Center for Studying Health System Change

PUBLIC POLICY

In general, regulation and state policy do not seem to be major forces in shaping the market or in driving market change in Lansing. However, because issues concerning mergers are within the purview of the state Attorney General and the courts, the future shape of the Lansing market may be determined in part by those decisions, which may be highly political since judges and the Attorney General are elected officials.

The effectiveness of Michigan’s CON regulations in Lansing appears mixed. At first glance, the relative lack of duplication of services across the major Lansing hospitals seems to be due to CON requirements; however, most respondents were not willing to attribute this to the impact of regulations. In fact, duplication of various hospital services is increasing as applicants redefine their service areas to justify the need for a new service. On the other hand, CON appears to be highly effective in limiting nursing home beds. In addition, many believe that CON has also led to a shortage of these facilities, as evidenced by very high occupancy rates and difficulties in reducing hospital lengths of stay.

In a recent reorganization, the state government created a new Department of Community Health that combines public health, mental health and Medicaid under one authority. The new department is now solely responsible for state health policy, and officials expect the office to do all health purchasing for the state, which would also create a powerful statewide market force. In addition, state Medicaid reforms, including a 1915b (managed care) waiver and changes to the way Medicaid funds graduate medical education (GME), are likely to have an impact on the Lansing area.

The transition to Medicaid managed care is already affecting the entry of various health plans into the market and increasing the presence of capitation and risk-sharing. The state plans to reallocate $35 million of the current $220 million in state funding for GME to promote training in primary care and to address the needs of the managed Medicaid population. To do this, the state issued a competitive request for proposal (RFP) to solicit bids from HMOs and hospitals to offer training programs that support these goals. While the outcome of this solicitation is not yet known, some respondents hope they will attract additional training dollars to the area because of their primary care emphasis and extensive primary care training capacity.

PUBLIC AND PRIVATE PURCHASING

Employing over 50 percent of the labor force, the Big Three and their associated unions dominate the Lansing region purchasers. Portrayed as "sleeping giants," the Big Three are just awakening to the issues in this market and becoming active and dominant players. Recent negotiations to lower hospital rates are evidence of their potential power. Other major employers include the health and health-related services, retail, education and government sectors. Many of the small employers depend on General Motors as contractors to the automobile industry, and the overall labor force is heavily unionized with the major unions, especially the United Auto Workers, involved in health benefit issues statewide.

Lately, most respondents have turned their attention to health care. Many indicated that until recently, Lansing was considered a low- to mid-cost health care market by most purchasers and therefore received less attention or pressure to reduce costs than other markets. However, employers and unions have zeroed in on the Lansing area, and are comparing it with the lower-cost "benchmark" market of Grand Rapids. Purchasers are also beginning to identify those providers and plans with high costs and are demanding reduced rates and premiums.

Purchaser concerns extend beyond cost to performance and quality. Last year, purchasers supported a study of cost and quality and efforts to establish a system to adequately monitor and compare the major hospitals. Respondents viewed these initiatives as the basis for increasing the emphasis on quality in the future. However, current views of quality of services in this market are mixed, especially tertiary services. Some respondents cite continuing out-migration as evidence of the area’s concern with local care while others report a high degree of confidence in the area’s services. Perceived quality, however, is viewed as an important issue for competing hospitals to gain more market share. Therefore, hospitals are all emphasizing quality and consumer satisfaction as they compete for patients and plan contracts.

Decisions reached in union negotiations strongly affect employer purchasing decisions. As a result, health insurance products are strongly influenced by the union philosophy, particularly that espoused by the United Auto Workers (UAW), that health care is a right and that it should be provided by nonprofit entities. Consequently, most health benefit packages among major Lansing employers generally reflect extensive coverage and emphasis on consumer choice. This consumer choice issue has led to large, overlapping provider networks for all products.

The Big Three and the UAW have a significant relationship with BCBSM, which includes membership (by some of these entities) on the BCBSM board and use of BCBSM as their third-party administrator. Increased concern on the part of the Big Three about the cost of health benefits has placed new demands on BCBSM to negotiate better rates and has involved the purchasers more directly in negotiations. In 1996 negotiations, for example, the Big Three took advantage of the results of a study of hospital costs they commissioned that identified Sparrow as the highest-cost hospital (20 percent above the others). As a result, the employer trio demanded that BCBSM keep its overall indemnity rates steady, in part by negotiating better rates with Sparrow.

These most recent negotiations have focused on hospital rates. BCBSM’s negotiations with the hospitals appear to be product-specific, and the results extend beyond these three large employers. For example, negotiations conducted several years ago helped reduce HMO rates, providing indirect benefits to medium and smaller employers, who were then able to offer an HMO option.

In addition to their involvement collectively, MSU and the State of Michigan are pursuing individual strategies to strengthen their negotiating power. The new MSU president is actively involved in various strategies to keep health care costs down as part of his promise to avoid tuition increases. Among the strategies MSU is exploring is a statewide university consortium designed to increase the university’s negotiating power. The State of Michigan is considering addressing cost control issues by pooling its health care purchasing for public employees.

Most smaller employers say these larger-employer negotiations set the standard for insurance plans, with benefit packages that are often cost-prohibitive to them. Some small employers have responded by purchasing health insurance through the Chamber of Commerce, although this is also reported to be expensive. The smaller employers feel they have very little choice in insurance products, but they have not been able to organize sufficient influence to "get a better deal."

Medicaid is widely believed to be the leader among purchasers in moving toward greater HMO enrollment and capitation. The state’s three-year plan to shift its Medicaid population into managed care includes implementing the state’s 1915b waiver and developing population-specific approaches. The 32,000 Medicaid recipients in the Lansing area may choose between a primary care physician through the state’s Physician Sponsor Plan (PSP) or an HMO.¹¹ In Ingham County, which has the greatest Medicaid managed care penetration of the three counties, more than half of the county’s enrolled population is in one of the area’s three HMOs participating in Medicaid. In contrast, the other counties’ enrollment is primarily in PSP.¹² The transition in the Medicaid program has led to competition between providers for Medicaid patients; established plans and new plans entering the Lansing market are developing specific Medicaid products. Respondents felt that the increased enrollment in HMOs has improved access to care for the Medicaid population.