Case Study

Health System Change in 1997

July/August 1998
Health Affairs

Health System Change in Newark, New Jersey

Round One Site Visit

Case Study
September 1997
Robert E. Mechanic, Susanna Ginsburg, Monica D. Williams, Jennifer Kates, Ha T. Tu

ewark’s health system is in the midst of significant structural change as a result of major reforms to the state’s health care regulations, which had been in place since 1978. In 1992 the New Jersey hospital rate-setting system was eliminated, and the state hospital charity care program was restructured. These programs were considered important to the financial viability of urban hospitals and to maintaining access to health care services in Newark’s urban core, which has among the highest rates of poverty and associated socioeconomic problems in the nation. Five years later, there are signs of growing financial distress among some of Newark’s inner city providers, which could indicate a worsening of health care for the poor.

The rollback of state regulation has intensified competition among Newark’s health care providers, leading to a rash of hospital consolidations and the emergence of several large hospital-based provider systems. Modest growth in managed care plan enrollment and providers’ efforts to position themselves for potential future growth also have accelerated the pace of organizational change. There is an increasing dichotomy between the health care systems in urban and suburban Newark, and it is unclear whether inner city conditions will deteriorate further or whether some combination of state intervention and investment in inner city hospitals by suburban health care networks will stabilize a hemorrhaging system.

While a major goal of New Jersey’s hospital rate-setting system was to control costs, it also ensured financial solvency for most of the state’s hospitals. As a result, there is substantial hospital overcapacity in New Jersey -- and in Newark. Since rate-setting ended, the gap between financially strong and weak hospitals has widened, with nearly 20 percent of the state’s hospitals reporting negative total margins in 1996. As of April, only one New Jersey hospital had closed, but Newark’s inner city institutions are likely to face growing financial pressure under the new free market hospital payment system.

Many respondents believe that reductions in Newark’s excess hospital capacity are imminent, but some fear these changes will be harmful to the area’s underserved residents. Most of the region’s economic strength and market power is concentrated now in suburban hospitals, and many respondents expressed concern that services -- particularly speciality care, would gradually be moved from inner city to suburban locations. However, shifts in capacity require certificate-of-need (CON) approval from the state Health Department, which has stated its interest in preserving access to care in the inner city. Despite the rollback of New Jersey’s rate-setting system, state regulation remains one of the most important determinants of health care system change in Newark.

Organizational change in the health care delivery sector has been dominated by the growth of hospital-based provider systems. Most of the mergers and acquisitions have taken place since 1996. In contrast, most physicians practice independently or in small groups, with few exceptions, such as the 75-physician Summit Medical Group. The major hospital systems are developing mechanisms to align physicians more closely with their institutions, but most of these efforts are in the early phases.

There has been little organized purchaser activity in Newark. Many of Northern New Jersey’s large employers have been reluctant to force employees into managed care options. The large commuter population and presence of companies with a regional or national work force reinforce employers’ demands for indemnity coverage or multistate managed care products.

The dynamics of purchasing differ in the small-group market, which is regulated by the Department of Insurance. Since recent reforms created standard benefits packages and limited medical underwriting in this market, enrollment in managed care options has grown.

In general, managed care enrollment in Newark has grown rapidly. Much of the current HMO activity is focused on negotiating discounts with providers rather than implementing innovative financial or care management arrangements. Aside from primary care capitation, providers have not established global at-risk arrangements with HMOs. Many respondents believe that most of Newark’s major providers do not currently have an adequate systems infrastructure to manage global capitation contracts effectively. In addition, a large number of New Jersey HMOs have recently merged or reorganized, which has diverted their attention from provider relations.

Perhaps the most important purchaser activity affecting Newark is the state’s implementation of mandatory HMO enrollment for Aid to Families with Dependent Children (AFDC) recipients. This is particularly important for inner cities in the Newark area because they have large Medicaid populations and providers that rely heavily on Medicaid revenue.

The long-run outlook for growth of managed health care is uncertain due to provider resistance and the high demand for choice voiced by New Jersey residents. Ultimately, future health system change in New Jersey will depend on the complex interaction between the invisible hand of the market and the visible hand of New Jersey State government.

Center for Studying Health System Change

Providing Insights that Contribute to Better Health Policy

Health System Change in Newark, New Jersey

Round One Site Visit