Tax-exempt hospitals in New Orleans now are focused on their common enemies: Columbia/HCA Healthcare Corp. and Tenet Healthcare Corp., the nation's two largest investor-owned hospital chains, which have forged multihospital systems in the city.
"Hospitals in the past were passively competitive, and now they're becoming aggressive," said Ken Keller, vice president and general manager of Maxicare Louisiana, an HMO with 17,000 enrollees in the area.
Eight of the city's tax-exempt hospitals are responding to the new level of competition by trying to forge a rare alliance that includes nearly every tax-exempt hospital in town. Such an alliance would contract with managed-care payers and may involve consolidation of some services.
If and when that's accomplished, the New Orleans market will be neatly segmented into three hospital systems rather than some 20 hospitals that operated a few years ago. In that consolidation, the city's experience could become a blueprint for the future of most metropolitan areas.
The lines are drawn in New Orleans between tax-exempt and investor-owned hospitals. Within the camps, there's division as well.
Only a few hospitals would remain outside the three systems, most notably state-owned Medical Center of Louisiana. However, the fate of that institution, always a political football, now is being debated by state legislators and other officials. Options include selling the hospital to an investor-owned chain, merging it with a state university hospital or privatizing it some other way.
Keller and others believe consolidation of the Crescent City's hospitals into three strong systems will increase competition in the area, and that could be good for payers. Tenet has seven hospitals in the area; Columbia has five.
The eight not-for-profit hospitals involved in the alliance planning are finding they are being squeezed economically if they work together or not. HMOs are cutting reimbursement, and Columbia and Tenet are spending millions on advertising campaigns.
Last month, officials of the tax-exempt hospitals reported that their $2 million in alliance start-up funding was nearly exhausted. Most of the cash, pledged nine months ago, went to attorneys and consultants researching the accounting and legal aspects of such an alliance. Each hospital has agreed to put up another $40,000, which is significant given that a hospital like East Jefferson General Hospital in Metairie, La., already contributed $300,000. "The study is progressing well," said East Jefferson CEO Peter Betts. "We are in sight of a conclusion."
Financial underwriting is but one hurdle in forming a network that has many in town skeptical. Even if the alliance can get past the antitrust implications, some question whether the CEOs can get along.
"It's going to depend on which egos drive that train," said Donna Fraiche, who chairs the healthcare practice at the New Orleans law firm Locke Purnell Rain Harrell. Investor-owned hospital CEOs are forced to work together. On the tax-exempt side, CEOs are more independent and have a longer tenure during which they've built a stronger power base in the community, she noted. If the tax-exempt alliance is to come to fruition, it will mean "a lot of really fine leaders have to come to grips with their own self-interests," Fraiche added.
However, if the alliance accomplishes its goal, it could be a model for how not-for-profit alliances can benefit the community in other cities, Betts noted.
The model also is a blueprint for survival for tax-exempt institutions in a market where managed care is firmly in control and is driving down prices.
For example, Maxicare's strategy in the overbedded New Orleans market is forcing hospitals to lower their own costs. Many are laying off staff and restructuring operations.
Maxicare is shifting hospitals it contracts with to capitation from per-diem payments. Hospitals that contract with Maxicare receive 36% to 40% of the medical premium dollar, depending on the range of services they provide.
However, the amount of the premium dollar is dropping in New Orleans. It averages $110 per enrollee, per month. That dropped 6% in 1995, Keller said.
That means everybody-the HMO, the hospital, the physician-is getting less money.
What's more, it may become harder for hospitals to get around that reimbursement squeeze. Last month, Maxicare signed an exclusive hospital agreement in the West Bank area with two Tenet hospitals: Meadowcrest Hospital in Gretna, La., and Jo Ellen Smith Medical Center in New Orleans. The contract threatens to shut out those hospitals' local competitor, West Jefferson Medical Center, a tax-exempt public hospital in Marrero, La. At the time Maxicare signed the deal with Tenet, it notified West Jefferson that it would be dropped as a provider in July.
Keller said the termination notice is "an opportunity to restructure our relationship with West Jefferson and convert that contract from per diem to capitation."
West Jefferson officials may not view it as an "opportunity," but that's the way the market works.
That development illustrates how competition among managed-care plans is squeezing cost.
"Our feeling is the providers have already lost the war," said Joseph "Butch" Passman, president and CEO of the Louisiana Health Care Alliance, a statewide business coalition based in Baton Rouge. "The battle now is between the purchasers of healthcare."
He noted that managed-care organizations are lowering premiums to capture market share. That competition has led to some "great deals" for employers, which are locking in two- and three-year caps on their healthcare costs, he said.
When asked whether consolidation of hospitals in markets like New Orleans will affect price and quality of medical services, Passman said those responsibilities now are in the hands of HMOs. "The health plans will have to hold their contractors accountable," he said.