Center for Studying Health System Change

hange in the Orange County health system appears to be driven by market leaders in each sector. The intense competition among large health plans, physician groups and hospitals has created a complex, rapidly changing market. It is unclear yet how this organizational maneuvering ultimately will affect the residents of Orange County in terms of their access to care and the cost and quality of health care services.

A study of Orange County conducted in 1995²⁰ raised the possibility of consolidation and concerted local action by purchasers, which has not materialized. Since that time, the markets for health insurance and health services have become increasingly concentrated among a few large organizations. Mergers and consolidations at the national and local levels have involved each of Orange County’s dominant plans, hospitals and physician organizations.

In particular, the relative power of the provider sector appears to have grown considerably. Hospital and physician consolidation have enabled the largest provider organizations to gain some clout in negotiating with health plans. Large-scale moves such as the national consolidation of the Tenet and OrNda hospitals and MedPartners’ entry into the Orange County market have altered the balance of power between providers and plans.

While the large health plans seemed to be in the driver’s seat two years ago as they played providers off against each other to achieve price reductions, providers appear to be holding their own now in some instances. Respondents reported examples of health plans offering to fund new physician entities to counter the bargaining potential of the larger, older physician organizations. In addition, plans, hospitals and physician groups are considering long-term contracts that lock in terms as a hedge against the potential fallout of continued competition. This may signal a move toward tighter, more stable relationships between providers and plans.

It is unclear how much farther price-driven competition can go. It is unclear whether premium, price and cost reductions are being passed on to consumers, but they reportedly have imposed cost pressures on providers. Respondents report that physician incomes are flat or decreasing, particularly for specialists. Several hospitals reportedly have implemented reengineering strategies, and have been forced to impose layoffs. Some respond- ents point to significant excess capacity remaining in the hospital sector. Others, especially primary care physicians, wonder with how much less providers can survive. It will be interesting to see whether consolidation ultimately reduces provider capacity and, if so, where and with what effect.

Reports of the impact of financial pressures on quality of care are mixed. Purchasers are beginning to seek information at the physician level that should allow them to see the impact of competitive dynamics on quality. Health plans and providers are looking for ways to achieve further cost savings. While some respondents speculate that such savings will have to come out of profits, others cited examples of cuts in services by plans (i.e., reduced benefit packages) and providers (reduced staffing levels, less time spent with patients).

On the other hand, adoption of care management strategies, emergence of quality as a factor in physician compensation and enhanced coordination of care among larger groups may bolster health care quality in Orange County. Care management strategies that include clinical protocols and disease management techniques are being implemented in many large hospitals, physician groups and IPAs. Physician compensation plans are being restructured to include quality-of-care factors in establishing salaries or bonus levels. Finally, large physician entities that emerge through horizontal consolidation have greater internal ability to provide comprehensive case management.

The availability and analysis of physician-level data may allow consumers and purchasers to differentiate providers based on quality. This may serve as an impetus to greater network selectivity among plans and greater provider-plan alignment. It will be important to monitor the effect of continued changes on patient care and the quality of clinical services. There is already some uneasiness about the impact of tough financial pressures on quality, and it remains to be seen how these concerns will be heightened or mitigated by the competitive dynamics of the local market.

The local safety net for the uninsured appears to face some significant challenges. How will the transfer of the MSI program to CalOPTIMA affect care for the uninsured? How will providers distribute indigent care responsibilities, especially if UCIMC relinquishes this responsibility? Access to care for the indigent reportedly has suffered as providers have become less able to absorb uncompensated care costs. Respondents expect the overall level of health insurance coverage to decline because of:

• continued immigration of low-wage earners who will not receive health benefits;

• declining employer coverage of dependents; and

• legislative changes (e.g., welfare reform) limiting Medi-Cal eligibility.