Center for Studying Health System Change

s noted, the health system is composed almost entirely of locally owned and operated not-for-profit organizations. Two national HMOs are active in the market (PacifiCare and QualMed), but the remaining plans and providers were founded in Seattle and have operated there for more than 50 years. Most area hospitals are independent; two local health care systems each own and operate two hospitals. In addition, provider-sponsored health plans and vertically integrated delivery systems have emerged.

INSURERS AND HEALTH PLANS

Organization

The two Blue Cross/Blue Shield carriers, Regence Washington Health (formerly King County Medical Blue Shield) and Blue Cross of Washington and Alaska, have been the dominant insurers in Seattle for decades. Their roots date back to the county medical bureaus of the 1930s, when Blue Shield was essentially a prepaid health plan largely serving the timber industry. Each of these two Blues carriers has more covered lives across different products than any other insurer or plan in the market, and together account for more covered lives than all other plans in the market.

Regence Washington Health is now a division of The Regence Group, a holding company for Blue Shield plans in Washington, Oregon and Idaho. It is the largest carrier in the Seattle market, with 767,000 enrollees in King and Snohomish counties.⁸ Its subsidiaries include HMO Washington, a troubled HMO product that is undergoing redesign, and Washington Physician Services, a management services organization (MSO). In 1992, Regence Washington Health purchased a proprietary software program designed to profile physician practice patterns, with an emphasis on cost, and used this information to design its Selections product. The introduction of this POS product has had a particularly strong impact because nearly all physicians in Seattle serve Regence Washington Health enrollees, and Regence has amassed extensive claims data to use for profiling.

Blue Cross of Washington and Alaska is now owned by a holding company called Premera. Blue Cross traditionally has been the second-largest indemnity carrier behind Regence Washington Health. Blue Cross lost access to the Boeing population this year when Boeing selected another set of plans. Blue Cross also has a PPO product that offers a 15 percent discounted fee schedule. HealthPlus, the HMO subsidiary of Premera/Blue Cross, includes commercial and individual products, Basic Health Plan and Medicaid products.

Seattle is also the home of the historic and nationally recognized Group Health Cooperative of Puget Sound, which was founded in 1948. Selected recently as one of the three highest-quality HMOs⁹ in the United States, Group Health Cooperative of Puget Sound is the largest HMO in the Puget Sound region, with more than 500,000 enrollees. Sagging enrollment forced Group Health to cut its premiums in 1995.

Group Health also jointly sponsored a POS product with Virginia Mason Medical Center called Alliant anticipating that the two entities together could improve their market share beyond what their individual HMOs could accomplish. This venture expanded the hospital and physician panel available to HMO enrollees in Group Health and the Virginia Mason Medical Center; enhanced the perceived quality associated with Group Health; and expanded the Virginia Mason Medical Center’s primary care base. Alliant is now very popular and was selected by Boeing for its employees.

Related to this joint venture was the closure of Group Health’s downtown hospital as a cost-saving strategy, and the transfer of patient volume to Virginia Mason Medical Center. In addition, Group Health and Kaiser Permanente Northwest have announced plans to merge their operations throughout the Pacific Northwest, making the resulting entity the largest HMO in the region.

Seattle has eight HMOs, which spend about $.87 of each premium dollar on health care services, although that figure ranges from 74 percent (HMO Washington) to 91 percent (Group Health Cooperative of Puget Sound).¹⁰ Overall, HMO penetration in Seattle is estimated to be about 22 percent.¹¹ Respondents reported that commercial HMO penetration grew only 1 percent between 1990 and 1995, and PPO products offer little more than discounted fee schedules. Several factors help explain the slow growth of managed care enrollment in this market:

• historically low health care prices and low hospital utilization;

• the process for obtaining HMO/HCSC licenses;

• consumer demand for provider choice; and

• the low price differential between HMO and non-HMO options (Group Health’s premiums, for example, are not substantially lower than those of indemnity insurers).

Informants believe that Seattle physicians historically have been thrifty, treating patients cost-effectively without making unnecessary use of hospital services. In addition, already low prices and a relatively sparse population outside Seattle serve as barriers to outside entrants that may not be able to price products sufficiently below market to generate enough profit. However, informants said that the Seattle market is starting to lean more heavily toward managed care; the Boeing initiative is a clear example of this.

Network arrangements in Seattle reflect the preference of individuals and employers for broad choice and minimal restrictions on access to care. PPO panels are overlapping and inclusive. A typical PPO product offers a slight discount off traditional fee-for-service rates with a broad network. Although HMO physician panels are fairly exclusive, Seattle has experienced success with POS products, which allow enrollees the option to pay for greater choice of physicians. In addition, plans have responded to consumer demand for choice by not insisting that physicians direct patients to particular hospitals. For example, Providence Health Plans (a subsidiary of the Sisters of Providence, which offers HMO and PPO products) has more patients in Swedish Health System hospitals than in Providence’s own hospitals.

