Case Study

Health System Change in 1997

July/August 1998
Health Affairs

Health System Change in Lansing, Michigan

Round One Site Visit

Case Study
August 1997
Susanna Ginsburg, Jennifer Kates, Ha T. Tu, Monica D. Williams

he Lansing area is known as the Capital Area of Michigan, a three-county region that includes the state capital. At the time of the site visit, area hospitals were competing for market share, a national for-profit hospital chain was considering entering the area and two of the three major hospitals were proposing a merger.

These events, coupled with recent studies comparing the cost and quality of hospitals, have motivated several major employers to be more aggressive health care purchasers, signaling the first step in a shift from a hospital-driven to a purchaser-driven system. Moreover, because the role of health plans in this market is closely related to the plans' relationships with hospitals, pending hospital consolidations and changes are likely to have an impact on the health plans and their positions in the market.

In addition, the advent of Medicaid managed care has increased the prevalence of capitation and other risk-sharing arrangements and has attracted players from out-side the Lansing area to compete in this market, one historically dominated by Blue Cross/Blue Shield of Michigan (BCBSM) and health plans affiliated with the local hospitals. A strong sense of community accountability and a culture resistant to outsiders are likely to have an impact on how Lansing's health care changes play out.

The current competitive environment among hospitals and health plans has developed over time. Until the early 1990s, there was considerable cooperation and collaboration among the four major hospitals, each with its own mutually agreed-upon specialty and geographic niche. Up to that time, the market was clearly hospital-driven: Decisions about health care services were made primarily by hospitals, whose administrators were major community leaders; physicians and purchasers were not regularly a part of these decisions, nor were they given much choice in decisions.

Two major events shifted Lansing's cooperative environment to one of intense competition: the establishment of Michigan Capital Healthcare Corporation (MC²), the result of a merger of two hospitals -- Lansing General and Ingham County Medical (the county-owned facility) -- and the departure of long-time administrators at the major hospitals. Past collaborative initiatives were rapidly replaced with competitive ones and systems development activities. These efforts included increased outpatient and home health services, acquisition of physician practices and insurance product development, either through ownership or strong contractual relationships.

The new era of hospital competition has been reinforced further by the financial difficulties of two of the three remaining hospitals -- MC² and St. Lawrence. Both are seeking different arrangements to survive in the Lansing market. The St. Lawrence effort appears to be an imminent merger with the Sparrow Health System. MC², on the other hand, has rejected potential arrangements with the local systems, and instead is seeking a partner from outside the area: Columbia/HCA, a for-profit hospital corporation. MC²'s move has generated considerable debate about for- profit enterprises and the role of "outsiders" in this relatively insular and locally based market. Since the site visit, MC² and its Board decided to end its negotiations with Columbia/HCA and instead pursue another partnership with a regional system in Flint, Mich.

Meanwhile, purchasers in the market, dominated by the "Big Three" employers (General Motors, the State of Michigan and Michigan State University) and their associated unions, have become more concerned with cost and quality of care and the available benefit packages for their employees. In pursuit of better rates with providers, these purchasers are supporting the analysis of comparative hospital data on cost and quality. Union bargaining power has led to expansive benefit packages and an emphasis on choice. Consequently, area insurance products are expensive, especially for small employers. According to respondents, the high cost of insurance is one factor contributing to an exodus of small employers, who cannot afford the coverage necessary to attract employees, and to an increase in the number of uninsured, particularly among dependents.

BCBSM maintains a strong presence in this market as well as throughout the state. The insurer offers a variety of products, is the major indemnity player and is the third-party administrator for many self-insured plans, including those of the Big Three. While indemnity products play a substantial role in the insurance market, managed care, primarily in the form of HMOs, is increasing penetration into the commercial and Medicaid markets. HMOs in the market appear to be used by hospitals to enroll covered lives, and by purchasers to control costs. In fact, ownership of HMOs by local hospitals or strong affiliations with local hospitals appear to be important to the success of HMOs in the market and to discourage outside plans' entry into the market.

The relatively loose structure and extensive networks of area HMOs appear to satisfy purchasers' and employees' needs for flexibility, making HMOs the managed care product of choice. Small employers tend to offer point-of-service (POS) and preferred provider organization (PPO) plans.

In general, the various players believe that a two-hospital system works best for this market. However, the characteristics of that two-hospital system are expected to have major effects on the local economy, labor force and issues of community accountability. In addition, until the actual entities, their ownership and relationships are determined, the current level of hospital competition is expected to escalate, with the roles of physicians and various health plans remaining unclear.

Given this scenario, the impact of hospital consolidation, system formation and competition among hospitals and health plans on the delivery of care, its cost, quality and accessibility is not certain. In the short run, competition is likely to have positive and negative effects. On the one hand, the health care industry is expected to put greater emphasis on efficiency and cost of services and the quality of care. On the other hand, providers could potentially increase duplication of unneeded specialty services, which, if they operate at low volumes, may decrease quality. As the level of hospital competition increases, various strategic decisions and efforts by hospitals, physicians, health plans and purchasers will affect relationships among these entities and will likely increase exclusivity of relationships.

Center for Studying Health System Change

Providing Insights that Contribute to Better Health Policy

Health System Change in Lansing, Michigan

Round One Site Visit