Center for Studying Health System Change

ittle Rock’s health care system is marked by strong alignments between a number of leading hospitals and health plans. Links between hospitals and physicians remain relatively weak despite recent acquisitions of many area practices. Relationships between hospitals and health plans are driven in large part by shared equity arrangements with limited administrative or clinical coordination or integration across the participating organizations. The dominance of fee-for-service payments and purchasers’ demands for broad physician panels have created a physician sector that is not organized into highly defined networks or large practice arrangements. Yet at the same time significant changes appear to be taking place in the way physicians are paid and organized. The market entry of several well-capitalized national health insurance companies and hospital chains is likely to alter this current balance of power.

HOSPITALS

The Little Rock metropolitan area is home to 10 short-term, acute care hospitals, eight of which are located within the city limits of Little Rock and North Little Rock. The most powerful area hospital system is Baptist Health, which owns Baptist Medical Center in Little Rock and Baptist Memorial Medical Center in North Little Rock. Together these institutions have more than 1,000 acute care beds, accounting for 42 percent of the MSA’s total.¹⁴ The system also owns Baptist Medical Center of Arkadelphia and the 120-bed Baptist Rehabilitation Institute. One way in which Baptist Health has secured its position in the Little Rock market is through its strategic partnership with BCBSA, and its physician affiliates are equity partners in the area’s biggest HMO, Health Advantage HMO. In return for its equity share, Baptist retains the exclusive contract for general inpatient services for the HMO’s 40,000-plus members. In addition, Baptist serves as the preferred provider for BCBSA’s PPO products and is actively developing a statewide provider network of hospitals outside the area.

Perhaps the most significant competitor to Baptist in terms of size and market clout is St. Vincent’s Medical Infirmary, a 566-bed hospital owned by the Kentucky-based Sisters of Charity of Nazareth.¹⁵ St. Vincent’s is aligned with Healthsource Arkansas Ventures, Inc., through a joint venture with the HMO’s New Hampshire-based parent, and is the exclusive hospital provider for the health plan in the Little Rock service area.

St. Vincent’s is also reported to be the prime force behind an attempt to establish a regional provider network called Novasys with out-of-area hospitals, most of which are owned by Tenet, a large national hospital chain. Respondents described the goals of this network as twofold: to check the growing influence of the Baptist/BCBSA alliance outside the metropolitan area and to establish a regional provider base that could help St. Vincent’s secure direct contracts with regional employers.

While St. Vincent’s is a full-service hospital that reportedly enjoys a substantial degree of patient loyalty and a reputation for being patient-focused, its position in the market may be weakening due to high costs and a rocky relationship with its managed care partner. In fact, several respondents noted that the institution recently underwent a round of layoffs and reductions in hours to reduce its costs.

Several other acute care hospitals operate in the area:

• University Hospital, operated by the University of Arkansas for Medical Sciences (UAMS), which provides a large share of Little Rock’s charity care and many of the area’s most sophisticated procedures, such as bone marrow transplants and experimental procedures;

• Arkansas Children’s Hospital, a regional center of excellence for pediatric tertiary care, which, like St. Vincent’s, has reportedly laid off staff to bring down costs;

• two smaller community hospitals in Saline and Faulkner counties;

• two small military hospitals; and

• a large Veterans Affairs Medical Center complex with more than 900 beds and specialty ambulatory care clinics that generate among the highest numbers of outpatient visits in the VA system.

Among the most significant changes unfolding in Little Rock’s hospital sector is the emerging presence of Columbia/HCA. In 1994, control of the 340-bed Doctor’s Hospital shifted from HCA to the newly merged Columbia/ HCA. Doctor’s Hospital was previously owned by HCA. Doctor’s has a reputation as a high-quality hospital with a favorable payer mix and a strong obstetrics program: it held the state Medicaid contract for inpatient obstetrical and newborn care until April 1997, when the state terminated selective contracting for these services.

Around the same time as the 1994 merger, Columbia/HCA purchased Columbia Family Practice, the largest medical group in town. While these acquisitions caused many in the health care system to take notice, they did not receive a great deal of public attention for two reasons: First, the acquisitions did not raise the specter of for-profit conversion of valued public institutions, an issue in other communities where Columbia/HCA has been active. Second, many consider Doctor’s Hospital to be weak due to its limited range of service offerings and its high number of unfilled beds, leading some to downplay the significance of Columbia/HCA’s control over that institution.