Several hospitals and physician entities have discussed or launched health plan initiatives, partly as a strategy to improve their clout and to enhance their visibility in the marketplace. These initiatives have achieved success in the health plan market.

First Choice Health Network offers a PPO product with a very broad network and discounted fee-for-service payments for 265,000 enrollees in the Seattle and Tacoma markets. It has been awarded an HCSC license and is enrolling in a new HMO product. First Choice Health Network is owned by nine hospitals, including eight community hospitals in Seattle and Tacoma, and Swedish Health System. First Choice has contracted to be part of Columbia/HCA’s national PPO network. In addition to being part owner of First Choice Health Network, Swedish Health System owns the former Cigna HMO license and markets an HMO product called Health First Partners.

The Sisters of Providence Health System owns the Sisters of Providence Health Plans, which offers three products:

• Sound Health, one of the four largest PPOs in the market, with 166,000 members in Seattle;

• Good Health, an HMO with 53,000 commercial enrollees in Seattle; and

• Providence’s POS product, Providence Healthcare, which has 36,000 enrollees in Seattle, two-thirds of whom are enrolled through Boeing.

Providence Health Plans recently consolidated operations in the Washington and Oregon markets. Providence Health Plans had a sizable Medicaid population in its HMO, but was dropped from the Healthy Options program in King County after the first round of selective contracting.

In 1995, the Washington State Medical Association launched the Unified Physicians of Washington, a physician-owned health plan designed to bolster physician influence on the market. Unified Physicians has developed a statewide PPO network and is now working on an HMO product.

All AFDC beneficiaries are in the Medicaid Healthy Options managed care program. Plans call for folding in the SSI population, but the timetable for this transition is uncertain. Of close to 135,000 Medicaid eligibles in the Seattle area, NYL Care had the most enrollees (fewer than 31,000 members), followed by the Community Health Plan, the plan sponsored by Seattle’s Community Health Centers (close to 20,000 members). These are followed by:

• Unified Physicians of Washington (17,000 members);

• Group Health Cooperative (12,000 members);

• CareNet, a Blue Cross-led consortium that includes the University of Washington hospitals and the King County Health Department (11,000 members);

• Providence Health Plans (10,000 members);

• Blue Cross (apart from CareNet, with 6,000 members); and

• QualMed (5,000 members).

About 19,000 Medicaid-eligible children are enrolled in Basic Health Plus, a component of the state’s Basic Health Plan.¹²

PacifiCare and Group Health are the top two HMOs in the Medicare market. While PacifiCare’s entry caused trepidation among local health care leaders, it has not had much impact outside the Medicare risk market. PacifiCare is consolidating its administrative functions with its Oregon operation, where PacifiCare also has a strong Medicare risk product. If the federal government raises its low AAPCC rates, national plans likely will view the Seattle market with greater interest. Respondents reported that the current low rates make it difficult for plans to compete for Medicare business, because they cannot afford to entice enrollees with additional benefits.

Changes

Seattle’s health insurance market has seen several recent horizontal mergers by entities pursuing regional or multistate market strategies. Market analysts estimate that 25 to 35 percent of the small- and large-group markets are with statewide or multistate purchasers. For example, public purchasing for the Basic Health Plan, Medicaid and public employees has led several plans to develop statewide strategies. Most of Seattle’s dominant plans participate in a regional or multistate strategy. For example, Blue Shield plans in King and Pierce counties have formally merged, and (together with all of Washington’s Blue Shield entities) have adopted the name Regence Washington Health. Regence Washington Health is also part of a larger holding company (The Regence Group) that owns Blues plans in Idaho and Oregon. As mentioned earlier, Blue Cross of Washington and Alaska (already a multistate actor) is now owned by Premera, a holding company with regional aspirations. Providence Health Plans and PacifiCare are consolidating administrative functions among their Portland, Oregon, and Seattle offices. Group Health has a Group Health Northwest division and, according to respondents, its planned merger with Kaiser is part of an effort to establish a strong regional strategy. However, these plans reportedly have not yet succeeded in securing regional or multistate contracts.

Under the planned merger between Group Health and Kaiser Permanente Northwest, Kaiser will provide cash to help Group Health improve its marketing and management information system development. Kaiser is not currently in the Seattle market, but is strong in Portland, Oregon, where Group Health has not yet entered. The affiliation with Kaiser would strengthen its competitive edge in a regional market. According to one respondent, Group Health’s lack of a regional presence proved instrumental in Safeway Inc.’s decision to pass on it as a contractor. Observers viewed Group Health’s merger plans with Kaiser, in part, as a way to keep up with other plans, like Regence Washington Health, that already have strong regional networks. They were uncertain, however, whether the Kaiser-Group Health affiliation would affect the Alliant HMO product jointly sponsored by Group Health and Virginia Mason Medical Center.

