Health Care and Insurance and Economic Development

Rivals tangle over impact of new hospitals: Health care providers disagree on how head-to-head competition will affect costs

March 19, 2007

Once joined at the hip, the two main health care providers in Tippecanoe County-Arnett Health System and Greater Lafayette Health Services-have become fierce rivals.

Each is building a new hospital and will compete to provide services for the 154,000 county residents, and tens of thousands more in surrounding counties.

Lafayette-based Arnett, a multi-specialty medical practice, has 140 doctors at a dozen area locations, plus eight facilities in other parts of the state.

Greater Lafayette Health Services, part of Mishawaka-based Sisters of St. Francis Health Services Inc., operates Lafayette's two existing hospitals: Home Hospital and St. Elizabeth Medical Center, both of which will phase out operations when its new hospital opens in the fall of 2009.

The two new hospitals, which collectively will cost $390 million, will sit just four miles apart.

Whether that competition is good or bad depends on whom you ask.

"There'll be an opportunity now to compete on quality and price," said Michael Skehan, Arnett's CEO. "That will make us better."

Countered Terry Wilson, CEO of the not-for-profit GLHS: "There's no evidence that competition in health care brings costs down. It will, in fact, cause costs to go up."

Arnett, which has collaborated over the years with GLHS on primary care, oncology, dialysis and cardiology services, is now partnering with Clarian Health Partners of Indianapolis to build its $200 million facility, which is slated to open in fall 2008.

GLHS says its new, $190 million facility will have private rooms, newer technologies and a more efficient design-all of which will enable it to better compete with the Clarian/Arnett hospital.

When it opens its new hospital, GLHS will close either Home or St. Elizabeth, and the other will become a long-termcare facility.

Wilson says the building boom is unfortunate for those who foot the costs of health care-primarily employers and insurance companies.

"We're about to dump $400 million in capital into the community with the two hospitals," Wilson said. "But people who make decisions about health care-the doctors and patients-aren't paying the bulk of the bills."

Pricey care

Already, those bills in the Lafayette area are unusually high.

A 2005 study found that hospital and physician costs in Lafayette-West Lafayette are 19 percent higher than in the rest of the state. Physician costs alone are 62 percent higher than in Indianapolis and 55 percent higher than costs statewide, according to the Lafayette-West Lafayette Economic Development Corp., which conducted the study.

The purpose was to determine if the area's health care costs were hindering its ability to attract and retain jobs.

"There has been a perception that our community's health care costs are high, and this puts us at a competitive disadvantage," Gary Henriott, chairman of the area's economic corporation said in the report. "This study shows there is some validity to that perception."

One local health care expert fears the new competition will make matters worse.

"Competition [in health care] does not lead to fewer, better products or services," said Ned Lamkin, a retired physician and president of the Indiana Employers Quality Health Alliance in Indianapolis.

"It leads to more and duplication. But the number of people needing a particular service doesn't go up or down with more facilities. An unforeseen consequence may be an adverse effect on quality."

Up to a point, more facilities are better, Lamkin acknowledged. But more doctors performing the same procedure, for example, means each does it less often. "The less a physician does of a procedure, the less good he is at it."

And competition in health care is very different than in other industries, where consumers have an abundance of information on quality and price on which to base choices, Lamkin said.

"A very large number of people simply can't use the information effectively to make good purchasing decisions." he said. "Pricing at a hospital is a bizarre thing. You've got to pay $5 for an aspirin tablet because $4.90 of it goes to pay for equipment down the hall."

Other experts say competition can drive down costs and improve quality, but only if health care providers do a good job disclosing prices, measuring quality and rewarding efficiency.

That's the take of Harvard University professors Michael Porter and Elizabeth Olmsted Teisberg, whose book "Redefining Health Care: Creating Value-Based Competition on Results" includes a decade-long study on competition in the health care industry.

The pair's thesis includes a host of caveats. For instance, they believe that, rather than trying to do everything, health care providers should specialize in what they do best.

Full-service hospitals

According to both camps in Tippecanoe County, each of the new hospitals will offer just about everything, which means they'll compete on nearly all services.

"People talk about competition in health care, but when they see it, they won't like it," said Wilson, who projects his hospital group will shed 40 percent of its 2,700 employees and lose 40 percent of its business after the new Arnett/Clarian hospital opens. The new GLHS hospital will have 56 percent fewer beds than the 340 that Home and St. Elizabeth now have.

"I think under the guise of competition, what will happen is, it will blow up the merger that has worked in this community for years," Wilson said, referring to the combining of Home and St. Elizabeth under common ownership in 1999.

Tippecanoe County has 370 licensed physicians, according to the Indiana Professional Licensing Agency. About 140 of them are part of Arnett, all of whom had or still have hospital privileges at the two GLHS facilities.

Both sides expect doctors will keep those privileges, but stopped short of saying it definitively will work out that way.

"Doctors leave or change affiliation," Wilson said.

In fact, a complex feud between Arnett and GLHS has been brewing for years, starting with a solo attempt by Arnett in 2003 to build a new hospital.

That plan was scrapped after several Arnett doctors sued Arnett in July 2004, claiming the board did not consult them on its decision to build the facility. Those doctors left Arnett and formed their own group under GLHS' ownership.

Arnett countersued, saying their former doctors conspired with GLHS to foster negative publicity about Arnett's plans for the new hospital. The suit eventually was settled out of court, but bad blood lingered. Arnett a year later sued GLHS, claiming it was attempting to maintain a monopoly on health care in the area.

A judge later dismissed that claim. But by then, Arnett was in talks with Clarian on the hospital they would build together.

It's a good outcome for health care consumers, according to Dan Evans, Clarian's CEO.

"Competition is not an issue," he said. "Hospitals tend to think about themselves. We need to think about this from the patients' point of view, not the hospitals'. Quality of care will go up, not down."
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