Center for Studying Health System Change

tate policy is a major force affecting the Newark metropolitan area’s health care system. The elimination of New Jersey’s long-standing hospital rate-setting program catalyzed a wide range of consolidations and other organizational changes in Newark’s hospitals in anticipation of a more competitive market environment. At the same time, reductions in state charity care and graduate medical education payments have created new financial pressures for many of Newark’s inner city hospitals, which are the major providers of service to the region’s poor and uninsured residents. In contrast, the state’s CON regulations have protected many of Newark’s inner city hospitals from new competition for specialized tertiary services, helping them to maintain a base of insured patients. Local health care policy has had relatively little influence on health system change, and private purchasing activities have also had a limited effect, in part because of the regional or national focus of many of Newark’s large employers.

PUBLIC POLICY

State policy is a major influence on the structure and operation of New Jersey’s health care system. In 1971 the state began its far-reaching regulation of health care with passage of the New Jersey Health Care Facilities Planning Act, which established mandatory CON, health planning and hospital rate controls for Medicaid and Blue Cross. In 1978 the state legislature extended the rate-setting system to cover all payers and hospitals. The new rate system explicitly recognized the cost of uncompensated care as an allowable cost incurred by hospitals, providing fiscal protection to many of New Jersey’s urban providers serving low-income and uninsured patients.

New Jersey implemented a diagnosis-related group (DRG) prospective hospital payment that was fully implemented in 1982. After the federal Medicare DRG system was enacted, the state continued to set Medicare payment rates for New Jersey hospitals under a federal waiver. The waiver was terminated in 1989 and payments to New Jersey hospitals for Medicare patients declined. Under New Jersey’s system, other payers were forced to make up the resulting Medicare shortfall, which was estimated at various times to be between $400 and $700 million.¹⁵

In 1987 the state established an uncompensated care trust fund financed by a uniform add-on to all hospital bills; by 1991 this charge had risen to 19 percent.¹⁶ In addition, the state rate-setting system recognized more than $700 million in bad debt and charity costs and about $400 million in direct and indirect graduate medical education expenses.¹⁷

The growing level of subsidies for charity care, medical education and Medicare shortfalls increasingly was opposed by employers forced to cover the bill and by conservative legislators. The final element in the demise of New Jersey’s hospital rate system was the May 1992 ruling of a U.S. District Court that the surcharge used to finance the system was preempted by the Employee Retirement Income Security Act (ERISA) for self-insured employee benefit plans.

The nature of the state’s health care regulation and the dynamics of competition among New Jersey hospitals and insurance plans changed substantially with the passage of the 1992 health reform legislation. Major components of the legislation included:

• elimination of state hospital rate-setting;

• restructuring of the state’s hospital charity care program;

• reform of individual and small-group insurance regulations; and

• establishment of a state-subsidized insurance program for low-income residents.

In 1993 a new governor was elected on a platform that emphasized reduction of state taxes, which created further impetus for the state to control health expenditures. Nevertheless the state has continued to play an active role in New Jersey health care. Respondents from the state government described a philosophy of reducing government barriers to efficient health care market operation, while at the same time playing a strong role to ensure that gaps in quality and access created by market failures are addressed. In addition to overseeing implementation of the HCRA, the current state administration has streamlined the CON program, implemented a mandatory Medicaid managed care program, developed an integrated services demonstration for seniors, designed new HMO standards and invested in new sources of health care information for consumers and policy makers.

Elimination of hospital rate-setting has had a profound effect on Newark’s market because it has exposed the differing ability of the region’s hospitals to compete in a free market system. These differences have been exacerbated by charity care funding reductions. In contrast, the CON program has provided a partial buffer for Newark’s inner city hospitals from competition for highly specialized care. Furthermore, the recent state insurance market reforms effectively bailed out BCBS-NJ, Newark’s largest insurance plan, from huge annual losses in the individual market. It is more difficult to assess the specific effects of these laws on Newark-based employers and residents.

