Center for Studying Health System Change

ewark’s health care system has undergone a significant consolidation of hospitals and health plans. Hospitals are joining forces to create economies of scale and bargaining clout with managed care plans. Competition is beginning to intensify among the newly formed systems, although there is still significant competition among individual hospitals. These changes have been accelerated by the elimination of state rate-setting, but continue to be influenced by state charity care and CON policy. At one time, many suburban Newark residents traveled to New York City or Philadelphia for highly specialized care, but that has been changing with establishment of many of these services closer to home.

Much of the health plan consolidation is a byproduct of national HMO merger activity as well as efforts by local plans to expand their regional contracting capabilities. In contrast, the physician community remains relatively dispersed and independent. However, hospital systems and national for-profit physician management companies such as MedPartners are beginning to compete for physician partners and affiliates.

PROVIDER ORGANIZATIONS

Provider consolidation in the Newark area has occurred in response to the perceived need for market power to negotiate effectively with health plans. Over the past 12 months, the St. Barnabas System has added six hospitals; the three principal members of the Atlantic System formally merged; and the Catholic Via Caritas System was formed. The emerging hospital networks have pursued distinct system-building strategies.

• St. Barnabas is a suburban system that has acquired inner city hospitals, Atlantic has focused on suburban locations and Via Caritas represents a mix of urban and suburban providers.

• Both Atlantic and St. Barnabas have begun to centralize administrative functions and develop formal structures for hospital-physician integration, while Via Caritas has decided on a decentralized approach.

All of the major hospital systems are working to develop stronger relationships with physicians for health plan contracting. Their strategies appear to include gradually building physician allegiance through development of more formal physician-hospital organizations, new management services and greater physician participation in systemwide planning efforts. Hospitals generally have not attempted to purchase physician practices or otherwise exert control over doctors.

The St. Barnabas Health System is New Jersey’s largest hospital organization with 3,200 beds and 4,000 affiliated physicians. It has a teaching affiliation with New York’s Mount Sinai School of Medicine. The two original members of the St. Barnabas system, the 600-bed St. Barnabas Medical Center located in suburban Essex County and Community Medical Center of Toms River in Ocean County, are financially strong and have good reputations for quality and service. St. Barnabas’s success is reported to stem from an "obsession with customer satisfaction" and a physician-friendly approach. St. Barnabas has been successful with a strategy of recruiting "star" physicians. It is beginning to develop physician alignment strategies and plans to implement a more formal organization to integrate hospital and physician care around January 1998.

One criticism of St. Barnabas is that a number of its new acquisitions are weak financial performers located in unattractive locations. Three of its newly acquired facilities -- Newark Beth Israel, Irvington General and Union -- are located in urban neighborhoods. St. Barnabas’s short-term strategy is to increase the market share of these institutions and implement operational changes to improve their financial performance. It also has moved quickly to centralize administrative functions such as purchasing, human resources and information services at the system level.

Another objective is to offer a full range of services within the St. Barnabas system. The recent acquisition of the 550-bed Newark Beth Israel Hospital provides St. Barnabas with the state’s sole license to perform heart and lung transplants as well as other specialty services it previously could not provide, including open-heart surgery. Some respondents are concerned that St. Barnabas will gradually attempt to move these services from Newark to Livingston. However, St. Barnabas representatives emphasized the system’s commitment to a strong presence in the inner city and recent capital investments and physician recruitment efforts it has made on behalf of its inner city hospitals.

