Health System Change in Cleveland, Ohio

Round One Site Visit

Case Study
May 1997
Raymond J. Baxter, Linda T. Kohn, Robin K. Omata, Claudia Williams

he organization of health care delivery in the Cleveland area has changed dramatically during the past few years. These changes appear to have been driven by the actions of the private sector, particularly a few dominant hospitals, physician organizations and health plans. Cleveland is also characterized by a strong hospital safety net and a unique collaboration of employers and providers to evaluate hospital quality. The impact of these changes on the access, cost and quality of services is not yet known in any measurable terms. It seems likely that future changes will be driven by changes in public policy, most notably those that increase managed care in the Medicaid and Medicare programs.

Health care is an important feature of Cleveland’s economic landscape. Indeed, Cleveland is recognized as both a regional and a national referral center, and the health care industry is a major employer there. Cleveland’s hospitals historically have dominated the area’s health care market. Of 43 hospitals in the Cleveland area, 17 are located in Cleveland, where the area’s tertiary facilities are concentrated, and account for 56 percent of the area’s hospital beds.¹ Until the last few years, most of these facilities had well-defined local geographic and service markets, and overall there was a high level of stability in the hospital sector. Foremost among the reasons for this stability are:

• a strong mission identification by the Cleveland area’s religiously affiliated, not-for-profit hospitals;

• hospitals’ overall financial success, despite significant excess capacity;

• Cleveland’s strong public hospital;

• the preservation of market niches afforded by the state’s certificate of need (CON) program; and

• the market power of Ohio Blue Cross & Blue Shield, which is the cornerstone of the prevailing fee-for-service/indemnity insurance market.

But this historical stability has been upset during the past two years, as local providers have begun reaching out to attract patients beyond their traditional geographic or service areas. At least three factors have contributed to this push to secure or expand market share:

• Legislation was passed that sunsets the state’s CON regulations as of May 1997, permitting hospitals to enter lines of business that previously were rationed.

• Aggressive regional and national providers and insurance entities have entered the local market. These include two national for-profit hospital chains, one of which is attempting to enter both the hospital and insurance markets. This threat of competition has spurred efforts to secure or expand traditional markets.

• Public and private purchasers have increased pressures to reduce health care spending. In the public sector, the state began phasing in mandatory managed care for Medicaid in Cuyahoga County in July 1996. In the private sector, employers have switched plans readily for small premium decreases -- spurring intense price competition among plans and, in turn, providers. These threats to revenue have reinforced hospitals’ inclination to expand market share and to grow to achieve economies of scale and greater market power.

Providers and insurers have responded promptly to this new environment by attempting to lock in or expand their share of the market. They are reportedly accepting -- even offering -- prices at or below cost in order to gain market share. Hospitals and physician groups are merging or affiliating at a rapid pace and forming into large networks. Anticipating more extensive penetration of managed care, institutional providers are seeking to improve their market position by expanding the range of services they offer, purchasing physician practices to ensure volume and reorganizing to contract with managed care plans. Most respondents believe this process of change will continue for some time, eventually resolving into a regional health care system dominated by three or four large provider systems.

The configuration of these evolving systems and the relationships and balance of power among the provider, purchaser and insurance sectors remain uncertain. A number of factors will shape the outcome, including:

• The traditional dominance of a small number of organizations, most notably the Cleveland Clinic, the University Hospitals and Blue Cross & Blue Shield of Ohio, in the Cleveland health care market.

• The growth of managed care, which to date has been modest but may be accelerated by changes in Medicare and Medicaid, and which likely will prove key to determining which systems succeed, because some systems are better positioned than others for managed care.

• The evolution of employer influence on health care delivery. Although many respondents feel that Cleveland’s employers have not yet exerted a heavy hand on the health care system, recent activities signal a change. There are several broad-based business organizations focused on health care issues. One of these organizations recently initiated a direct contracting effort, and, as noted above, employers have demonstrated clear readiness to switch health plans frequently for modest economic gains.

• The shakeout of several different system-building approaches that are being pursued by Cleveland’s providers. These models include ownership/acquisition, affiliation/contracting and horizontal integration and vertical integration among hospitals and health plans or between physicians and hospitals. Each major emerging system has shifted its strategy at least once in the last few years, and it is unclear which approaches will prevail.

• The considerable surplus of hospital beds and physicians. The concentration of providers through purchase and affiliation has not yet resulted in significant capacity changes. Following the effect of competitive pressures on capacity changes over time will be important.

As noted, the impact of these changes on the delivery of care and on its cost, quality and accessibility is not fully known. Changes in the respective roles of generalist and specialist physicians may be taking shape, and interest in data to guide or evaluate practice appears to be increasing. Premium costs reportedly have flattened out in response to widespread health plan and provider discounting, but it is not clear that underlying provider costs have changed significantly.

The community generally views the quality of care as high, citing hospital report card data published during the past few years as evidence that quality has not declined. Access to care is not seen as a critical issue, probably because of favorable perceptions of the area’s safety net providers. Some observers believe that the advent of mandatory Medicaid managed care will improve access. At the same time, concerns have surfaced about the impact of the recent acquisition of not-for-profit safety net hospitals by national investor-owned chains.