Center for Studying Health System Change

The Community Snapshots Project

Capturing Health System Change

San Diego, Calif.
1995

Overview

an Diego is a self-contained, increasingly ethnically diverse metropolitan area with 2.6 million people. San Diego’s economy is moving away from dependence on the military and military-related industry and toward high-tech activities and industries.

There is almost no way for health maintenance organizations (HMOs) new to San Diego to enter the San Diego market other than through merger or acquisition of an existing plan. HMO plan penetration is already about 50 percent of all insured enrollees, and half a dozen large HMOs control the capitated market. Because existing HMOs have operated for years, they benefit from name brand recognition and economies of scale. As a result, they are in a much better position to capture new HMO enrollees from indemnity insurance or from other HMO plans than are new HMOs.

The state legislature is unlikely to significantly change laws that were created in the old indemnity insurance system. Although legislation will move many Medi-Cal (California’s Medicaid) enrollees into managed care, its impact will be felt in the future.

Purchaser and HMO negotiations outside San Diego have affected the San Diego health system. Over the past three years, assertive statewide purchasers negotiated with statewide HMOs to reduce premiums and led many local employers to expect that their premiums would decline as well. Meanwhile, over the past three years, HMOs have competed aggressively for market share, growing either through merger and acquisitions or through price-based competition. As a result, San Diego commercial insurance premiums declined from 1993 to 1995.

HMOs are divided into Kaiser and non-Kaiser health plans. Kaiser, an integrated health plan and delivery system, currently serves about 35 percent of San Diego’s HMO enrollees and 14 percent of the San Diego population. After controlling a large percentage of San Diego’s HMO market for decades, Kaiser’s market share and power declined in the early 1990s because it failed to actively pursue rapid growth and had higher cost and rates than its competitors. Most other HMOs are distinctly separate from delivery systems. Seven non-Kaiser HMOs, including some smaller ones, now control nearly all of the non-Kaiser HMO market. They compete with Kaiser on the basis of price and network, with one another on the basis of price, and with preferred provider organizations (PPOs) on the basis of price and point of service (POS) plans.1 Most non-Kaiser HMO plans are similar in price and network. Their quality of care is currently unknown.

Statewide non-Kaiser HMOs dominate the San Diego market, despite substantial local delivery system consolidation.2 These statewide organizations can pass premium decreases to the San Diego non-Kaiser delivery systems and force them to cut costs because HMOs exploit large excess hospital and specialist capacity, account for a large part of the three non-Kaiser delivery system business, and, as statewide or national organizations, have greater financial resources and less at stake financially than the local San Diego delivery systems. Non-Kaiser HMOs force Kaiser to act like other delivery systems.

The San Diego health care delivery system is consolidated and very competitive. The four main delivery systems account for about 85 percent of capitated enrollment and more than 70 percent of discharges. Health plan market power is leading to consolidation of the delivery system. The health systems have used mergers and acquisitions and increased HMO enrollee market share to counter new health plan market power. Kaiser and Sharp Healthcare, the largest San Diego delivery systems, have made the greatest progress in integrating hospital and physician operations.

The economic power of the insurance industry in San Diego, which led to stagnant or declining capitation rates, has forced delivery systems to decrease hospital use, reduce payment to specialists, contain primary care physician (PCP) salaries, engage in more secondary prevention activities, and integrate clinical health care delivery. Sharp and Kaiser have done the most to change their delivery system operations. Insurers are straining delivery system finances, forcing Sharp and the University of California at San Diego (UCSD) to seek capital partners or part owners. Delivery system nonprofit (or, in the case of Kaiser Permanente, large and democratic) boards may slow delivery system responses to actions by mostly for-profit health plans.

No one knows if quality of care for insured and uninsured consumers has changed in the past several years because quality of care is not measured and reported. Funding for the uninsured has become increasingly inadequate and unpredictable. There are significant threats to funding sources for community clinics, including anti-illegal immigrant legislation.