Center for Studying Health System Change

PROVIDER ORGANIZATIONS

Phoenix is home to 35 hospitals, including federal government, psychiatric and rehabilitation facilities, most of which are not-for-profit and locally owned. Phoenix’s hospital market does not follow the "hub and spoke" configuration common to many older cities, where large tertiary care hospitals are located in the downtown area and the less technologically equipped institutions are found in the suburbs or surrounding communities. Although a substantial amount of tertiary and specialized care is provided in downtown Phoenix, many suburban hospitals also deliver tertiary care because of the market’s large geographic size.

Samaritan Health System is the largest health system in the state and the most geographically dispersed system in the Phoenix area. Its flagship hospital, 582-bed Good Samaritan Regional Medical Center, is in central Phoenix, and it has three hospitals in the suburban areas:

• Desert Samaritan Regional Medical Center, with 331 beds;

• Maryvale Samaritan Medical Center, with 213 beds; and

• Thunderbird Samaritan Medical Center, with 221 beds.

Samaritan has been the most active of the health care systems in developing health plans. It owns Arizona Physicians IPA, the largest AHCCCS contractor in Phoenix, and HealthPartners Health Plans, which serves 180,000 private sector enrollees statewide and is cosponsored by Tucson Medical Center.

Mercy Healthcare Arizona, which includes the 570-bed St. Joseph’s Hospital and Medical Center and the nationally known Barrow Neurological Institute, competes with Samaritan for central Phoenix’s tertiary care market. The next-largest hospital in central Phoenix, the 474-bed Maricopa Medical Center, is owned by the county and primarily serves the indigent population and AHCCCS beneficiaries. Its financial viability is uncertain.

Tenet/OrNda has the largest for-profit presence in the Phoenix hospital market, with four hospitals:

• the 289-bed St. Luke’s Medical Center;

• St. Luke’s in Tempe, with 102 beds;

• Mesa General, which has 145 beds; and

• the 75-bed Community Hospital.

Another national for-profit hospital system, Columbia/HCA, owns two hospitals in Phoenix and is attempting to increase its presence there. It participated in merger discussions with Samaritan Health Systems and reportedly has approached other hospitals with acquisition offers.

The Phoenix market is attractive to for-profit hospital systems, in part because of its growing population and the large number of independent hospital-based health systems located there. However, the proposed acquisition by Columbia/HCA of not-for-profit Samaritan generated substantial opposition from community leaders.

The physician market in Phoenix historically has been organized around solo and small-group practices, with only a handful of larger groups. Like the health system market, the physician market may be described broadly as a set of geographically separated sub-markets specific to individual hospitals. The formation of PHOs by hospitals and their physician staffs imposes an organizational structure on these physician sub-markets.

A small number of statewide physician groups exist in Arizona, including the Thomas Davis Medical Centers, which has 217 physicians, 75 of whom are in Phoenix; Casa Blanca, with 79 physicians; and Arizona Physicians Group, which has 35 physicians. These groups were formed and have expanded primarily to contract with managed care organizations.

The Mayo Clinic-Scottsdale, located in the northeastern Valley, is unusual in the Phoenix market. Mayo entered the Phoenix market in the late 1980s, attracted in part by the absence of large multispecialty group practices. In addition to the 145 specialists who practice at the main facility, Mayo employs 45 primary care physicians at six centers throughout the area. The Mayo Clinic’s national reputation draws attention to its presence in Phoenix, but its impact on the local physician market has been limited. Its main facility is located in the far northeastern corner of the metropolitan area, its physicians constitute a relatively small proportion of Phoenix’s 6,000 physicians and a significant proportion of its patients come from outside Phoenix, primarily the southwestern United States and Southern California.