Stakeholders’ interests were piqued early in 1997, however, when Columbia/HCA announced its intention to acquire Southwest Hospital, a 125-bed community hospital also located in Little Rock proper. News reports of the company’s underlying area strategy may have done more to sound an alarm than the transaction itself did. In press interviews, a Columbia/HCA spokesman described his company’s newest acquisition as part of a strategy to build critical mass in central Arkansas -- a strategy similar to one being pursued in Northwest Arkansas where Columbia/HCA now owns or manages several hospitals and home health care facilities.

In the article, the Columbia official went on to name the four biggest hospitals in Little Rock, all not-for-profits, as potential acquisition targets, stating further that he didn’t want to "strike fear into the hearts of the existing facilities, but if none of these institutions was willing to sell, building a new hospital in the area is definitely an alternative."¹⁶ In news reports, hospital executives either declined comment or denied any interest in a sale.¹⁷ Indeed, respondents interviewed for this study reported that the Southwest Hospital transaction has sparked concern among nonprofit institutions and stimulated discussions in many quarters about how best to keep Columbia/HCA at bay.

Another major development with a potentially significant impact on local institutions was the March 1997 opening of Arkansas Heart Hospital. Like the new hospital, a number of hospitals in town, including Baptist, St. Vincent’s and University Hospital, offer full-service cardiology and cardiovascular surgery programs. The Arkansas Heart Hospital was built by MedCath, a Charlotte-based health care company specializing in cardiac care and management of specialty hospitals. More than a dozen local cardiologists with ties to both Baptist and St. Vincent’s are equity partners in the venture. The Arkansas Heart Hospital poses a significant threat because cardiology programs are reportedly big moneymakers for these institutions, generating as much as one-third of each hospital’s total revenues.

Arkansas Heart Hospital has yet to secure a managed care contract, and its investors anticipated limited success in this regard given the equity position of its major competitors in two of the area’s most highly subscribed HMOs. However, a lack of managed care contracts does not restrict Arkansas Heart Hospital’s ability to compete for patients enrolled in traditional health insurance plans, who represent the largest share of Little Rock’s commercially insured population. Arkansas Heart Hospital’s presence has touched off an intense advertising blitz by local hospitals to secure their existing share of the cardiology and cardiovascular surgery market. Respondents also reported that the new hospital’s opening has generated significant competition for specialized nursing and mid-level technical staff.

PHYSICIANS

Little Rock has a healthy supply of physicians. In 1994, for instance, the metropolitan area had 11 percent more primary care physicians per capita than the U.S. average and 47 percent more physicians in non-primary care specialties than the national norm.¹⁸ This supply may reflect the fact that the area is home to several medical training programs. UAMS trains physicians and sponsors residency programs at University Hospital, Children’s Hospital and the VA. Baptist Health trains a large number of the state’s nurses at its two Little Rock-based acute care institutions. While physicians in Little Rock tend to practice in small, single-specialty practices, several larger group practices exist: Columbia Family Practice, a primary care-dominated practice with 35 full-time-equivalent (FTE) medical staff that has hired a number of specialists over the last two years, and the Little Rock Diagnostic Clinic, an independent 27-member multispecialty clinic located near the Baptist Medical Center campus.

One of the most visible changes in the organization of Little Rock’s health care system is the recent acquisition of physician practices by several leading area hospitals. According to respondents, Columbia/HCA set off the buying spree when it purchased Columbia Family Practice, the area’s largest physician group.

Other hospitals, including Baptist and St. Vincent’s, reportedly followed suit in a series of defensive maneuvers. Despite the community’s focus on these acquisitions, however, many respondents questioned whether their impact is proportionate to the attention they have generated given two aspects:

• Many respondents reported that only a small proportion of physicians in the area actually work in practices owned by the hospitals.¹⁹

• There is a widely held perception that these acquisitions were not part of a well-thought-out strategy, and that hospitals are now realizing they may have acted too precipitously.

Physicians have also played a major role in a number of lower-profile, but potentially important, changes in the organization of Little Rock’s health care system. Respondents reported that over the last year or so, a large number of physicians have joined together in formal independent practice associations (IPAs) and in less formal practice groups, marking a significant shift in the traditional organization of physician practice in the community. Examples of some of these new arrangements include the recent establishment of two separate primary care IPAs; an informal affiliation of all the practicing urologists in town; the formation of a new large multispecialty group; the merger of two cardiology groups associated with the Arkansas Heart Hospital, a prelude to the opening of that institution; and a merger of several OB/GYN practices that plan to practice together and, perhaps, to undertake collective contracting. Respondents noted that these endeavors reflect an attempt by physicians to combat potential reductions in income and clinical autonomy.

