Market Stabilizes Around Five Large Organizations:

In September 1998, researchers traveled to Boston, Massachusetts, to examine the local health system, its ongoing transformation and the consequences for area residents. The study team interviewed more than 60 prominent figures in the health care market as part of the Community Tracking Study, conducted by Health System Change (HSC) and The Lewin Group. Boston was among 12 communities that HSC monitored on a biennial cycle through a combination of site visits and surveys. Separate community reports were issued after each round of visits. The initial site visit to Boston took place in September 1996, establishing the baseline against which subsequent developments would be measured. The Boston market encompassed both the city proper and its surrounding suburban communities.

Five Major Organizations Anchor a Stable Market

Following a wave of health plan and hospital mergers that preceded HSC's 1996 visit, Boston's health care landscape had settled into a phase of greater organizational steadiness. That pattern persisted into 1998. Five nationally prominent not-for-profit entities continued to hold sway over the market: two large care systems rooted in academic medical centers -- Partners and CareGroup -- along with three major health plans -- Harvard Pilgrim Health Care, Tufts Associated Health Plan and Blue Cross and Blue Shield of Massachusetts (BCBSM). Although the relative competitive standing of these organizations had shifted somewhat, no single entity or sector exercised outright control.

Beneath this surface continuity, several noteworthy changes were taking shape:

• Health plans had adopted a more defensive stance in the face of mounting anti-managed care sentiment among consumers and legislators.
• The large care systems had pivoted from seeking new partners to the harder work of managing sprawling networks and risk-based contracts.
• Medicaid enrollment had climbed, but consolidation, plan departures and shifts in state contracting practices left fewer plans available to serve this population.

Boston's Distinctive Market Characteristics

With a 46 percent HMO penetration rate, the Boston health care market stood apart from other heavily managed care communities in several respects. Three well-regarded not-for-profit health plans dominated the insurance landscape, and an activist state government with a pronounced consumer orientation shaped the regulatory environment. Compared to residents in other HSC study sites with similarly high managed care penetration, a larger share of Boston-area families reported satisfaction with their health care.

The market also featured more hospital beds and physicians per capita than most comparable areas, and health care costs ran well above national averages. Purchasers, plans and providers generally accepted these higher costs as a fair exchange for access to Boston's world-class academic medical centers, which served as major engines of the local economy. The desire to preserve teaching and research capacity had been the primary rationale behind the 1993 merger of Massachusetts General Hospital and Brigham and Women's Hospital into the Partners system.

While aggressive cost reduction had not been the central preoccupation, some organizations had made meaningful cuts over the prior two years. BCBSM reported eliminating roughly half its workforce in a bid to jettison unprofitable lines of business and streamline operations. Boston Medical Center also carried out significant staff reductions, and Harvard Pilgrim announced plans to lay off at least 100 employees.

Employers, meanwhile, were absorbing moderate premium increases atop an already elevated cost base, though they pressed plans for better benefits and improved customer service in return. Boston premiums rose by roughly 3 to 5 percent in 1998, roughly in line with the 3.3 percent national average. Many market watchers expected plans to push for substantially larger increases -- on the order of 8 to 10 percent -- for 1999, driven by several consecutive years of poor financial results.

State Government as a Persistent Shaping Force

Massachusetts state government had long wielded outsized influence over the Boston health care market. An extensive framework of consumer protections and benefit mandates was already in place, and officials continued to play an active -- if often behind-the-scenes -- role in steering market dynamics. Health care organizations monitored legislative sentiment closely and frequently adjusted their strategies preemptively in response to concerns raised by lawmakers and regulators. At the same time, these organizations attempted to advance their competitive interests through policy advocacy.

While little new legislation had actually been enacted over the preceding two years, vigorous debate on managed care reform was ongoing. Proposals introduced in 1998 -- though ultimately unsuccessful -- would have expanded state oversight of managed care plans, established a standardized appeals process and broadened mandated coverage to include reasonable emergency room visits. Similar measures were expected to resurface in future legislative sessions.

The managed care reform debate had brought employers and health plans together in opposition, while forging an unusual alliance between physicians and consumer advocacy groups in favor of greater state oversight. The legislative battle left a lasting imprint on the market. Health plan representatives reported that local HMOs with longstanding reputations for quality found themselves suddenly viewed with suspicion by the public.

Plans Pull Back as Provider Systems Gain Ground

Facing growing public hostility toward managed care, health plans appeared to be assuming a lower profile than they had two years earlier. They narrowed their scope of activities, divesting owned provider assets, trimming product lines and shifting certain responsibilities onto providers. BCBSM unloaded its nine health clinics to MedPartners as part of its effort to generate cash and refocus on core insurance functions. Harvard Pilgrim separated its 14 health centers -- the original backbone of the Harvard Community Health Plan -- into a physician-led entity called Harvard Vanguard.

The three major plans had also pursued regional expansion by affiliating with, acquiring or establishing plans in neighboring New England states to serve multistate employers. Within the local market, competitive positions had shifted. Harvard Pilgrim remained the largest plan in Massachusetts, but Tufts had climbed into second place, boosted significantly by the popularity of its Secure Horizons Medicare managed care product. BCBSM, formerly the dominant insurer by a wide margin, had slipped to third. Although the Blues plan showed signs of recovery, it had weathered serious difficulties in recent years, including financial losses that triggered close scrutiny from the state's Department of Insurance and a federal enrollment freeze on its Medicare risk plan.