ORGANIZATIONAL CHANGE: PROVIDERS

At the time of the site visit, it appeared that health care in central Phoenix would be consolidated through a merger of Samaritan Health System and Mercy Healthcare Arizona. Prior to the Samaritan/Mercy merger agreement, Samaritan had engaged in merger discussions with Columbia/HCA and with the Tucson Medical Center. The latter discussions proceeded from the 1995 merger of the health plans owned by the two entities that created HealthPartners Health Plans. Samaritan sought a merger partner to help finance its sizable debt load. Competitors predicted that the merger process would be painful, because of culture conflicts between the two organizations and overlapping clinical service areas. However, they viewed the proposed merger as more favorable, from a competitive standpoint, than the purchase of Samaritan by Columbia/HCA. Subsequent to the site visit, the Samaritan/ Mercy merger was abandoned, apparently due to disagreement concerning how much control over the merged entity should be ceded to Catholic Healthcare West (Mercy Healthcare’s parent organization) in return for the assumption of Samaritan’s debt.⁹

While Samaritan’s search for a merger partner is the most visible evidence of the potential for consolidation in the Phoenix market, it is unclear whether it is a presage of more system mergers or acquisition activities. Most systems in Phoenix have strong positions in well-defined geographic areas. They have pursued strategies, such as the creation of PHOs, designed to tighten their links with physicians and make them indispensable to managed care plans in their geographic sub-markets.

Health systems that succeed with this approach may feel less pressure to merge or seek contracting alliances with other provider systems. However, the effectiveness of PHOs as integrating mechanisms varies greatly. Many Phoenix physicians have been exploring other organizing approaches that do not include hospitals.

Two emerging trends portend a greater degree of consolidation and practice integration among Phoenix physicians.

First, for-profit physician management companies are acquiring existing physician group practices. For example, Phy-Cor, a national physician management company based in California, recently purchased two physician groups, and FPA, another California-based physician management company, acquired the Thomas Davis Medical Centers. The Thomas Davis physicians subsequently became one of the few major physician groups in the country to unionize. Respondents predicted that physician management companies will use their acquisitions as a basis for expansion in Phoenix through the purchase of more practices. In fact, the Mayo Clinic has been steadily expanding its primary care physician base through the purchase of primary care practices located throughout Phoenix.

The second emerging trend in the physician market is the development of single-specialty physician networks to contract with managed care plans and self-insured employers. For example, an orthopedic surgeons’ network contracts with Cigna Health Plans to provide services to 220,000 individuals under a capitated payment arrangement. Similar physician networks exist, or are under development, for reconstructive surgery, cardiology and other specialties. These networks provide specialists with an organizational alternative to PHOs for contracting with managed care organizations and for developing practice guidelines, practice profiles and other educational efforts related to specialty care.

HEALTH PLANS

The Phoenix health plan market is highly competitive. Managed care enrollment has increased gradually since the late 1970s and, as a result, Phoenix residents are relatively accustomed to managed care. Population growth has supported the growth of managed care organizations; new residents establish links with their providers by choosing a health plan. Under the AHCCCS program, all Medicaid recipients are enrolled in prepaid plans. Together, HMOs and PPOs reportedly enroll about 60 percent of the commercial health insurance market. Ownership of the large health plans is split between national HMO firms and local providers or insurers.

Cigna is the largest health plan in Arizona. It acquired a local plan in 1982. It offers staff-model and IPA-model HMO products, including a point-of-service (POS) product and a PPO option. Its staff-model plan employs 229 physicians and 65 other providers, primarily in the Phoenix area; its IPA is statewide. It is strong in the commercial, Medicare and Medicaid markets, because of its size, long-standing local presence and variety of product choices.

Intergroup is owned by a national, for-profit HMO firm. Intergroup was launched in 1980 under the sponsorship of two multispecialty group practices in Tucson that later merged; subsequently, the plan expanded into Phoenix. It was acquired by Foundation Healthcare in 1994. Recently, Foundation sold the founding multispecialty group, the Thomas Davis Medical Centers, to California-based FPA, a for-profit practice management company. Intergroup offers HMO, PPO and indemnity products, and manages self-insured plans for large employers. Its service area includes Tucson and Phoenix. It enrolls Medicare and AHCCCS beneficiaries, along with commercial members, and its Medicare plan reportedly has grown from 17,000 to 45,000 members during the past two years. The separation of Intergroup’s health plan from its founding physicians, combined with the recent vote by these physicians to unionize, has raised questions about the plan’s future.