Plans are considering new product options as well. Informants indicated that Regence Washington Health and Premera may introduce Medicare risk products. Despite low AAPCC rates, Medicare risk contracting could be attractive to some insurers because:

• it virtually guarantees rate increases into the future, whereas non-Medicare group insurance premiums are flat or declining; and

• these carriers historically have been the largest indemnity carriers in Seattle, and they believe that their insured populations will prefer to stay with them as they retire and move on to Medicare.

PROVIDERS

Organization

All of Seattle’s strong health care provider systems are locally owned and have been active in Seattle for more than 50 years. Residents reportedly have come to trust these providers. Competition among providers is moderate, and is as focused on quality and reputation as it is on price. For example, respondents differentiated among providers of certain high-end services -- like Providence and Swedish Health hospitals in downtown Seattle, which have highly respected cardiac care capabilities -- solely on the basis of quality and reputation rather than price.

Seattle’s hospitals have had to contend with decreasing utilization for well over a decade, but few hospitals have been forced to close or consolidate. Group Health found it could no longer support two hospitals in the metropolitan area, but its efforts to close the suburban Eastlake hospital sparked strong staff protests and a nurses’ strike. Instead, Group Health has closed its downtown hospital and transferred patient volume -- and many physicians, nurses and other staff -- to Virginia Mason Medical Center. Sisters of Providence acquired a second hospital in Everett, and is converting one campus into ambulatory surgery and long-term care facilities. Respondents believe that all hospitals in the market are operating on very low margins (1 percent, for example), and wonder whether capacity will be further reduced.

Most primary care physicians are organized into large groups, as are many specialists, and generally are only informally tied to hospitals. Respondents reported that 75 to 80 percent of primary care physicians and 40 to 50 percent of specialists are employed by large groups in Seattle. The Washington State Medical Association reports that two-thirds of its Seattle members are employed by one of six large physician groups. There are eight physician groups with more than 100 physicians in the Seattle market.¹³ Although many physicians (including those whose practices are owned by large groups) still provide care through small-group or solo practices, it is increasingly common to find large, multispecialty clinics. Although physicians generally do not have formal relationships with hospitals, they nevertheless may have strong hospital ties. For example, some physicians prefer to refer cardiac care patients to Providence, while others prefer Swedish Health or the University of Washington.

There are 28 hospitals in the Seattle area, including eight that are either owned or operated by one of Seattle’s dominant provider systems:

• Swedish Health System;

• Sisters of Providence Health System;

• Virginia Mason Medical Center; or

• the University of Washington.

The Swedish Health System includes Seattle’s largest hospital (558 beds) as well as a hospital in Ballard (149 beds), representing 14 percent of beds in the market. For many years, Swedish Health has enjoyed an excellent reputation for quality among local residents, as well as a large endowment that enhances its financial stability. Unlike Seattle’s other major provider systems, Swedish Health does not have a strong and geographically diverse primary care physician network; in fact, Swedish Health divested itself of Swedish Medical Partners in 1996. Instead, Swedish Health aligned with three local hospitals to provide continuing education, health promotion support and certain administrative services in exchange for increased tertiary care volume. Swedish Health is also affiliated with Multi-Care, a Tacoma-based hospital system.

The University of Washington plays a significant role in Seattle as a teaching institution, research center and significant provider of hospital and physician services. The University of Washington is the only medical school in Washington, Idaho, Montana and Alaska. It owns and operates the nationally recognized, 377-bed University of Washington Medical Center, and operates (under contract) Harborview Medical Center (the area’s public hospital and only Level 1 trauma center) and Seattle Children’s Hospital. Each university-operated hospital is staffed by the University of Washington Physicians. The university recently created a primary care network that will provide care through 10 clinic sites in the area.

Among Seattle’s remaining hospital systems, the Sisters of Providence is the largest. The Sisters of Providence joined forces with Tacoma-based Franciscan Health System in 1994 to form a regional Catholic-owned system. The Providence system includes two hospitals (661 beds in Seattle and Everett), the Medalia physician group (the largest physician group in the state with 41 primary care clinics and more than 400 primary care physicians), two home health agencies, the Providence Health Plans and other health services.

Virginia Mason Medical Center was formed in the 1920s as a physician group, and 10 years later built a hospital in downtown Seattle. Virginia Mason Medical Center is physician-led, and its staff compares it with the Mayo Clinic.