Responses to the End of Rate-Setting

Passage of the HCRA was followed by predictions of imminent financial demise for New Jersey’s inner city hospitals. The initial HCRA agreement created a gradual phasing-down of charity care and Medicare shortfall subsidies, but no such transition was put in place for medical education. Hospitals also were concerned about the financial impact of allowing health plans to negotiate rates. However, hospitals responded more quickly than insurance carriers, and four months after the new law was signed the New Jersey Star Ledger reported a large increase in hospital charges.¹⁸ With the exception of Newark’s United Hospital, there have been no significant hospital closings since enactment of the HCRA, but a number of distressed hospitals in the Newark region have been acquired by other institutions. According to 1996 data, about 20 percent of NJHA members reported negative total margins and another 19 percent reported margins below 1 percent; many of these are located in inner city Newark and Elizabeth.¹⁹ A number of respondents speculated that perhaps a dozen institutions were on the brink of fiscal collapse.

Hospital Charity Care Funding

Newark’s hospitals are among the largest recipients of state charity care funding. In 1992 the state made about $700 million in bad debt and charity care payments to hospitals. Subsequently, bad debt was eliminated as a reimbursable expense and charity care payments were reduced to $300 million in 1997. However, a Hospital Relief Fund was created to supplement the charity care program, making payments of $135 million to hospitals that treat a disproportionate share of patients with AIDS, tuberculosis, substance abuse, mental illness and complex births. In 1997 University Hospital received $55 million in charity care and hospital relief pay-ments. Cathedral Healthcare System, East Orange, Newark Beth Israel and United hospitals received between $15 and $17 million from the two programs.²⁰

Further changes may be in store for New Jersey’s charity care program. In December 1996 the State Health Commissioner announced a proposal requiring hospitals receiving charity care payments to implement a managed care program for charity care patients.²¹ The program is intended to encourage hospitals to develop ambulatory provider networks to treat charity care patients in more appropriate settings and perhaps at lower cost. Every hospital that wants charity care funding would have to submit an annual plan to the Health Department describing its provider network, quality assurance program, utilization management program and data capacity. The Health Department is seeking a federal Medicaid waiver to enact the program.

Certificate-of-Need Regulations

Many of Newark’s inner city institutions, such as University Hospital, Newark Beth Israel Hospital and the Children’s Hospital of New Jersey, provide highly specialized tertiary care. The ability to perform services such as specialized pediatric care, organ transplantation and cardiac surgery is regulated by the state’s CON program. One objective of the CON program is to control health care spending by preventing new investment in expensive facilities and services when sufficient capacity already exists in the community. Another objective expressed by state policy makers is to ensure that appropriate specialty care capacity is maintained in New Jersey’s inner cities. This is illustrated by the Health Department’s decision to allow St. Barnabas to acquire the Children’s Hospital license from the bankrupt United Hospital only on the condition that it keep those pediatric services in the city of Newark. As a practical matter, CON regulations often protect hospitals with specialty service capacity from development of new competing services.

In March 1995 the Health Commissioner proposed revisions to the CON program to streamline the process. The proposal made a variety of services eligible for expedited 90-day review, such as magnetic resonance imaging, basic obstetrics, ambulatory surgical care and changes in hours of operations. Full six-month review remains in place for services such as home health, trauma and perinatal care, and for services with a statewide impact such as transplants. State respondents said that under the new regulations, nearly 400 CONs were approved between April 1996 and April 1997. However, some industry groups complained that the process was still too slow and bureaucratic.

The new regulations include a pilot licensing program for cardiac catheterization that allows hospitals to initiate or expand low-risk cardiac catheterization services with an expedited review.²² This was opposed by some of Newark’s urban teaching hospitals, fearing loss of additional volume to suburban hospitals.

Insurance Market Reform

Insurance market reforms initiated by the HCRA and modified over time have been credited with increasing access to individual and small-group coverage throughout the state. In addition, reforms helped the Newark-based BCBS-NJ, New Jersey’s largest insurer, regain financial stability. In 1990 BCBS-NJ was one of 11 Blue Cross plans with negative net worth.²³ Prior to the HCRA, Blue Cross was the state’s only insurer that was required to offer open enrollment for individual health coverage. In 1992 BCBS-NJ covered 165,000 individual policyholders and was considered to be a repository for bad risks. In that year it received a $65 million state subsidy to cover individual market losses.²⁴

The HCRA created two new programs: the Individual Health Coverage (IHC) Program and Small Employer Health (SEH) Benefits Program under jurisdiction of the state’s Insurance Commissioner. Three major provisions of these programs are:

• A requirement that carriers offering small-group coverage in New Jersey also must offer individual coverage or pay an assessment to cover the losses of carriers in this market.