St. Barnabas’s most recent acquisition further increased its inner city presence and its specialty care capabilities. In 1996 the 429-bed United Hospital declared bankruptcy, hampered by a large debt, increasingly poor payer mix and declining charity care payments. United’s major asset was its designation as the Children’s Hospital of New Jersey. Three local systems (Cathedral, UMDNJ-UH and St. Barnabas) and Primary Health Systems, a Pennsylvania-based for-profit hospital chain, expressed interest in acquiring United. Ultimately, the United board worked out an arrangement with St. Barnabas, which paid $13 million to acquire the facility and its existing debt. St. Barnabas has closed the adult hospital, but has agreed to keep the Children’s Hospital in the city of Newark at its Newark Beth Israel campus and to maintain three outpatient facilities in United’s service area. The lynchpin of the deal was the Health Commissioner’s decision to allow St. Barnabas to transfer the Children’s Hospital CON to its Newark Beth Israel Hospital campus. This gave St. Barnabas the sole franchise as the Children’s Hospital of New Jersey while ensuring that the services remained in the city of Newark. UMDNJ and Cathedral contested the agreement, claiming that the decision should have been made in bankruptcy court rather than in negotiations among St. Barnabas, the United Board and the Health Department. The deal has been completed, however, and pediatric services are now being offered at Newark Beth Israel.

In May 1996 Morristown Memorial Medical Center located in Morris County, Overlook Hospital in Union County and Mountainside Hospital in Essex County merged to form the Atlantic Health Care System. In April 1997 Passaic General Hospital was added to the system, which now has over 1,500 beds. Members of the Atlantic System have teaching affiliations with UMDNJ. The system’s strengths are reported to be good location, geographic focus and a reputation for quality. Atlantic plans to continue growing and may try to acquire up to four new hospitals over the next year. All of Atlantic’s purchasing, finance, billing, management information systems (MIS) and human resources are operated at the system level.

The Atlantic system is centralizing its managed care activities through the newly formed New Jersey Health Resources (NJHR) group, which is responsible for contract negotiation, global risk-contracting, infrastructure development (e.g., information and clinical management systems, claims processing) and physician practice management. Atlantic’s hospitals also have their own physician-hospital organizations (PHOs) and independent practice associations (IPAs), which hold the system’s few risk contracts. It is unclear whether these will ultimately be consolidated into a single systemwide structure. A substantial proportion of Atlantic’s volume comes from the Summit Medical Group, which admits most of its patients to Overlook Hospital. The nature of this relationship may change with the recent acquisition of Summit by MedPartners.

In February 1997 several Catholic hospitals in Northern New Jersey announced the formation of the Via Caritas Health System, bringing together two Catholic orders, The Sisters of Charity of St. Elizabeth, which runs St. Mary’s Hospital in Passaic and St. Joseph’s in Paterson, and the Sisters of the Sorrowful Mother (SSM), which runs Northwest Covenant Medical Center’s three facilities in Morris and Sussex counties. The Via Caritas system has 7,000 employees and about $600 million in annual revenue. St. Joseph’s hospital is a highly specialized teaching facility affiliated with New York’s Mount Sinai School of Medicine. It draws some of its cardiac and pediatric patients from the Newark metropolitan area. It is currently talking with a number of other hospitals about joining the system.

A second Catholic entity is the 600-bed Cathedral Healthcare System, affiliated with the Archdiocese of Newark. Cathedral includes St. Michael’s, a large tertiary care teaching hospital located in the Central Ward of Newark, and St. James, a small community hospital in the city’s Ironbound section. Cathedral has a small base of commercial patients (about 15 percent) and relies heavily on Medicare and Medicaid. It also serves a large proportion of uninsured patients. Cathedral competes primarily with UMDNJ and the St. Barnabas system.

The future relationship between the two Catholic health systems is uncertain. The Newark Archdiocese exercises a great deal of influence over Northern New Jersey’s Catholic hospitals and has expressed a desire for the hospitals to join forces rather than being picked off by non-Catholic systems. Despite this, a number of respondents expressed the opinion that Via Caritas and Cathedral are unlikely to unite because of the differences among their respective managements.

University Hospital is a state-owned 518-bed teaching hospital in downtown Newark run by UMDNJ, New Jersey’s only medical school. Established in 1969, UMDNJ sponsors approximately 1,100 medical residency positions accounting for just under half of New Jersey’s 2,500 residents in 1995.³⁰ UMDNJ officials cite its strengths as good-quality care (disputed by some respondents) and its unique tertiary services (trauma, liver transplant, cardiac and AIDS care). Its major vulnerabilities are high costs, an inner city location and a patient mix dominated by Medicaid recipients and the uninsured, which are distinct disadvantages for competing in a deregulated environment. UMDNJ-UH has had to cope with recent budget cuts due to reductions in charity care funding and state appropriations.