Changes

The purchase of physician groups by Medalia, Virginia Mason Medical Center and other hospital and physician groups is among the most significant ownership and control changes in Seattle in recent years. The large physician groups (either multispecialty or primary care) have been purchasing many of the small and independent physician practices in or close to Seattle. Medalia and Virginia Mason Medical Center are also acquiring practices in outlying communities as well as outside the metropolitan Seattle area with the hope of establishing comprehensive care networks and strengthening the referral base for tertiary care to their downtown facilities. However, informants indicated that in the rush to buy physician practices, buyers overpaid for assets that are depreciating in value.

Two factors have driven the expansion of physician networks.

• First, physicians and hospitals alike anticipated that managed care would increase under the Health Services Act and, subsequently, with Boeing’s new purchasing initiative. Large physician networks -- particularly primary care networks -- were expected to be more successful under the Health Services Act, and Boeing made physician networks an important criterion for plan selection. For example, Medalia was created as a direct result of the Health Services Act and was well positioned for Boeing’s 1996 solicitations.

• Second, Seattle’s hospitals have pursued stronger ties with physicians to bolster occupancy. Virginia Mason Medical Center has been actively purchasing physician groups, in part to secure its referral base from outlying areas. About 42 percent of Virginia Mason’s inpatient admissions come from outside the Seattle metro area. The University of Washington needed a community-based primary care capacity to support the University of Washington Medical Center.

Physicians are attracted to large groups for their ability to manage care under capitated payments. The size and scope of these groups improve their financial solvency; help supply the assets needed to capitate physician services; enhance their negotiating clout with managed care plans; and attract the interest of payers seeking broad area networks. Some physician groups are becoming experienced with managing care under capitation, and are beginning to pursue fully capitated contracts with plans and fully capitated direct contracts with employers.

Some informants expressed doubts that extensive physician capitation will emerge any time soon. They argued, for example, that the original Medicaid managed care capitation rates were high, making it relatively easy for physicians to provide care, earn a living and become interested in other capitated contracts. Some plan respondents are concerned that physicians still lack the ability to manage full capitation; they believe that commercial capitation may not be as generous as Medicaid. Two health plans indicated they will only share risk with physician groups that have managed at least 1,000 lives.

There are several examples of organizations that own and control hospital and physician services and insurance. However, there is little evidence of economies, exclusivity or common strategies across entities owned by the same system, and the nature and degree of integration achieved varies by entity. Informants generally said that clout and visibility were essential to success in the Seattle market. Control over several functions may be viewed as one indicator of clout. An example is the Sisters of Providence Health System. While Sisters of Providence owns the Providence Health Plans and Providence Health Systems, which in turn owns two hospitals and is majority owner of the Medalia physician group, Medalia has no exclusive referral relationships with Providence hospitals. Typically, there are more Providence Health Plan patients in Swedish Health hospitals than in Providence hospitals.

Historically, physicians have been informally aligned with hospitals and not aligned with health plans (except for Group Health). However, physicians have developed strong working relationships with some hospitals. For example, some physicians prefer to refer cardiac care patients to Providence, while others prefer Swedish Health or the University of Washington. Physicians who are employed by Group Health, Virginia Mason Medical Center and the University of Washington, however, are tied exclusively to those hospitals. It is common for primary care and specialty care providers to belong to several PPO and HMO panels, according to several respondents, who said that choice of physicians within a health plan (particularly a PPO) is very important to consumers. As a result, networks tend to be broad and overlapping. The reported success of POS options is cited as evidence that consumers want choice.

Two concrete examples of exclusive relationships and formal integration across functions within one organization are Group Health and Virginia Mason. Group Health has the only vertically integrated system for health insurance and health services provision. Group Health enrollees use only the Group Health (and now the affiliated Virginia Mason Medical Center) health service facilities, and Group Health’s staff-model physicians provide care management exclusively to Group Health enrollees. Each enrollee has a consolidated medical record, and Group Health sees its population-based clinical initiatives as long-term investments in the health of its many long-tenure enrollees. Finally, there is a high degree of economic and clinical integration between Virginia Mason Medical Center’s physicians and the medical center they own.

The joint venture between Group Health and Virginia Mason Medical Center has strong potential for clinical and other integration. To date, however, there has been little clinical integration between the two entities, aside from the transfer of some Group Health staff to Virginia Mason Medical Center. Informants attribute this lack of clinical integration to culture clashes between staff in the two institutions. For example, Group Health staff previously did not have to contend with the emphasis on patient volume that is more common at Virginia Mason Medical Center. In addition, Group Health physicians place more emphasis on prevention and wellness, while Virginia Mason’s physicians are quicker to pursue state-of-the-art care and high-end technology.