Center for Studying Health System Change

ublic policy and purchaser activities have affected the Syracuse-area health system. State policy before 1996 minimized competition through hospital rate-setting and community-wide planning, in conjunction with one of the country’s most comprehensive certificate of need (CON) programs. Syracuse’s powerful elected officials in the state legislature frequently have influenced state health policy. More recently, state policy has shifted to support a competitive marketplace and embrace managed care. In contrast, Syracuse-area private purchasers have been slow to embrace managed care and continue to seek state aid for academic health centers and indigent care.

PUBLIC POLICY

Four dimensions of public policy are of particular import to the Syracuse health system:

• the long-standing state hospital regulatory structure, which was radically altered in 1996;

• state university policy toward its academic medical centers;

• state law effectively prohibiting large, for-profit hospital companies; and

• state Medicaid policy.

Hospital regulation in New York State has centered for 14 years around the state’s hospital payment system, the New York State Prospective Hospital Reimbursement Methodology (NYPHRM).⁵ NYPHRM regulated hospital rates through a complex formula that set individual hospitals’ rates, limiting the ability of insurance carriers other than HMOs to negotiate rates. This policy stunted the development of PPO plans in the state, because PPOs typically rely on discounted hospital fees to achieve market advantage.

NYPHRM also governed the state’s funding of care for the uninsured and graduate medical education, and at times offered special adjustments to finance other policy goals, such as work force development and support for hospitals that served other objectives. NYPHRM was also part of the rubric for controlling service expansion and capital investment through a comprehensive health planning and CON process.

Changes in NYPHRM were imminent at the time of the site visit in May 1996, as the legislature actively debated the governor’s proposal to replace the system with one in which nongovernment payers would negotiate inpatient rates directly with hospitals.

Health care organizations in the Syracuse area vigorously advocated for their interests and began positioning themselves to address the potential consequences of deregulation.

Hospitals set out to reduce costs in anticipation of lower negotiated rates and cuts in graduate medical education (GME) and charity care funding. To secure referrals and maintain volume in a more competitive environment, the hospitals initiated various physician-hospital organizational structures and affiliations. Both hospitals and doctors prepared for managed care contracting, and medical groups tried to increase their attractiveness to managed care plans by highlighting centers of excellence. Teaching hospitals re-examined historic commitments to GME.

Physicians explored new alignments with hospitals and health plans. Health plans also anticipated significant changes, including more aggressive contracting practices as hospitals become more competitive.

Most of these activities involved more planning and negotiation than action at the time of our site visit. However, some actions, such as aggressive hospital acquisition of physician practices, were clearly competitive.

The New York Health Reform Act of 1996, with its anticipated rate negotiation system, was signed into law in September 1996. Special state funding for uncompensated care and GME was retained at a reduced level and in a somewhat different form. Health insurance for uninsured children was expanded.

The impact of the new law, which took effect in January 1997, is not yet fully clear. The first round of rate negotiations reportedly resulted in lower rates for Syracuse hospitals than under NYPHRM, but not as low as providers had feared. Some respondents attributed this to the relative inexperience of all the parties in negotiating rates. More aggressive negotiation is expected during the next round, which will begin as the existing contracts expire, most of them in early 1998. Although GME dollars in total are expected to fall by 15 to 20 percent, Syracuse medical centers believe that replacement of a statewide GME pool with regional GME pools will reduce what they have considered a transfer of upstate dollars to New York City teaching hospitals, and thus mitigate some of the impact on Syracuse teaching hospitals.

SUNY’s policy toward its academic medical centers is closely related to the NYPHRM reform. During late 1995 and early 1996, it was feared that the new administration in Albany would support budget-cutting efforts by the SUNY Board of Trustees to close one or more SUNY medical centers. Such a proposal had been approved in October 1995 by the SUNY trustees. This move, combined with anxiety over the imminent NYPHRM reform, drove Syracuse’s SUNY Health Sciences Center and University Hospital to re-examine the size and scope of their teaching program. With the HEC and the MDA, these two institutions explored alternative means for financing GME and sharing their training programs with other institutions in Syracuse. In mid-1996, the SUNY trustees dropped a plan to privatize its medical centers. The SUNY Health Sciences Center reportedly was able to negotiate acceptable rates under the new hospital payment law.

The long-standing state law effectively barring out-of-state, investor-owned hospital companies from the New York State market is another important public policy. Respondents generally viewed this law as protecting existing hospitals from the intense price competition that might accompany the entry of a for-profit hospital company, such as Columbia/HCA, to the central New York region.

Another important state policy that bears watching is the potential effect of Medicaid managed care in the Syracuse area, which could shift 56,000 covered lives into managed care plans,⁶ increasing overall managed care penetration by more than 50 percent. This program has been implemented so far on a voluntary basis; mandatory enrollment will begin in February 1998.

PURCHASING

Purchasing approaches in the Syracuse area are sharply divided between the private and public sectors. Private purchasing favors employee choice, support for local health care organizations and, at least until recently, traditional fee-for-service insurance. Public purchasing, as reflected principally through the state Medicaid program, favors cost reduction and managed care.