INSURERS AND HEALTH PLANS

While the dominant forms of commercial insurance in Little Rock are traditional indemnity-based coverage and PPO plans that allow enrollees to see out-of-network providers for an additional copayment, more individuals are moving into managed care arrangements. Roughly 18 percent of the metropolitan area’s population is enrolled in HMOs.²⁰ These plans tend to be loosely structured IPA-type models in which health plans contract with providers who see HMO patients and non-HMO patients, and under which payments remain predominantly fee-for-service. According to respondents, only 10 to 15 percent of provider payments in the area are capitated; most physicians in managed care arrangements are paid on a discounted fee schedule in combination with withholds that are returned to physicians only if they meet predetermined performance targets.

A number of health plans competing in the market are relatively new to the Little Rock area. In fact, none of them had a presence in the market prior to 1992. These plans include:

• United HealthCare, the second-largest HMO in the metropolitan area and reportedly the fastest-growing health plan in the market (22 percent enrollment growth between 1995 and 1996);

• Healthsource, with a strong base of HMO enrollees and a large number of individuals enrolled in products offered by its newly acquired third-party administrator; and

• Prudential Healthcare, a national insurance company that offers both HMO and PPO products in the market.

Supplementing these national insurers are three homegrown HMOs: Health Advantage, the biggest HMO in central Arkansas; American Health Care Providers, in operation since 1985, making it the area’s oldest HMO; and QualChoice, an HMO sponsored by the University of Arkansas for Medical Sciences, which, until recently, has focused on public employees and received a commercial HMO license in the fall of 1996.

Respondents noted that the entry of these new health plans has led to increased marketing efforts and premium competition. A number of respondents asserted that several health plans are "low-balling" their rates to build market share even though the underlying rate of increase of medical costs has not slowed. As a result, revenues collected from insurance companies have not always kept pace with amounts they pay to medical providers. For instance, several respondents accused United HealthCare’s parent company of subsidizing premiums quoted in Arkansas, a charge refuted by local company executives. Others noted that in 1996, BCBSA announced a $22 million operating deficit and a $5 million operating deficit for Health Advantage. This is another indication that competitive pressure may be holding down premiums, perhaps below a sustainable level.

Purchasers interviewed for this study, however, had mixed views about whether premium costs are really abating in Little Rock. Some asserted that the rate of premium growth is accelerating for many plans in the market.

Despite the mounting competitive challenge posed by out-of-state plans, BCBSA appears to retain a relatively strong position in the local market for several reasons:

• BCBSA still enjoys strong name recognition, and BCBSA-affiliated products reportedly cover more than 40 percent of all commercially insured lives. With 5,000 members enrolled in its Medicare HMO, and three-fourths of the area’s large and growing managed workers compensation market, BCBSA’s large base of covered lives gives it a great deal of leverage in negotiating rates with local providers.

• The insurer’s successful PPO bid for the state employee and teachers pool increased its enrollment base and market clout, particularly in areas of the state outside Little Rock and North Little Rock, where teachers represent a large share of the commercially insured population.

• BCBSA has forged a strategic joint venture with the Baptist system, the region’s dominant hospital provider.

One significant change health plans are making is use of more sophisticated payment arrangements to encourage participating providers to practice medicine more efficiently and to increase patient satisfaction. Such initiatives supplement discounted fee-for-service payment methods rather than replace them. For example, in January of 1997, Health Advantage introduced a controversial payment system that adjusts physician payment levels using provider-specific "quality index" scores. These scores are numeric values that indicate the extent to which a provider’s practice varies from the health plan’s explicit practice guidelines. Physicians with above-average scores receive an increased payment for each service billed (for example, 115 percent of the fee schedule), while providers with scores at the lower end of the range receive discounted payments as low as 80 percent of the basic fee schedule. The health plan also considered using the profiling system to remove physicians with consistently low scores from the HMO’s list of participating providers. Given the high level of physician concern about the profiling effort, Health Advantage is reportedly reconsidering its use of index scores altogether.

In another move that could significantly transform Little Rock’s delivery system, Health Advantage announced that this year it will offer global capitation to providers that organize themselves into self-selected sub-networks. Under these arrangements, patients would be able to "self-refer" within their primary care doctor’s sub-network, a feature that allows members to see network providers without referral from a gatekeeper. To date, no Health Advantage providers have stepped forward to participate in such an arrangement.

