rea hospitals are rapidly consolidating in the Lansing area, which has prompted the larger hospitals, MC² and Sparrow, to develop health systems and downsize their inpatient capacity. For the most part, mergers that have taken place or are currently being considered have been financially driven. The most significant merger in the area took place in 1992 when Lansing General Hospital, an osteopathic provider, purchased the then county-owned facility Ingham County Medical -- and MC² was created. The acquisition’s high cost fueled financial difficulties and is driving MC²’s current need for a new arrangement. Another major hospital, St. Lawrence, recently announced a memorandum of agreement to merge with Sparrow Health System, a move that comes after a considerable period of searching for a reliable and compatible partner. The two resulting systems -- MC² and Sparrow -- while heavily focused on the tri-county area, are also pursuing arrangements with outside hospitals to support their development of expanded and specialized services and with smaller hospitals in the market to expand their market share. As they develop and increase their level of competition, the hospitals are also re-examining their relationships with physicians and with health plans.

While change in the hospital sector seems to be occurring rapidly, physicians are slowly moving from their solo practices and small groups to larger multispecialty groups. The largest group has 25 members. Hospitals have been buying physician practices and establishing offices on or near their campuses to attract doctors to their facilities. The increasing number of employed physicians are generally primary care physicians at the hospitals or at the one staff-model HMO. Physicians also affiliate with the hospitals either through physician-hospital organizations or the one physician organization. In addition, MSU has a faculty practice plan. Some physicians, however, are beginning to rethink these close ties with the hospital systems and are developing networks to contract independently with hospital systems and/or plans.

At the same time, competition is increasing among the health plans in the market. Until recently, BCBSM has dominated the market, particularly with its indemnity product. However, managed care products, primarily HMOs, are becoming more significant players, with plans such as BCBSM and its competitors offering a variety of products.

The five HMOs in the market are all not-for-profit; most are owned by or contract with area hospitals. Of the five plans, those owned by BCBSM (Blue Care Network) and Sparrow Hospital (Physicians Health Plan) hold the most market share, followed by Care Choices, part of St. Lawrence through its corporate sponsor, Mercy Health Services. The other two plans are from outside the area, M-CARE, which is part of the University of Michigan, and the Wellness Plan of Detroit. Because of the relationships of the major plans with local hospital systems, the current consolidations among the hospitals are likely to affect the relative positions of plans in the market. Moreover, the community bias favoring local entities continues to discourage new entrants from other parts of the state who are primarily interested in the Medicaid market.

PROVIDER ORGANIZATIONS

MC² and Sparrow Health Systems are the two dominant provider organizations in the area. The third major player is St. Lawrence Hospital. Until recently, these hospitals have had distinct areas of specialty and little duplication of services. The three rural hospitals are closely aligned with the larger hospitals in Lansing. Clinton Memorial’s shared arrangement with Sparrow has resulted in a merger of their durable medical equipment companies and arrangements for home care services. A merger of these two facilities is anticipated at some later point.

With approximately 45 percent of the area market share and the highest patient volume, Sparrow Health System would like to be the dominant hospital system and is already viewed as such by other players in the market. This current perception is based in part on Sparrow’s market share, size, the services it offers and its sound financial condition, which allow the system to aggressively pursue an expansion strategy. For example, Sparrow is upgrading its existing Level 2 trauma center to Level 1, an effort that has been used to support development of a new cardiovascular surgery program. The Sparrow system also includes an HMO and two PPOs, a home care company and an ambulatory care center outside of Lansing.

MC², the other major health system in the capital area, has two campuses, 483 licensed beds and the second highest patient volume in the area. In addition to its inpatient services, it offers a continuum of services, including primary care, outpatient rehabilitation, home health and hospice services. The last is a result of its merger with the Greater Lansing Visiting Nursing Services. MC² is a Cardiovascular Center of Excellence, with a long history of open-heart surgery.

St. Lawrence, the smallest of the three hospitals, is part of Mercy Health Services and has been seeking a merger over the past six years with one of the two major hospitals. The hospital is known in the area for geriatric services, behavioral health (it has a psychiatric partial hospitalization program) and wellness programs, including the well-known Michigan Athletic Club and Health Services Pavilion, subsidiaries of the Mercy System, which are managed by St. Lawrence. St. Lawrence is affiliated with the Mercy HMO, Care Choices, which is primarily active in Medicaid managed care. Capital Area Physician Entity (CAPE), a PHO, was established as part of the Care Choices effort, with Care Choices providing administrative services to the PHO.

The three hospitals compete on the basis of services provided and their relationships with health plans, the smaller area hospitals and physicians in the community. Assuming the merger of Sparrow and St. Lawrence, each of the remaining two systems has some unique services but they compete in such areas as open-heart surgery, MRI, home health and rehabilitation services. By merging with St. Lawrence, Sparrow will add geriatrics, outpatient rehabilitation and sports medicine to its competitive arsenal. Most view Sparrow as the entity least willing to cooperate, as evidenced when it pulled out of a community collaborative effort to create a single joint program in radiation oncology. As a result, there will be two separate competing services. Sparrow also uses its position in the market to keep its prices high and limit entry of outside health plans by not participating in their networks. Since most respondents agree that networks need Sparrow Hospital to be successful in marketing, this strategy has limited the success of those plans unable to contract with Sparrow. A recent study identifying Sparrow as the highest-cost area hospital, and consequent demands by the Big Three and BCBSM, have pressured Sparrow to lower its hospital rates, but not to lower its HMO rates.