Provider systems, by contrast, appeared to be operating from a position of relative strength. Having moved past the period of actively seeking merger partners, they were now focused on making those partnerships productive. Over the preceding two years, they had broadened their activities -- implementing mergers, constructing networks and building out the infrastructure needed to manage risk-based contracts. Observers noted that the large academic hospitals had been conspicuously quiet during the managed care debates in the legislature, seemingly content to let health plans absorb the criticism from consumers and advocacy groups.

Other entities in the Boston market were also seeking to bolster their market position through affiliations. Neighborhood Health Plan, a Medicaid HMO originally established by the city's community health centers, was acquired by Harvard Pilgrim. New England Medical Center, one of the last unaffiliated academic medical centers in the area, was purchased by Rhode Island-based Lifespan. And Lahey Clinic announced a new partnership with CareGroup after its planned merger with the New Hampshire-based Hitchcock Medical Center collapsed. These moves underscored the continued premium placed on belonging to a large, regionally powerful organization.

Hospital Consolidation Yields No Quick Payoff

By the time of the 1996 site visit, three large care systems had emerged from a series of mergers, each motivated by the goals of enhancing market power and reducing excess capacity. Different integration strategies were pursued, and by 1998 it appeared that the systems that had invested more heavily in operational consolidation had not yet reaped competitive rewards.

Partners took a comparatively light-touch approach, preserving the operational autonomy of its two flagship hospitals -- Massachusetts General and Brigham and Women's -- while centralizing managed care contracting and administrative functions such as human resources and purchasing. The degree of independence was illustrated when Massachusetts General opened an obstetrics unit despite Brigham and Women's well-established preeminence in maternity care. Notably, despite longstanding predictions of significant downsizing in Boston's academic hospital capacity, both Partners institutions had reopened previously closed beds during the prior two years to handle growing patient volume.

CareGroup invested far more effort and resources in merging Beth Israel Hospital and Deaconess Hospital into a single entity. Considerable progress was made, including the consolidation of all departments under single chiefs. But the process proved contentious. By multiple accounts, the majority of department chiefs selected for the combined institution came from Beth Israel, alienating many Deaconess physicians. While CareGroup reported meaningful cost savings from the consolidation, some observers believed the system's intense internal focus over the prior two years had damaged its competitive standing. The recently announced partnership with Lahey Clinic, however, was expected to improve CareGroup's market position.

The Boston Medical Center merger brought together the former Boston City Hospital and Boston University Medical Center into one organization. The combination offered complementary clinical strengths and produced substantial cost savings. However, many viewed Boston Medical Center as financially and operationally vulnerable. Cultural frictions also surfaced: Boston City Hospital's physicians tended toward primary care, while BUMC's faculty leaned more academic and subspecialty-oriented. Initial concerns that the BUMC doctors would not support the public hospital's mission of community service and care for the poor had largely subsided by 1998.

On balance, Partners appeared better positioned competitively than CareGroup or Boston Medical Center, both of which had pursued more aggressive integration. Some analysts cautioned, however, that Partners' success owed more to the prestige and capital access of its two hospitals than to the merits of its integration strategy.

Managing Risk Contracts Becomes the Focus

The volume of lives covered under providers' risk-based contracts had grown substantially over the preceding two years, and both Partners and CareGroup had devoted increasing attention to managing these contracts and overseeing their provider networks. Although such arrangements still represented a relatively small share of total revenue for most providers, the management demands they imposed were considerable. Each system was building out its infrastructure for utilization review, data analysis and network management.

Referral Control and Care Management Raise Concerns

As the large care systems expanded their risk-bearing activities, questions arose about the extent to which they were directing referrals within their own networks and whether this was affecting patient access or the quality of care management. Some health plan representatives expressed concern that provider systems were prioritizing network loyalty over clinical considerations when routing patient referrals, while provider leaders argued they were simply building the coordinated networks that managed care required.

Medicaid Enrollment Grows, but Fewer Plans Participate

Medicaid managed care enrollment continued to increase in the Boston area, but consolidation among plans, market exits and changes in state contracting practices had reduced the number of health plans available to serve this population. The contraction raised concerns about whether Medicaid beneficiaries would retain adequate access to providers and whether the remaining plans could handle the growing caseload without sacrificing quality.

Issues to Track

As HSC continued to monitor developments across American communities, several trends in Boston warranted close attention. Would the anti-managed care backlash lead to significant new regulatory constraints on health plans? How would the large provider systems manage the operational challenges of their expanding risk contracts? What impact would continued consolidation have on the range of choices available to Medicaid beneficiaries? And would the competitive balance among Boston's five dominant organizations hold, or would financial pressures finally push one or more toward a more dramatic restructuring?

Sources and Further Reading

• Community Tracking Study Household, Physician and Employer Surveys, 1996-1997, Center for Studying Health System Change.
• U.S. Census Bureau, Population Estimates, 1997.
• Williams, C., Christianson, J.B., Barraclough, M.L.E. and Gaylin, D.S., "Market Stabilizes Around Five Large Organizations: Boston, Massachusetts," Community Report No. 03, Winter 1999, Center for Studying Health System Change.