local not-for-profit systems to strengthen their positions -- and they had moved aggressively to do so. Several key questions remained as the market continued to evolve: Would local organizations maintain their dominance? Would growing provider concentration lead to genuine service integration, and would it attract regulatory scrutiny? How would the expansion of specialty services affect market dynamics? Would health care premiums stay relatively flat, and if not, how would purchasers react? How might plans differentiate themselves? And how would instability in the Medicaid market affect care for low-income populations?

Sources and Further Reading

This Community Report is based on site visit research conducted in June 1998 as part of the Community Tracking Study by Health System Change and The Lewin Group. Comparative data come from the Household, Physician, and Employer Surveys conducted in 1996 and 1997. Survey margins of error vary by community and question: plus or minus 2 to 5 percent for the Household Survey, 3 to 9 percent for the Physician Survey, and 4 to 8 percent for the Employer Survey.