The ownership or strong affiliation with health plans by two of the hospitals is part of their systems’ strategies to capture greater volume and market share. Sparrow’s ownership of Physician Health Plan (PHP) provides the system with several managed care products in the market and strong incentives to limit its participation in other plans. Currently, PHP has a strong market presence, although a number of employers remain concerned about its high costs and do not offer this product. GM recently dropped PHP as a health plan offering to its management staff because it was unable to get lower rates. The automaker also does not offer PHP to its other employees because the UAW objects to PHP’s management contract with a for-profit entity, United HealthCare. Of the three major hospitals, MC² is the only one that does not own or have an affiliation with a specific health plan; instead it contracts with various plans, including those of St. Lawrence’s Care Choices, M-CARE and the Wellness Plan. The future Sparrow/St. Lawrence merger will present some issues related to the Care Choices plan and the current competition with the Sparrow plan for the Medicaid market.

The three major hospitals also have been purchasing physician practices with a major emphasis on primary care. Several respondents indicated that this strategy has not always been financially successful, and as a result, fewer purchases are occurring. Instead, hospitals appear to be focusing on developing and supporting physician hospital organizations and establishing physician office space close to their inpatient facilities. These activities include Sparrow’s new office building and attempts by MC² to develop a clinic on one of its campuses, an expansion issue that is meeting some community resistance. The rural hospitals have implemented similar strategies and own a range of practices.

Changes in the physician sector have been less dramatic. Physicians are primarily moving away from solo and small-group practices to larger ones, and many primary care physicians are shifting from private practice to salaried positions at hospitals and with plans. Generally physicians in this market have been viewed as following the hospitals rather than actively organizing themselves. In fact, several PHOs exist but only one physician organization operates in Lansing.

In response to concerns among some physicians that they need to have a strong, independent presence, a small number of physicians are developing multispecialty groups to contract independently with hospitals and plans. For the most part, specialty physicians participate in overlapping networks of the various plans while primary care physicians are more likely to be affiliated with a single hospital and plan. Some plans, especially PHP, are trying to develop exclusive arrangements with specialty physicians. Consumer preferences and purchaser pressures have limited the success of such efforts to date, but it is expected that as the competition between Sparrow and MC² increases and spills over to the plans in the market, exclusive arrangements will become more prominent.

A unique feature of the physician market in this area is the strong presence of both allopathic and osteopathic physicians, due in part to the two medical schools but also resulting from a long community and state tradition of using osteopaths. The osteopathic presence is credited in large part for the market’s emphasis on primary care. However, there are mixed views as to the extent of integration of these two groups and their relative roles in providing specialty services. At the medical schools, students pursue largely separate paths after the initial non-clinical training. The faculty practices operate separately and are not administratively integrated, with the exception of a few departments. On the other hand, all hospitals give admitting privileges to both groups, there are some "mixed" practices and there is a single medical society.

HEALTH PLANS

The Lansing area insurance market is still dominated by a single plan, BCBSM, which is the primary indemnity carrier and offers a number of other products. As previously noted, BCBSM also serves as the third-party administrator for many of the self-insured employers. While in the past all employers had often offered only BCBSM as their insurance plan, they now offer other health plans or may contract with other third-party administrators. HMO penetration in the area is high, at 38.3 percent¹³ and will increase as the Medicaid market moves rapidly into managed care arrangements.

Health plans in the market are characterized by their not-for-profit status, a strong emphasis on and bias toward "locally grown" products and a focus on HMOs. This bias and the unwillingness of Sparrow Hospital to contract with newer entrants are the major barriers to entry. The most successful plans are locally owned or strongly affiliated with a local group: the Blue Cross plan; the Blue Care Network (BCN), the Blue Cross plan; Sparrow’s PHP; and the St. Lawrence/Mercy Health Services Care Choices.

BCN and PHP currently have approximately 80 percent of the HMO market,¹⁴ and only recently have entrants from other parts of the state, including the Wellness Plan and M-CARE, come in, primarily to pursue the new Medicaid market. With a small elderly population and low Medicare managed care penetration ranging from 4 to 8 percent in the three counties,¹⁵ Lansing is not viewed as a particularly attractive market for Medicare risk products.

Indemnity plans and HMOs are preferred by many employers. For example, among the Big Three, which account for almost 60 percent of the labor market, the state and MSU offer BCBSM indemnity and two HMO options, PHP and BCN, while GM offers the BCBSM indemnity and BCN only. HMOs are not restrictive, so there is less reason to have other products, such as preferred provider organizations or point-of-service plans. Nonetheless, various plans, including BCBSM and Sparrow’s PHP plan, offer these products. While there is often little differentiation in terms of cost to purchasers, the plans do differentiate their products, primarily by the way they compensate providers and design risk arrangements.

