Competition hurts. Tired of beating one another up, some healthcare leaders in Rochester, N.Y., are trying to bring collaboration back from the dead.
The current climate of cutthroat competition comes a decade after healthcare leaders pulled the plug on a precedent-setting payment experiment that established the market's reputation as a leader in low-cost, high-quality healthcare. Slowly, competition has crept in.
A sharp rise in healthcare costs is threatening to erase that reputation and has prompted new interest in reincarnating the city's traditional cooperative approach to healthcare.
Providers, payers and employers deplore the recent insurance premium increases, which they say have eroded Rochester's 33% price advantage over the national average in 1993 to a mere 6% last year as measured by average health insurance costs per employee.
Last week, in an attempt to head off this alarming trend, top executives of Rochester's hospitals, insurance companies and large businesses, as well as physician, labor and consumer representatives, met to discuss opportunities for working together to put the upstate New York city of 1 million residents back on the map as a Mecca of low-cost healthcare.
"In a community the size of Rochester, competition in the delivery system will not generate a material cost reduction," said David Klein, M.D., president and chief operating officer of Blue Cross and Blue Shield of the Rochester Area and a chief advocate of a collaborative approach.
The Rochester Blues helped drive some of the community's earlier cooperative attempts.
"In the long run it (competition) will lead us to lose the historical advantage we have had," he said.
Closed-door consensus-building. Last week's meeting, the first in a series called the Health Forum, is the most significant move toward local cooperation in years, according to participants and the forum's sponsor, the Rochester Health Commission. The commission is a group of employers, consumers and others that disseminates benchmarking information to employers and pushes for innovative solutions to the problems of healthcare cost and quality.
The Health Forum will consist of several closed-door meetings, culminating in what organizers hope will be a communitywide consensus on how to improve Rochester's healthcare system.
While all major players have agreed to participate in the meetings, Charles Phelps, provost of the University of Rochester, likened the attempt to revisit the city's collaborative past to "putting toothpaste back in the tube."
"Cooperation is dead," he said. "It's really dangerous to even talk about this stuff (given antitrust concerns). I feel we're on the road to a competitive system."
Phelps' is hardly an objective voice. The University of Rochester owns two-hospital Strong Health, the city's only profitable healthcare system and arguably the city's biggest winner in the post-collaborative Rochester market.
Even as the Health Forum was launched, many of its members continued a rancorous debate over the fundamental question of whether Rochester's future lies in collaboration or competition.
A move to competition is in strong contrast to Rochester's healthcare past.
Beginning in 1960-when Marion Folsom, an executive at what was then Kodak, created a community planning council credited with slowing growth in hospital capital expenditures-Rochester relied on collaboration to rein in costs.
In 1980 Rochester's hospitals took the lead on collaboration, embarking on a global budgeting experiment with HCFA, the state of New York and Blue Cross and Blue Shield of the Rochester Area. Hospitals in Rochester and surrounding towns agreed to an overall price cap, based on costs in the 1978 base year and adjusted for inflation. Hospitals could keep the difference if they operated under budget. Known as the Hospital Experimental Payment system, the decade-long collaborative effort also included group decisions on capital spending.
A 1993 report issued by the General Accounting Office attributed Rochester's low health costs and superior quality to its community approach in general and the HEP system in particular.
It was so efficient that the Rochester model was considered as a model for national healthcare reform.
Under HEP, "the hospitals all felt secure that there would be ups and downs but all felt that they could survive in the long run," said Jack Zwanziger, an associate professor at the University of Rochester's department of community and preventive medicine.
DRGs kill HEP. But by 1987 hospitals began dropping out of HEP to take advantage of better rates under Medicare's DRG system. HEP officially ended in 1990, but for a time, the Rochester climate remained congenial rather than competitive. Since 1980 the state of New York had set the rates that insurers paid hospitals, effectively eliminating any need for hospitals to compete with one another.
Then, in 1997 statewide rate-setting was repealed. In response, hospitals merged, consolidated or closed at record rates throughout the state. Rochester was no exception.
In 1997, Park Ridge Hospital and St. Mary's Hospital merged to form Unity, a Roman Catholic system. Later that year, Highland Hospital of Rochester merged with Strong Memorial Hospital of the University of Rochester to form Strong Health.
