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Indianapolis hospitals hit with tough bargaining environment

June 1, 2013
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For the past decade, Indianapolis-area hospitals have been some of the nation’s poster children for aggressively building hospitals and expanding into one another’s service territories.

By nearly all accounts, that building has contributed to health care costs’ rising faster in the Indianapolis area than in most other markets.

But now, the geographic expansion of Indianapolis’ hospital systems could actually lead to lower bills to patients—or at least to slower growth in health care prices.

That’s because there are now multiple hospital systems to choose from in most of the submarkets around the Indianapolis area. Health insurers and employers, who increasingly say they are willing to exclude one or more hospital systems from their networks in order to get lower prices, have begun to pit hospitals against one another in a kind of bidding war.

“If you have a new competitor, which is offering the same services in a nearby location, it makes it harder to demonstrate that you are truly necessary at any cost,” said Dr. Emily Carrier, a senior health researcher at the Center for Studying Health System Change, based in Washington, D.C., which conducts in-depth analysis of the Indianapolis health care market every few years.

Traditionally, hospital systems in the Indianapolis area dominated distinct geographic markets. St. Vincent Health controlled an arc from Carmel around to the western suburbs of Indianapolis; Franciscan St. Francis Health dominated the southern suburbs; Community Health Network controlled the entire east side up to the Castleton neighborhood; and Indiana University Health dominated downtown.

IBJ.COM EXTRA
To see a map of area hospitals and outpatient centers,
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No employer and no health insurer could afford to exclude any of the systems from the network of health care providers the insurers made available to patients.

It’s not clear whether hospitals’ loss of geographic exclusivity will weaken their negotiating leverage with insurers more than their negotiating hands have been strengthened recently by their consolidation via purchases of smaller hospitals, surgery centers and physician practices.

But what is clear is this: Any price cut from hospitals would be nearly unheard of in the world of health care, where increased competition among hospitals has traditionally—and somewhat counterintuitively—led to higher overall costs to the health care system.

That’s because doctors have had an interest in referring patients for high volumes of tests and procedures, first because they were investors in new hospitals and now because they are employees of the hospital systems.

Also, patients typically prefer more health care, not less. And since they pay only 14 percent, on average, of their total health care needs from their own pockets, they’re shielded from the true financial impact of their health behaviors and health care buying decisions.

“It has driven up costs,” Alex Slabosky, the former CEO of M-Plan and IU Health Plans, said about the rapid hospital building in Indianapolis.

Building boom

The most recent hospital building boom got rolling in 2002 when cardiologists associated with the large practice The Care Group opened the Heart Center of Indiana in Carmel. They later sold a majority stake in the hospital to St. Vincent, which went on to acquire the entire Care Group practice.

In 2003, Community Health formed a joint venture with cardiologists to open Indiana Heart Hospital in Castleton. In the following two years, IU Health, then called Clarian, broke out of its downtown territory with new hospitals in Avon and Carmel.

Also in 2005, OrthoIndy, a large group of orthopedic surgeons, opened its own hospital, Indiana Orthopaedic Hospital, on the northwest side.

Franciscan St. Francis Health expanded its hospital in Mooresville in 2008 and then expanded its south-side hospital in 2011. Franciscan is the one system that has closed a hospital recently, pulling out of its aging Beech Grove facility. But then it opened a small hospital in Carmel in 2012.

Community Health added major expansions to its hospitals on the northeast and south sides, and also acquired Westview Hospital on the west side.

But IU Health and St. Vincent each invaded Community’s turf by building hospitals in Fishers.

Not all of those hospitals offer the same services, however. For example, the IU Health Saxony hospital in Fishers is focused primarily on heart and orthopedic surgeries, which is one reason St. Vincent saw an opening to provide obstetrics at its hospital across the street.

Dr. Bernie Emkes, medical director for managed care services at St. Vincent Health, said the geographic expansions are in part a search for more patients covered by lucrative employer-sponsored health plans.

But the more recent building projects are also driven by President Obama’s 2010 health reform law, particularly its expansion of health insurance coverage and its emphasis on “accountable care organizations” that are paid by the federal Medicare program for taking care of a specific population of patients.

“Many patients, and especially Medicare patients, will not drive across town to receive care that can be provided near home,” Emkes said.