FHP of Arizona is owned by a national HMO. Like Intergroup, this plan recently underwent a change of ownership; its new parent company is PacifiCare of Southern California. FHP offers an IPA-model HMO, as well as an indemnity product with limited enrollment. It does not offer a POS product. FHP competes in the commercial and Medicare markets, with a particularly strong presence in the latter market.

Blue Cross and Blue Shield of Arizona, which competes statewide, has its enrollees in Phoenix distributed across HMO, PPO and indemnity products. Its traditional focus has been on the commercial and Medicaid markets, but the Blues plan recently won a multistate contract to serve CHAMPUS beneficiaries. Blue Cross and Blue Shield has drawn on several strengths: its brand-name recognition, database management capabilities and willingness to offer purchasers multiyear price guarantees.

HealthPartners Health Plan is owned jointly by Samaritan Health System and Tucson Medical Center. It markets both "gatekeeper" and "direct access" HMO products, a POS product and a PPO. HealthPartners competes for commercial and Medicare enrollees, and is perceived to be gaining strength statewide. With the recent sale of Intergroup, HealthPartners is the most visible remaining local, provider-owned HMO alternative in the Phoenix market.

A number of smaller HMOs operate in Phoenix, some of which are relatively new entrants sponsored by national managed care companies. These smaller plans have escalated price competition in the commercial and Medicare sub-markets, according to their larger competitors, because considerable overlap between their provider networks has forced these plans to differentiate themselves on price.

The Medicare market has been hotly contested in Phoenix, where the reimbursement rate for risk-based contracts is relatively attractive. Medicare beneficiaries in this market who choose a risk plan option typically pay little or no premium. Competition among plans is based primarily on benefits and provider choice. For example, Intergroup offers Medicare enrollees free transportation to their physician appointments. Intergroup and FHP both offer free health club memberships. Some respondents believe that competition for Medicare business is helping to hold down increases in the commercial market. To get risk-based contracts with Medicare, plans must enroll at least 50 percent of their members from the commercial sector. Some plans intent on increasing their Medicare enrollment may feel compelled to lower their commercial premiums to attract a sufficient number of enrollees to meet that requirement.

There appears to be tremendous variation among plans in their financial relationships with their contracting providers. Even within plans, reimbursement varies according to market type. Most health plans report that they reimburse at least some of their primary care physicians on a capitated basis. They generally pay specialists on a fee-for-service basis, and reimburse hospitals using a DRG or per diem payment methodology. However, there is a great deal of experimentation with payment approaches. For example, some plans reimburse specialists on a capitated basis but use a fee schedule for primary care physicians. In general, health plans are reluctant to negotiate global capitation contracts with PHOs because they prefer to maintain control of the premium dollar and keep whatever savings they can realize through cost-cutting measures.

ORGANIZATIONAL CHANGE: HEALTH PLANS

Competition among health plans in Phoenix likely will increase. Some national HMO companies are starting to make inroads. Respondents noted that these firms can draw on their corporate strength to underprice existing plans and build market share. The short-term effect of this competition may be to drive those plans already in the market to step up their experimentation with different products and provider arrangements. For example, the Mayo Clinic-Scottsdale has announced its plan to market an HMO in Phoenix, using its expanding primary care network. Although the Mayo HMO will not be a low-priced option in this market, it is expected that its strong brand-name recognition will attract enrollees from other plans.

Plans are adopting different strategies to secure a competitive advantage in the Phoenix market. In response to purchasers’ perceived desires for broad geographic coverage, most plans are trying to expand their provider networks. For example, Cigna is broadening its staff-model option, and other plans are exploring relationships with additional hospital systems. Capitated contracts with specialty networks appear to be increasing, although these arrangements may restrict the number of specialists available to enrollees within a plan. Depending on how these contracts are structured, they may support health plans’ efforts to develop products that offer consumers direct access to specialists.

The lack of a dominant health plan or group of plans and the expected entry of new plans suggest that the health plan market in Phoenix will undergo organizational change. Driven by competition for Medicare and commercial enrollees, Phoenix health plans will continue to redesign their internal organizational structures, provider networks and financial arrangements with providers.