• Establishment of standard benefits packages. The number and specifics of the benefit packages have changed since 1992, but as of 1996 there were three standard plans plus an HMO plan in the individual market and five standard plans plus an HMO plan in the small-group market.

• A series of rules governing health benefits plans, including guaranteed issue and renewal, strict limitations on pre-existing conditions exclusions, community rating in the individual market and modified community rating in the small-group market. Although the state does not regulate premium rates, it has a mandatory minimum loss ratio of 75 percent (e.g., carriers must pay at least $.75 in benefits for every $1 collected in premiums).

In 1996 the state reported that 26 carriers, including 10 HMOs, were participating in the individual market and that 186,000 people -- including 100,000 who were previously uninsured -- purchased standard plans since August 1993.²⁵ Enrollment in the small-employer program grew by more than 10 percent between the end of 1994 and the beginning of 1996, and more than 50 carriers, including 17 HMOs, now participate in the program. More than 800,000 people are covered under small-employer health benefit plans.

Small-group enrollment in HMO options grew from 14 percent in 1994 to about 27 percent in 1996.²⁶ Because the law’s prohibitions on medical underwriting eliminated carriers’ most important cost-containment tool, many have moved rapidly into managed care products. Several studies of rates in the IHC and SEH are underway. According to respondents, small-employer HMO rates grew at about 2 percent annually between 1994 and 1996 compared with preferred provider organization (PPO) and point-of-service (POS) rates of around 10 percent annually and traditional indemnity rates of 20 to 40 percent annually.

PURCHASING

Purchasers are not considered a major force behind health system change in the Newark market. There are no large employer purchasing coalitions in Northern New Jersey, and the large employers interviewed generally do not offer strong financial incentives for employees to select managed care options. However, they do consider health plans’ National Committee on Quality Assurance (NCQA) accreditation status and Health Employer Data Information System (HEDIS) performance measures in their purchasing decisions. Small employers with fewer than 50 covered enrollees purchase standard benefit plans regulated by the state Insurance Department.

Large national employers with operations in Northern New Jersey, such as Bell Atlantic, Continental Airlines, Prudential Insurance, Federated Department Stores, Hoffman-LaRoche, American Home Products and Schering-Plough Pharmaceuticals, generally offer self-insured benefits programs and a range of managed care products. They also continue to offer indemnity-type options and favor HMOs with broad provider networks to serve their regional work force.

Newark’s hospital systems are major employers and purchasers of care. The St. Barnabas system has about 20,000 employees, University Hospital and UMDNJ have 11,500 workers and the Atlantic System employs 10,000. These systems encourage their workers to select health benefits plans that contract with their own institutions. The First Option Health Plan, for example (which was owned by a group of hospitals and physicians until it recently agreed to be acquired by Foundation Health Systems), covers about 72,000 enrollees affiliated with hospital or health care systems throughout the state. Similarly, Prudential, a Newark-based insurance company, only offers Prudential products to its employees.

The state of New Jersey is becoming a major force in the purchaser market as it moves its entire Medicaid AFDC population into HMOs. This is particularly important for inner city Newark, where more than 20 percent of the population is Medicaid eligible. New Jersey has substantial bargaining clout, insuring more than 700,000 people statewide under its Medicaid program.²⁷ Managed care became mandatory for Essex County AFDC recipients in January 1996. As of August 1996, 340,000 Medicaid beneficiaries were enrolled in 13 commercial HMOs and the Garden State Health Plan.²⁸ All of the state’s 450,000 AFDC recipients were slated for enrollment by 1997. The state also plans to expand HMO coverage for its Social Security income (SSI)-related aged blind and disabled populations. Medicaid managed care is reported to have had both positive and negative effects. The state reports that preliminary surveys indicate high patient satisfaction.²⁹ Providers in Newark reported that physicians receive much better reimbursement under Medicaid managed care than under the traditional Medicaid program, but that hospital payments have been reduced.

The state also purchases coverage for public employees through its State Health Benefits Policy and Planning Organization, which represents nearly 800 employers (including many local governments) and approximately 260,000 employees and retirees. It offers a standard indemnity product, a POS plan and 14 HMOs. Respondents did not tout the state program as particularly innovative, but noted that the share of premiums paid by employees who select the traditional plan recently was increased.