Costly expansions

Whatever hospitals’ motivations, their building spree has been one significant factor in the 4.1-percent annual rise in inpatient hospital prices paid by health insurers, according to a recent study by the Center for Studying Health System Change. That steady growth, spread out over 15 years, has added about 10 percent more in costs than the national average during the same period.

Indeed, Indianapolis-area hospitals command prices from private health insurers that are about 40 percent higher than the national average among all private health insurers, according to a 2010 study by the Center for Studying Health System Change.

Higher prices by hospital systems accounted for about two-thirds of the higher health care spending incurred in the Indianapolis area by the Big 3 automakers, compared with 18 other cities in which they have clusters of employees, according to a 2011 study by the center.

But the world is changing, said Dr. John Dietz, an orthopedic surgeon who spearheaded the launch of Indiana Orthopaedic Hospital in 2005.

“The old way of dicing the region into territories sort of inhibits the competition,” Dietz said. But “competition offers the potential for two things: higher quality and lower prices.”

“The increased competition that’s occurred in Indianapolis, I look at that favorably,” he added. “I believe that the best suppliers of health care are going to get better contracts. Because they’ll be more desirable, they’ll get more patients.”

Quality, cost focus

Indeed, the watchwords in health care among health care providers in health insurers are “higher quality” at “lower cost.”

The accountable care contracts Medicare has formed with Franciscan and IU Health are one possible way to get both. If those hospital systems demonstrate high-quality care on more than 30 measures and reduce the cost of their patients’ care from year to year, they can receive bonus payments.

Private health insurers like Indianapolis-based Anthem Blue Cross & Blue Shield are also moving to form “accountable care” contracts with hospital systems.

But a more direct way to lower costs is the narrow-network concept, which has resurfaced in insurers’ dialogue with employers after effectively dying out in the 1990s. A narrow network excludes one or more hospital systems from a health insurer’s “preferred” providers, which will likely drive more patients to those hospitals that remain in the network.

But hospitals’ price of admission to a narrow network is lower reimbursement rates from the health insurer.

Anthem, a subsidiary of Indianapolis-based WellPoint Inc., has been asking employers for price cuts of 8 percent to 10 percent to form a narrow-network product.

“Historically in Indiana, we know most patients prefer a broad network,” Dr. David Lee, Anthem’s vice president for provider contracting, told IBJ in September. “However, we have seen this increase in appetite from patients, because of the relative unaffordability of health care, to make some trade-offs. That appetite is growing and has been so over the last few years.”

In January, Anthem told other hospitals it had selected Community Health as its “exclusive” provider for the Indianapolis area.

However, Community CEO Bryan Mills said in February that his intent was to include St. Vincent, Indianapolis-based Eskenazi Health and hospitals in the counties surrounding Indianapolis—with whom Community also has contractual relationships—in the arrangement with Anthem.

Anthem officials did not return calls for this story.

Slabosky said the broader geographic reach of hospitals compared with 20 years ago gives the narrow-network concept a better chance to stick and have an effect than it did in the 1980s and ’90s.

“Lack of geographic coverage, that was one of the competitive pressures on all of us,” Slabosky said, speaking of M-Plan, as well as its predecessor Metro Health and competitors MaxiCare, IU Health Plan and Advantage Health Solutions.

Of all those organizations, only Advantage survived the 1990s customer backlash against narrow networks. Advantage, which is primarily owned by St. Vincent and Franciscan, makes its members pay more when they receive care at an IU Health facility.

Within a year of launching M-Plan in 1989, Slabosky recalled, employers said it would have to include more than just Methodist Hospital and its physicians for it to adequately cover their employees—who were typically spread around the metro area.

M-Plan quickly struck contracts with other health insurance plans, transforming from a narrow network into one that included multiple hospitals.

So the real test to see whether narrow networks exact price cuts from hospitals is if employers actually embrace the concept.

In 2010, Slabosky struck out selling a narrow-network plan to employers on behalf of IU Health. The only employers to sign up were IU Health and Indiana University, with whom IU Health has a close affiliation.

Employers are still going to be reluctant to embrace health plans to limit their workers’ choices, said Dave Kelleher, who as part of the team that launched Metro Health in the 1970s also fought numerous battles to get employers to embrace lower costs in exchange for the limited choices of narrow networks.

“They still have to face employee pushback,” said Kelleher, now executive director of the Employers Forum of Indiana. But, he added, “It’s more likely that an employer will try it, now that there aren’t protected [hospital] territories.”•
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