The Washington healthcare market, until now a quiet neighbor of northern Virginia, appears to be readying for a blowout.
The entrance of investor-owned Universal Health Services-which bought an 80% stake in prestigious George Washington University Hospital in August-has set the stage for an explosion in mergers, acquisitions and affiliations. And managed care's burgeoning market power in the nation's capital likely will hasten the process.
Across the Potomac River in northern Virginia, Inova Health System of Springfield, Va., and Columbia/HCA Healthcare Corp. of Nashville already have become regional colossi (June 30, p. 36). Despite the threat to their market shares, hospitals in the District of Columbia have largely bucked the urban trend of rapid consolidation and still go it alone in many ways.
But change is on the horizon. Just as party planners clean house and stock up on beer, district hospitals are undertaking pre-consolidation steps:
Talking to potential partners.
Developing physician and subacute-care networks.
"We're in a volatile stage," says Sam Wiesel, executive vice president of Georgetown University, which operates Georgetown University Medical Center.
The territory. Washington's 16 nonfederal acute- and specialty-care hospitals serve a city with a dwindling population of 554,000 people. They also draw from surrounding suburbs in Maryland and northern Virginia. The entire metropolitan area has about 4.2 million people .
The district's first for-profit facility, 346-bed GWU/Universal, is getting ready to make its presence felt.
It's negotiating to buy nearby 110-bed Columbia Hospital for Women Medical Center, a task aided by the recent repeal of a law requiring the property be used for a women's hospital.
At least two other hospital partnerships are under discussion, says Allan Weingold, M.D., executive dean and vice president of medical affairs at the university. Weingold, however, acknowledges talks only with 131-bed Prince William Hospital in Manassas, the heart of the competitive northern Virginia market.
He says he expects to announce at least one acquisition or affiliation within six months.
The GWU/Universal partnership has cash for expansion. King of Prussia, Pa.-based Universal will pay $80 million upfront and an additional $45 million over 10 years for its stake in the hospital.
About one-third of that sum will finance physician network building, although probably not through outright purchases, Weingold says. Many hospitals that have bought physician practices are sustaining substantial financial losses, he says. "Serendipitously, by being involved in our merger discussions (with prospective partners), we did not move in that direction," he says.
Fortifications. Other district hospitals also are fortifying their positions.
For instance, two-hospital Medlantic Healthcare Group has established links to the northern suburbs in an affiliation with five-hospital Helix Health System, based in Baltimore.
Medlantic already is an established power with 775-bed Washington Hospital Center, which has the biggest share of admissions, patient days and outpatient surgeries in the district. The system's other hospital is nearby 160-bed National Rehabilitation Hospital.
It also has a 60-physician primary-care network, largely in Washington and suburbs to its northeast and east. And it has aligned with 450 practices in a physician-hospital organization that's contracting with payers.
Not to be outdone, the second-busiest district hospital, Georgetown University Medical Center, is looking west and northwest. It already operates a 40-physician clinic in suburban Arlington, Va., and plans to open a comparable facility in Montgomery County, Md., this fall.
After its faculty practice plan merges with New York-based Avanti Corporate Health Systems, a management services organization, Georgetown will have 20 to 25 primary-care practices in its network.
As for a hospital merger, "we have not found the right partner," Wiesel says.
Expecting radical market change, Georgetown has a fresh bottom-line perspective symbolized by a new executive team. Wiesel works with medical center Chief Executive Officer Kenneth Bloem, a former Stanford University official who arrived last fall, to balance academic and business needs at the hospital.
In the fiscal year ended June 30, 1996, Georgetown medical center earned $3.9 million on net patient revenues of $212.6 million, according to SMG Marketing Group, a Chicago healthcare information and marketing consulting company.
Crying for consolidation. Washington hospitals' network building couldn't come soon enough.
Looking at utilization statistics, the district healthcare market has been crying out for consolidation for some time, says Susan Hansen, president of Washington-based consulting firm National Health Strategies.
From 1994 through 1996, district hospitals closed nearly one-fifth of their operating beds and lost 7.9% of admissions and 14.2% of inpatient days. The decreased utilization wasn't offset on the outpatient side as ambulatory surgeries rose just 2.6%.
The truth is, several factors have kept mergers and acquisitions from taking place.
The Washington area is fragmented by three political jurisdictions: the state of Maryland, the District of Columbia and northern Virginia. Maryland regulates hospitals more rigorously than the others, which has been an obstacle to cross-jurisdictional consolidation.
Partnerships crossing the Potomac have proved just as challenging, hospital executives say. Indeed, the river dividing Washington and northern Virginia often is called the "Potomac Ocean" because area residents so rarely cross it for healthcare or other services.
What's more, three of Washington's biggest players are academic medical centers: GWU, Georgetown and 381-bed Howard University Hospital.
The academic hospitals say they must be particularly selective when choosing partners to preserve their research and teaching missions.
In fact, Georgetown views the development of a physician network as an alternative method of generating patient volume in case it can't find a suitable hospital partner, Wiesel says. "We want to plan to be as independent as we can be in today's environment."
Managed-care weakness. Another deterrent to consolidation has been the relative impotence of managed care in the district.
"The managed-care players are not playing hardball," says consultant Hansen, former president of Columbia Hospital for Women.
That's partly because the area's largest employer-the federal government, with nearly 285,000 employees in its health plans-has continued to offer employees the choice of numerous health plans, both indemnity and managed care. Thus, any one plan has been blocked from developing much market clout.
Further limiting their power, plans have marketed themselves as offering a wide range of providers, says Bruce Edwards, vice president of network management of Blue Cross and Blue Shield of the National Capital Area and president of the Blues' Capital Care HMO.
"Although you have managed care, it's not at the same level of sophistication that you may have in other parts of the country," Edwards says.
The situation is changing. Federal employees are migrating in increasing numbers into tightly managed plans, comparing price and quality as well as network breadth, says Susan Lefkowitz, senior vice president for healthcare delivery services with NYLCare Health Plans of the Mid-Atlantic, based in Greenbelt, Md. As a result, managed-care plans have more leverage to demand discounts from providers.
"I'm talking to a lot of people about lower rates," Lefkowitz says. NYLCare has 100,000 federal beneficiaries in its HMO product.
Edwards says he is securing contracts with providers that ensure the National Capital Blues gets rates at least as low as competitors. The Blues' HMO-style plan enrolls about 140,000 federal employees.
Contracts that give providers a greater share of the risk for ensuring enrollees' health might not be far behind.
"Some of the carriers are beginning to think that the way to really prosper is to share risk with the providers," Edwards says.
Adds Lefkowitz: "(Systems) haven't had the hospital-doctor connections in place. Only now are we able to talk to people seriously about full-risk arrangements. We're pushing hard, and finally they're being able to step up."
Meanwhile, Medicaid's adoption of managed care should increase HMOs' influence. An estimated 80,000 Medicaid beneficiaries are expected to enroll in four area managed-care plans starting Nov. 1. One plan is organized by 265-bed Children's National Medical Center, 383-bed Greater Southeast Community Hospital, Howard, 333-bed Providence Hospital and Medlantic's Washington Hospital Center.
Looking ahead, consultant Hansen sees three systems evolving in the district: a Georgetown-centered network; Medlantic and its Washington hospital; and a combination of Howard and Greater Southeast Healthcare System, which is based near the district's Maryland border. The role of GWU/Universal, she says, still appears up in the air.
According to market watchers, much of this consolidation will take place in 1998 and 1999.
Says Lefkowitz: "Georgetown and (Washington) Hospital have gotten used to being the only players in the market. Things are going to change."