Other health plans have also begun to make changes in the way they pay providers. United HealthCare has started to adjust physician payments using member satisfaction data and plans to adjust payments based on severity-adjusted utilization data sometime in 1997. The Minnesota-based health plan is also considering capitating payments to specialists in the future. Healthsource has introduced a system that rebates primary care doctors’ withhold based on an "efficiency index" that reflects severity-adjusted utilization data. Healthsource is already the driving force behind much of the existing capitation in the area; its contract with St. Vincent’s makes the hospital responsible for medical costs incurred by Healthsource enrollees in return for 75 percent of the HMO’s premiums, leaving the hospital at full financial risk for all costs that exceed this dollar amount.²¹ Last year Healthsource unsuccessfully tried to talk Southwest Hospital into a similar arrangement.²²

RELATIONSHIPS AMONG HOSPITALS, PHYSICIANS AND HEALTH PLANS

Many of Little Rock’s HMOs are jointly sponsored by insurers and hospitals through shared equity arrangements. These relationships bind together, at least in the short run, the fate of some of Little Rock’s most important health care organizations. Shared equity arrangements are the foundation of both Health Advantage, a partnership between Baptist and BCBSA, and Healthsource Arkansas Ventures Inc., a joint venture between St. Vincent’s Infirmary and the New Hampshire-based HMO company. Moreover, the recently licensed QualChoice network is owned by the University of Arkansas for Medical Sciences, which also owns and operates University Hospital.

The principal characteristic that binds these organizations together, however, is a shared financial stake in the success of the products. Health Advantage is an equity arrangement among three parties that share in the operating profits or losses of the venture: BCBSA, which has a 50 percent stake in the venture; Baptist Health, which has a 25 percent stake; and the 200-member Baptist physician group, which holds the remaining equity in the HMO. Similarly, Healthsource is a 70/30 venture between the health plan and St. Vincent’s Infirmary. These joint ventures have not led them to organization integration, but rather only a limited degree of financial and administrative integration. For instance, health plan and hospital officials reported that Health Advantage provides Baptist with access to up-to-date administrative information that allows the hospital to verify patients’ insurance coverage on-line. Respondents had conflicting views about the success of efforts to create a "data warehouse" that attempts to combine clinical information from BCBSA’s claims files with hospital records and other data sources. The goal of that system would be to enable providers to develop "episodes of care" and other analyses to aid clinical practice.

Views were mixed on the overall market impact of these hospital/health plan alliances. Some respondents asserted that the strong economic relationships between health plans and local hospitals limit the ability of plans to negotiate as aggressively on price as they would be able to if they had a more arms-length relationship with their hospital partners. Others, including health plan representatives, asserted that hospitals are willing to offer their best price to the HMOs since they have a strong interest in the products’ success in the market and because the contract terms guarantee patient volume.

While the BCBSA/Baptist relationship appears to be on firm footing, a number of respondents reported that tensions between Healthsource and St. Vincent’s cloud those organizations’ future relationship and potentially weaken the position of both companies in the Little Rock market: Healthsource’s ability to compete on premiums may be hobbled by alleged high costs at St. Vincent’s; hospital officials are reportedly dissatisfied with the terms of the joint venture agreement.

Hospitals’ acquisition of physician practices is also a potentially important source of cross-sector activity, although these acquisitions are reported to have limited influence on physician referral patterns. Physicians are not required to direct patient volume to the acquiring hospital. Indeed, respondents noted that hospitals tend to tread carefully in such matters lest they run afoul of federal anti-kickback regulations; they merely purchase "good faith," as one respondent called it. In some cases, this good faith is yielding healthy returns. For example, while only 45 percent of patients seen by doctors at Columbia Family Clinic are admitted to Columbia Doctor’s Hospital, this is reportedly up from 10 percent prior to Columbia/ HCA’s purchase of the practice.

In addition to practice acquisitions, management service organizations (MSOs) appear to be hospitals’ preferred way to build stronger links between hospitals and community doctors. Several hospitals, including Baptist and St. Vincent’s, sponsor MSOs. Respondents did not emphasize the importance of physician-hospital organizations (PHOs) as a means of organizing medical practices or carrying out contract arrangements, although St. Vincent’s’ PHO appears to play an especially significant role in the allocation of capitated payments for Healthsource enrollees.