Case Study

Health System Change in 1997

July/August 1998
Health Affairs

Health System Change in Seattle, Washington

Round One Site Visit

Case Study
August 1997
Douglas L. Fountain, Raymond J. Baxter, Linda T. Kohn, Srija Srinivasan

eattle’s health care market has undergone steady but significant change during the past five to six years. Seattle is a relatively self-contained and stable health market. Each of Seattle’s dominant provider systems and most of its health plans are not-for-profit entities that have coexisted for at least 50 years. The past five years, however, have witnessed several important precipitating events that have shaped the financing, organization and delivery of care. These events include:

the introduction of Seattle’s first major cost-driven, selective point-of-service (POS) product in 1992;

the passage and demise of comprehensive health reform in 1993 and 1994;

the drive by Boeing Company, Seattle’s largest private employer, to enroll its employees in managed care during 1995 and 1996; and

implementation of price-driven selective contracting in Washington’s Medicaid managed care program in 1996.

Foremost among the changes resulting from these events was the creation of large physician groups, which occurred in anticipation of greatly expanded managed care under comprehensive health reform and the Boeing initiative. Consolidation of independent physician groups and the acquisition or development of physician networks by hospitals have resulted in the growth of large physician groups. Several hospitals have launched health plan initiatives as components of vertically integrated health systems -- again, with the hope of competing for new managed care opportunities.

Other changes include increased price competition and heightened concern about costs. Public and commercial purchasers generally have regarded health care costs as stable and reasonable and have not viewed costs with much concern. However, several events indicate that Seattle may experience greater levels of price-based competition in the future:

the 1992 introduction of a POS product that selected physicians based on claims history;

the designation of price as the dominant criterion in Medicaid selective contracting in 1996; and

intensification of price competition prompted in part by the entry of two national HMOs into the commercial and Medicare risk markets.

Regional expansion by Seattle’s dominant insurers and health plans is another notable trend, evidenced by affiliations among several health plans to develop a statewide or multistate presence.

Three distinctive market characteristics influence provider and health plan strategies and help explain the results of change. First, it is commonly perceived that consumers in Seattle demand choice in plans, physicians, hospitals and, recently, alternative medicine. Second, respondents repeatedly maintained that success in the Seattle market hinges on a large and comprehensive market presence ("clout"), which, they say, is necessary for leverage in negotiations and to stimulate consumer demand for products. Third, there is widespread belief that some combination of healthy lifestyles and thrifty practice styles has kept hospital utilization low and overall health care costs down.

These characteristics help explain several trends observed in Seattle. For example, consumer demand for choice helps explain the breadth and overlap among Seattle’s preferred provider organizations (PPOs) and the increasing popularity of POS products. Market presence is related to numeric size and geographic scope, and helps explain the rapid growth among several Seattle physician groups. Moreover, Seattle’s historically low health care costs have protected the market from some national actors, including hospital chains and health plans.

A few important events have propelled change in Seattle’s health care system. The first precipitating event was the introduction of the Selections POS product in 1992 by Seattle’s largest indemnity plan, Regence Washington Health, formerly known as King County Medical Blue Shield.¹ For this product, Blue Shield analyzed claims data from physicians who regularly served the company’s indemnity enrollees and selected for inclusion in its panel the top 40 percent of physicians with the lowest-cost practice patterns. Selections sent the message that expensive practice patterns could result in exclusion from network panels; it reportedly contributed to a rapid decline in hospital utilization.

The second precipitating event was the passage of a comprehensive health reform bill, the Health Services Act of 1993, and the subsequent demise of the Health Services Act through successive legislative actions in 1994-95. The Health Services Act would have created universal coverage through a combination of subsidized insurance mandates and employer mandates, some of which were overturned. The legislation also reformed the individual and group insurance markets, although several of those provisions also have been overturned. Health care providers altered their strategies, forming stronger physician networks and launching provider-sponsored health plans in part to take advantage of new managed care opportunities.

The third precipitating event was Boeing’s effort to improve its managed care options and provide cash incentives for its work force to move from traditional insurance plans into managed care. The Boeing initiative is an important purchasing strategy change by Seattle’s largest private purchaser.

The fourth precipitating event was the introduction of price as the dominant criterion in the selection of Medicaid managed care contractors. This altered the array of contractors, and is credited with a 10 percent decrease in prices that has had a spillover effect on health care costs in other parts of the market.

Despite the degree of change underway in this market, informants were optimistic about quality and access to health care services, particularly for Seattle’s poor and indigent populations. They believe that the long-standing coexistence and not-for-profit status of Seattle’s dominant providers, plans and insurers ensure that competition will not get out of control. Access to care for the poor is provided through Medicaid managed care and the state-subsidized Basic Health Plan.

Some of Seattle’s largest health care organizations (such as the University of Washington School of Medicine and Harborview Medical Center) have achieved national acclaim for their programs. Seattle serves as a multistate locus for tertiary care, trauma care and medical education in the four-state WAMI region (Washington, Alaska, Montana and Idaho). Many state policy makers and private sector health care leaders come from a "homegrown" pool based in the Pacific Northwest and affiliated with the University of Washington. Except for Seattle’s historic Group Health Cooperative of Puget Sound, managed care has developed slowly in this market. Purchasing in Seattle is dominated by the state (which purchases for public employees, the medically indigent and Medicaid populations) and The Boeing Company, which purchases benefits for 86,000 local employees plus dependents (literally more than 10 times the purchasing volume of the next largest private employer, Microsoft). Brokers also have a long-standing relationship with employers and are highly influential in purchasing.

Center for Studying Health System Change

Providing Insights that Contribute to Better Health Policy

Health System Change in Seattle, Washington

Round One Site Visit