Managed care penetration, primarily HMOs, has been on the rise in the Lansing area, but managed care has been a very loose construct, with little capitation and few overlapping networks, except in the Medicaid market. In the commercial sector, most physicians, especially specialists, participate in the various plans, although there has been some move toward exclusivity among primary care physicians. While the plans attempt to include all area hospitals in their networks, Sparrow has limited its participation in some of the networks. Plans’ attempts to limit networks have been largely unsuccessful, although new attempts are expected as more exclusive hospital/physician and hospital/plan relationships are established.

The picture for the Medicaid market contrasts with that of the commercial market. Fewer plans offer a Medicaid product and networks established by these plans are more limited. Only three plans offer a Medicaid product. The three Medicaid plans have generally established exclusive arrangements with community-based providers, such as the health department and neighborhood health centers. Physician panels are also defined within the Medicaid market based on their hospital affiliations. For example, the Wellness Plan uses physicians affiliated with MC², and Care Choices mainly uses physicians affiliated with St. Lawrence.

Provider payments in the commercial market remain largely discounted fee-for-service, with some capitated arrangements with primary care physicians and the expectation that the public sector (Medicaid HMOs) will provide pressure to move to various risk arrangements, including capitation. At least one plan reported that primary care physicians are assuming some risk for hospitalization. One plan reported using diagnosis related groups (DRGs) for hospital payments, but is moving to per diems. PHP and BCBSM differentiate payments based on the product as described below.

BCBSM has a complicated position in this market, particularly given its roles with major employers. This position particularly affects its relationship with area hospitals because it may, at some point, negotiate with the hospitals on behalf of employers and then compete with the hospitals and their health plan products. BCBSM’s major products include its indemnity, Blue Managed Traditional; an HMO, Blue Care Network (BCN); a PPO, Blue Care Preferred; and a point-of-service product, Blue Choice. BCBSM maintains a competitive edge by keeping premiums down, although some products may be losing money. BCN is a staff/IPA model that has a 30 percent market share of the commercial HMO market.¹⁶ It competes well on price in part based on its ability to manage care through utilization review and the staff component of its model and on its use of primary care capitation. BCN’s ability to use BCBSM’s name recognition to market itself and its strong union support are its major advantages in the market. BCBSM views its major competition for BCN as its own indemnity product, not Sparrow’s PHP, which actually has a larger market share at 50 percent.¹⁷

PHP is an IPA owned by Sparrow Health System with a management contract with United Health Care. It covers 95,000 lives in the capital area, including the commercial HMO and a point- of-service product.¹⁸ The point-of-service product is offered to provide choice to employers, but most utilization occurs within the HMO. PHP prices are generally higher than those of its competitors, which has contributed to recent problems in obtaining contracts. PHP’s high costs are viewed as its major problem, and pressures by employers are influencing the plan to develop a variety of strategies designed to bring costs down, including improved clinical management and changes in its current discounted fee-for-service arrangements with providers.

The three remaining HMOs in the market trail far behind these two market leaders. They include: Care Choices, affiliated with Mercy Health Services; M-CARE, affiliated with the University of Michigan; and the Wellness Plan, based in Detroit. As discussed previously, bias against "outsiders" and Sparrow’s refusal to join these plans are two major reasons for their current position. Only three of the plans currently offer a Medicaid product: PHP’s Family Care; Care Choices, a Mercy Health Services plan affiliated with St. Lawrence; and the Wellness Plan located in Detroit.

ORGANIZATIONAL CHANGE: PROVIDERS AND PLANS

Two major underlying issues in the Lansing market will influence health system change: a strong desire to maintain the current ownership and control of key health care organizations as local and not-for-profit, and efforts to reduce costs and emphasize quality.

Because of the strong relationship between area hospitals and health plans, the emerging hospital system ownership changes will strongly influence the nature of plans and physician relationships to hospitals and plans. Sparrow/St. Lawrence and MC² are currently making these strategic choices. The Sparrow/St. Lawrence merger appears to be headed toward a full-scale integration and partnership, proposing a potential scenario in which St. Lawrence will become the system’s outpatient center and Sparrow, the inpatient center. Questions remain, however, concerning the relationship between each hospital’s health plan (PHP at Sparrow and Care Choices at St. Lawrence) since they have been competing aggressively with each other for Medicaid patients. In addition, it is unclear what will happen to the PHOs at each hospital and the relationships St. Lawrence has established with plans such as M-CARE and the Wellness Plan. Change resulting from the resolution of MC²’s current poor financial shape is highly dependent on the nature of the solution.

In contrast to the hospital market, change within the plans does not center around ownership. Instead, market impact is more likely to relate to changes in provider arrangements, including limited provider networks, expanded use of capitation and newly developed risk arrangements. Hospital ownership changes, however, will likely affect health plans. To the extent that indemnity and HMO or other managed care products become more differentiated, either in terms of cost or their networks, the penetration of various products may shift over time.