University Hospital has remained independent in the face of the market’s rapid consolidation. UMDNJ officials report difficulty finding willing partners and express concern about being isolated in the market. UMDNJ has historically used its residency programs as leverage for negotiating with other major teaching hospitals, but this is probably not sufficient to attract a strong teaching hospital partner, particularly because several major teaching hospitals have recently shifted their medical school affiliations. Many people expressed the hope that UH will never close because of its role as Newark’s public hospital, but some have suggested that UMDNJ should consider moving the bulk of its residents to other institutions and substantially downsizing the physical plant.

INSURERS AND HEALTH PLANS

Newark’s commercial health benefits market continues to be dominated by indemnity and PPO products. Managed care’s late start is attributed by some to the state’s history of rate-setting, which prohibited commercial insurance plans from negotiating hospital discounts and set limits on the discount arrangements established by HMOs. Consumer demand for broad physician choice and lack of support from the state’s medical community also are contributing factors. Recent HMO enrollment reportedly is brisk; the region’s HMO enrollment is estimated to be 25 percent of the total population.³¹

Most of New Jersey’s locally based HMOs that included Newark in their service area, such as Rutgers Community Health Plan, CoMed and, most recently, FirstOption, have been acquired by national or regional companies. HMOs report that employers are increasingly looking to NCQA accreditation as a "Good Housekeeping seal." And the state is playing a more active role in the HMO market through issuance of consumer-focused HMO regulations and mandatory HMO enrollment for Medicaid recipients, which began in January 1996 for Essex County residents.

The two largest Newark-based insurance plans are BCBS-NJ and Prudential Healthcare. Both offer HMO, PPO, POS and indemnity coverage. Other major HMOs operating in Newark are Aetna/U.S. Healthcare, Oxford HealthPlan, Cigna/CoMed, HIP Health of New Jersey and FirstOption, a New Jersey-based provider-sponsored HMO that recently agreed to be acquired by California-based Foundation Health Systems. There also are a number of HMOs that focus predominantly or exclusively on Medicaid. Two of the largest in Newark are the UMDNJ-sponsored University Health Plan and the Garden State Health Plan.

The regional nature of Newark’s large employers and resistance of white-collar employees to restricted choice plans have led purchasers to favor HMOs with broad provider panels. According to several respondents, Aetna/U.S. Healthcare initially offered a very limited New Jersey panel, but has developed one of the broadest HMO networks in the state in response to employer demand. Similarly, Oxford recently introduced an open access model, which allows patients to go directly to specialists and is available to Newark employers.

Many of the managed care companies have focused primarily on negotiating hospital rate discounts. Aside from primary care capitation, respondents gave little evidence of provider risk-sharing arrangements. Many plans and providers characterized hospitals and PHOs in Newark specifically and New Jersey generally as not yet ready to manage global capitation contracts effectively. In addition, the plans were described as being distracted by merger activity and unable to focus on developing provider risk arrangements.

Recent health plan merger and reorganization activities affecting the Newark market include:

• Foundation Health System’s pending acquisition of a 70 percent share in First Option;

• the merger of U.S. Healthcare and Aetna;

• the reorganization of Prudential’s managed care division and appointment of a new CEO; and

• the planned acquisition of BCBS-NJ by Indiana-based Anthem Inc., which was canceled following an opinion by New Jersey’s Attorney General that BCBS-NJ assets were, in effect, a public trust and would have to be donated to a charitable foundation when the sale closed.³²

The FirstOption merger reflects the need of a growing health plan to establish a regional presence and access new financing. Company officials described their pending decision to merge with Foundation Health Systems as influenced by the need for a seamless multistate network to serve regional employers and for new capital to update its administrative and information systems.

The growth of large hospital systems may be followed by direct contracting arrangements that compete for health plan market share. Although no examples of directing contracting were identified, interest has been expressed by some of the region’s providers.