There are a number of health-related enterprises in the Syracuse business community; 11 of the top 40 service-related employers are hospitals or health-related firms.⁷ SUNY, with 4,500 employees in its Health Sciences Center and University Hospital, is the area’s single largest employer.⁸ While direct employment in health care delivery represents just over 8 percent of the metropolitan area’s non-agricultural work force, other significant health-related industries in the area include Welch Allyn, a major national medical equipment supplier, and the pharmaceutical concern Bristol-Myers Squibb.⁹ These ties partly explain local employers’ distinctive approach to health care purchasing.

It is also important to note that Syracuse’s influential business community views health care not as a cost problem, but as a way to attract and hold quality workers. These employers believe that a high-quality health system, and particularly an academic medical center, improve the region’s economy and quality of life.

Private Purchasing

Private purchasers in the Syracuse area fall into two groups: local firms, which tend to have close ties to the area’s local health care organizations, and "branch offices" of large national firms like Carrier Corporation, Lockheed-Martin and Anheuser-Busch, whose headquarters and health care purchasing decisions are centered outside the local community.

Historically, both groups have taken a relatively passive approach to purchasing. Locally based firms embrace the "community development" values already described, and the national firms make their purchasing decisions independent of local health care conditions in Syracuse. Local representatives for various employers typically voiced support for what they consider a high-quality local health system, and expressed the view that utilization and cost of services in and around Syracuse was not a particular problem, particularly when compared with New York City.

Some employer representatives stated explicit concerns that excessive pressure on health care providers would hurt a vital part of the area’s economy. In addition, many employer representatives indicated that, until very recently, they had few incentives to offer managed care plans because the HMOs serving the area did not offer better prices than traditional fee-for-service insurers. Those firms that do offer managed care plans have tended to offer them side-by-side with a traditional insurance plan, with few financial incentives for employees to choose the HMO plan.

During the last few years, three factors began to influence a shift in employer purchasing approaches.

• HMOs became more price-competitive as new health plans, such as the national MetraHealth plan, entered the local market.

• At about the same time, traditional local plans and insurers became less competitive. One local plan, PHP, reportedly raised its premiums to absorb major capital investments, and both Guardian and Blue Cross/Blue Shield of Central New York raised their rates to cover higher-than-anticipated claims.

• Concern about the impact of state and federal policy on hospital payment focused more attention on excess bed capacity, raising questions about the traditional delivery system’s efficiency.

In response to these factors, employers like Syracuse China Company have altered premium cost-sharing with employees to promote enrollment in managed care options. Other area employers reportedly have narrowed their plan offerings, citing the high cost of administering multiple health insurance options (especially while corporate human resource departments were "downsized"), and a desire to reduce "employee confusion."

The new Purchasing Coalition of Central New York, which currently represents seven companies with 10,000 to 15,000 covered lives, has attracted considerable attention. Views on its significance differ. Some observers have criticized the coalition for upsetting the customary collaboration among business and health care organizations; others view the coalition as a sign that business attitudes toward health care purchasing are changing. The coalition’s principal initiative has been its solicitation for a managed care plan to offer its members. It issued a request for proposal (RFP) from competitive point-of-service (POS) plans with broad, nonexclusive provider networks to service its member companies. Twenty-two bids were submitted. The local managed care plan, PHP, was selected in late 1996, and in January 1997, six member companies began offering the plan to their employees. The coalition ultimately hopes to represent 14 large member companies with 50,000 lives.

Public Purchasing

The movement of Medicaid toward managed care is the most important public purchasing development in the Syracuse region. Managed care penetration in the local Medicaid market (roughly 34 percent in Onondaga County and 0 percent to 17 percent in the outlying counties) is higher than in the commercial market. (MSA-wide commercial HMO enrollment is 24 percent.) There is virtually no Medicare managed care (0.1 percent in the Syracuse area versus 7 percent in New York State).¹⁰

Approximately 21,000 Medicaid enrollees in the four-county Syracuse metropolitan area have voluntarily enrolled in Medicaid managed care.¹¹ However, under a demonstration program recently approved by the Health Care Financing Administration (HCFA) for selected counties in New York State, Onondaga and Oswego counties will begin enrolling Medicaid beneficiaries in managed care plans on a mandatory basis in January 1998. The two other counties that make up the Syracuse metropolitan area -- Madison and Cayuga counties -- will implement mandatory Medicaid managed care programs later, if HCFA approves a statewide waiver.

The waiver seeks to reduce state spending on health care services through mandatory enrollment in managed care for all Medicaid eligibles, except the elderly and disabled populations who receive nursing home and related long-term care services. Responsibility for executing enrollment and transition of recipients will remain at the county level. The four Syracuse counties have been working since January 1996 to restructure welfare and Medicaid eligibility and enrollment procedures, and plan to merge those processes into a single authority in each county.