Economic Downturn Slows Phoenix's Once-Booming Health Care Market

State Focus on Illegal Immigration and Budget Crisis Spark Changes Across the Health Care System

News Release
July 21, 2011

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON , DC—After more than a decade of rapid population growth and a thriving economy, Phoenix’s once-booming health care market has adopted a more cautious outlook amid the lingering effects of the great recession, according to a new Community Report released today by the Center for Studying Health System Change (HSC).

Job losses and the subsequent loss of employer-sponsored health insurance, along with a high rate of home foreclosures, have adversely affected many Phoenix residents. At the same time, employers, especially small firms, and health plans continued to search for ways to reduce health insurance premiums. In response, hospitals and physicians increasingly were rethinking expansion plans and seeking closer collaborations.

Against this backdrop of new-found provider caution, the state’s focus on illegal immigration and a state budget crisis have sparked changes across the area’s health care system. State laws enacted over the past few years reportedly have led many immigrant families to either leave Arizona or go underground. At the same time, the state is struggling to close the wide gap between declining tax revenue and rising public program costs, which has led to policies to reduce public health insurance and could drive the area’s already high rate of uninsurance even higher.

“The reversal of fortunes in Phoenix is striking. Providers in the once-booming health care market, which couldn’t add capacity fast enough to keep up with population growth, have adopted a much more cautious approach to expansion,” said HSC President Paul B. Ginsburg, Ph.D.
     
In July 2010, HSC researchers visited the Phoenix metropolitan area—Maricopa and Pinal counties—to study how health care is organized, financed and delivered in the community. Researchers interviewed more than 45 Phoenix health care leaders, including representatives of major hospital systems, physician groups, insurers, employers, benefits consultants, community health centers, state and local health agencies, and others.

Phoenix is one of 12 communities across the country tracked intensively as part of the Community Tracking Study site visits, which are jointly funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform. HSC has been tracking these communities since 1996. Key findings of the report, Economic Downturn Slows Phoenix’s Once-Booming Health Care Market, available online at www.hschange.org/CONTENT/1221/, include:

• The ongoing state budget crisis has led to an enrollment freeze for most childless adults in the state’s innovative Medicaid program, which had extended coverage to low-income residents without children and incomes up to 100 percent of poverty, or $10,830 for a single person in 2010.
• Hospitals and physicians increasingly were aligning either through contractual or employment arrangements, a sharp change for the historically highly independent medical profession.
• The health plan market remained relatively fragmented, fostering some price competition as employers regularly switch carriers to achieve even small savings. Other than developing products with more patient cost sharing, health plans showed little innovation in payment methods or quality improvement.

The hospital sector in Phoenix is fairly diverse, with multiple hospital systems, although Banner Health, with nearly 2,800 beds in 12 hospitals in the metro area and market share of more than 40 percent, is by far the largest. Despite the economic downturn, most Phoenix hospitals have done well financially, primarily from continuing to gain significant payment rate increases from private insurers. At the same time, many hospitals’ uncompensated care burden stabilized or even declined as undocumented immigrants left the area.
     
Although Phoenix has a handful of larger multispecialty physician practices, Phoenix’s physician culture has emphasized independence and autonomy, resulting in most physicians practicing solo or in small, single-specialty groups. Faced with rising costs and flat reimbursement, specialists were merging into larger practices to gain negotiating clout with payers and the scale to provide profitable ancillary services, such as laboratory testing and imaging. While less pronounced than in some markets, physicians also were interested in becoming employed by hospitals.

The Phoenix market has no dominant health plan, with some observers describing a high level of competition among the four largest insurers: Blue Cross Blue Shield of Arizona, UnitedHealth Group, CIGNA and Aetna. Most market observers noted little innovation in product design or provider payment methods. Respondents suggested the relative lack of innovation was a result of the lack of large employers headquartered in Phoenix that might drive local market developments.

The area’s safety net is anchored by the public Maricopa Integrated Health System, which includes a hospital and community clinics. Additionally, a number of federally qualified health centers and free clinics also serve low-income people. Precipitously falling tax revenues resulting from the economic downturn led to significant state budget cuts to safety net programs, including a Medicaid enrollment freeze for childless adults with incomes above 33 percent of poverty, or about $3,574 for a single adult in 2010.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.