Center for Studying Health System Change

hree features unique to Phoenix have shaped the local health care system, and they will continue to exert a strong influence. They are:

• sustained population growth;

• large geographic scope; and

• the strong influence of Medicare and Medicaid, versus private sector purchasing initiatives, on the health plan market.

The importance of Phoenix’s rapid population growth during the past three decades as a force for health system change cannot be overemphasized. This expansion has precipitated entry of new health plans, contributed to the creation of new health care facilities to serve rapidly growing areas and provided a cushion for health care organizations to grow out of their "mistakes." While health systems in most other metropolitan areas have undergone periods of retrenchment and consolidation to address overcapacity, health systems in Phoenix for the most part have been able to focus on geographic and product line expansions. These efforts have been facilitated by the geographic dispersion of Phoenix’s population growth. The broad geographic area encompassed by the Phoenix market has helped health systems to develop geographically protected sub-markets and to implement strategies for defending them. Success with these strategies has further helped systems negotiate more effectively with managed care plans.

Health plans in Phoenix have benefited from the important role played by Medicare and Medicaid in creating an environment supportive of managed care. The AHCCCS program has accelerated the participation of physicians and hospitals in managed care arrangements and has created opportunities for local start-up plans. Medicare’s favorable reimbursement rates for risk contractors in Phoenix have attracted national, for-profit managed care plans, which in turn have stimulated price competition for private sector enrollees. In the private sector, health plans compete with few regulatory restrictions and virtually no coordinated oversight by private purchasers.

Respondents reported that the uninsured population has increased since 1990, but that access to care has changed little. Health insurance premiums have been relatively flat, but some respondents questioned whether the premium savings enjoyed by employers have been shared adequately with consumers. Respondents were uncertain about the impact of recent market changes on quality of care.

Within this context, several trends in the Phoenix market merit tracking.

One major issue is whether Samaritan will be able to find a merger partner willing to assume its debt, which reportedly is approximately $350 million. Columbia/HCA and Tenet, two large for-profit hospital systems, have expressed interest in the Samaritan system but, in the past, community leaders have opposed the acquisition of Samaritan by a for-profit corporation. There was no clear consensus among market respondents on whether a Samaritan merger would signal the beginning of a major consolidation of hospital systems in Phoenix and an increasing role for national for-profit hospital markets in the market.

The financial viability of the Maricopa Medical Center is another important issue. If, despite the efforts of its new management, the Maricopa Medical Center cannot be saved, access to services for indigent patients may diminish, and other providers may face increased demands to serve this population. As the largest alternative providers in central Phoenix, Samaritan and St. Joseph’s hospitals likely will bear the brunt of these demands.

In the physician market, where physicians historically have been weak and unorganized relative to health plans and systems, organization is underway. Practice consolidation is increasing, as is the role of national, for-profit practice management firms, which are purchasing primary care and specialty practices. Specialists are seeking greater participation in networks to contract with managed care organizations. Hospital systems are competing with physician management companies and specialty networks to form physician groups that can negotiate more effectively with managed care plans. This is the most unsettled component of the Phoenix health care system and merits close attention.

The Mayo Clinic’s strategy to increase its presence in the Phoenix market may prove significant. Mayo is purchasing primary care practices, marketing a health plan built on these practices and its own specialists and constructing a hospital in northern Phoenix. The strategy may affect Phoenix’s hospital, health plan and physician markets, although the short-term impact on these markets will be minimal, with the possible exception of the localized market for hospital services in northern Phoenix. Even there, projected population growth will soften the impact.

In the health plan market, the dominance of for-profit, national managed care companies is increasing. The purchase of Intergroup, a locally owned HMO, by a national firm is the most recent example of this trend. Although acquisition possibilities are limited, market respondents expected that national managed care organizations will continue to increase their strength through enrollment growth and, possibly, market entry. However, possible changes in Medicare reimbursement rates, which currently favor risk contractors in Phoenix, could have a significant impact on the local health plan market.

Finally, it will be important to track whether competition among health plans, which currently turns on benefits in the Medicare market and on premiums in the private employee market, expands to focus on issues relating to the organization and delivery of care. It seems unlikely that this will occur in the near future, because of the lack of coordinated purchasing activity among Phoenix employers.