Health System Change in Syracuse, New York

Round One Site Visit

Case Study
July 1997
Raymond J. Baxter, Linda T. Kohn, Robin K. Omata, Loel S. Solomon

he Syracuse community historically has featured a high level of coordination among its major health care institutions and mutual support among them, the business community and elected officials. Now the community is seeing the first signs of overt competition in health care, driven in large part by uncertainty about the end of the state’s hospital rate-setting law, the prospect of new managed care companies entering the market and anticipation of mandatory Medicaid managed care.

The health system for the four-county Syracuse, N.Y., metropolitan area is dominated by Syracuse’s four general hospitals, which traditionally have engaged in a high degree of cooperation around downsizing hospital capacity and meeting new community needs in ambulatory and long-term care. For the past 14 years, these institutions have operated in the highly regulated New York State health care environment, which set hospitals’ payment rates, precluding much negotiation between purchasers and hospitals, and subsidized indigent care and graduate medical education. The insurance market has been decidedly fee-for-service, although a few local managed care organizations have sprung up during recent years in collaboration with local hospitals and physician groups. Physicians typically have practiced in small groups or in solo practices. However, larger multispecialty groups are beginning to emerge and to align themselves selectively with hospitals or health plans or both.

Until very recently, the Syracuse health system was largely insulated from and resistant to the competitive forces prevalent in many communities throughout the United States. Health care in Syracuse traditionally has been provided through locally owned, not-for-profit organizations that have worked together over the years with considerable business, community and political support. This cooperative spirit may be attributed to a number of factors:

• First, Syracuse is a relatively small community, with a limited number of significant health care organizations, which have developed close working relationships.

• Second, the community takes pride in the perceived quality of its health care system, particularly attributed to the state university’s Health Sciences Center. This pride and the widely held belief that good health care institutions are an asset to the community and its economy have contributed to a strong working relationship among health care organizations, the business community and local political leaders.

• Third, Syracuse is not keen on making rapid or major changes to its health care system, preferring instead "to learn from other communities’ mistakes" before embracing managed care or altering the nature of health care organization and delivery.

These factors, combined with a perception that local health care costs are favorable compared with those in other communities, have sustained the traditional fee-for-service insurance market and softened employer pressure to reduce costs, restrict provider choice or manage health care utilization.

But signs of change are emerging nonetheless, largely in anticipation of new state policies and the entrance of new health care organizations into the central New York market. Observers expect deregulation of hospital rates to ignite aggressive negotiating by health plans to reduce hospital costs and competition among hospitals to retain volume. The business community has pressed hospitals to examine the potential effects of policy and market changes on hospital capacity and medical education, and a group of large employers has formed a purchasing coalition. Anxiety about and anticipation of these changes appear to be the major driving forces behind newly competitive behavior and repositioning by local health care organizations. These activities are reflected in:

• the emergence of physician-hospital organizations (PHOs) and management service organizations (MSOs);

• efforts by hospitals to ensure referral flow and facilitate managed care contracting by tightening long-standing physician affiliations and acquiring physician practices;

• alliances among various combinations of hospitals, health plans, physician groups and other service providers; and

• the appearance of entrepreneurial physician-owned organizations, particularly in the suburban areas around Syracuse.

An air of uncertainty prevails among providers, whose most commonly cited concerns about the future include:

• heightened price competition and discounting, spurred by the anticipated entry of national managed care companies into the local market;

• consolidation of the four principal Syracuse-based hospitals into two or three allied systems;

• reductions in graduate medical education and charity care, prompted by price competition and cuts in state reimbursements to hospitals; and

• increased power of physicians.