In August of this year, a historically loose relationship between Genesee Hospital and Rochester General Hospital was formalized with an announced merger. The hospitals operate under the ViaHealth umbrella, which includes two other acute-care hospitals 25 miles away.
"I think that the collegial atmosphere between hospital administrators has largely dissipated," Zwanziger said. "Part of that is just the fact that times are tougher."
Tightened Medicare reimbursement and rising pharmaceutical costs have contributed to double-digit insurance premium increases, Zwanziger said.
Only one of the three systems is making money: Strong Health, which has a total of 838 beds, earned $10.8 million on $738.6 million in revenues in 1998. Unity, with 312 beds, lost $23.9 million on $242 million in revenues; ViaHealth, which has a total of 801 beds, lost $21 million on $545.8 million in revenues.
Competition for patients among the three hospital systems has eroded most signs of collaboration, but it has not resulted in lower prices.
"We (providers) are not competing on costs. There's competition in Rochester but not price competition," said Fritz Liebert, acting chief executive officer of ViaHealth. Instead, the competition centers on filling beds and offering new technologies or specialized services, he said.
Collaboration is not dead, he contended, pointing to a HCFA-funded five-year demonstration project for senior care, to be run by a partnership of the Blues, Unity and ViaHealth. But collaboration alone is not enough.
"I don't know that we're going to see true price competition among providers in this community, but I think that if you don't have some degree of competition you get sloppy," Liebert said.
Many in the business community favor some degree of collaboration as well. Mike Morley, senior vice president and director of human resources at Eastman Kodak Corp., the city's largest employer, said that in recent years he has seen a dramatic change "from a collaborative model to more of a competitive model. Some of that was at the urging of companies like Kodak saying that we really had to have lower cost and better quality."
But many employers are convinced that competition has failed to control costs, he added.
Sandra Parker, president of the Industrial Management Council, which represents local businesses, is another collaboration advocate.
"I think one of the key components (in collaboration) is that the business community has to take a primary role. Just as in any other service we purchase, we like to have some say in cost, quality and method of delivery," she said.
One goal, Parker said, would be to reduce duplication of services through the creation of centers of excellence, which would give some hospitals monopolies on certain high-cost treatments and procedures. During the HEP years, which ended in 1990, the city's healthcare system regulated growth, but since the mid-1990s the hospitals have engaged in what some see as a medical technology arms race.
Squeezing out excesses. Timothy McCormick, CEO of Unity, said he's tired of it. "I don't think this competition has gotten the community what it wanted: better quality, better access, lower costs," he said.
McCormick attributed much of the rising prices to excess capacity. An independent study by the Columbia, Md.-based Center for Health Policy Studies recommended that the community close one or two hospitals to save on costs. The study was commissioned last year by the local Industrial Management Council and the Rochester Health Commission.
McCormick said Unity has addressed excess capacity by reducing its bed count by 42% since the 1997 merger and consolidating acute-care services at Park Ridge. Unity is the smallest of the three systems in beds and revenues, and it is struggling the most financially. The cuts should bring Unity into the black next year and allow it to compete more successfully with the other systems, McCormick said, but collaboration would produce better results for the community.
"Longer range, cooperation is really the only way, the preferred way, we can deal with these three issues (quality, access, cost)," he said.
The University of Rochester's Phelps, who is also a health economist, disagreed.
"If you believe in competition, excess capacity is your friend," Phelps said. "You need excess capacity to produce competition."
Others point to factors beyond bed counts. The Rochester Blues is the area's largest insurer, with close to an 80% market share. Some say its dominance is one reason for high prices. But President and COO Klein said competition with Preferred Care, the region's second-largest insurer, has not led to lower prices because consumers refuse to trade completely open access for cost savings.
Heavy managed-care penetration, at an estimated 70%, has not helped to bring costs down either.
Hospitals can hold out for good rates, Klein said, because they know most enrollees demand access to all three systems. In early October one system still had not reached terms on a 1999 contract with the Blues.
Klein said the Health Forum is a step in the right direction.
"If we had a return to the way it was, I feel confident that we could return to lower costs," he said.
John Urban, president and CEO of competitor Preferred Care, couldn't disagree more.
"Competition in the provider community is literally brand-new. Those systems have spent the last three years getting ready for the competition by doing the consolidation. The first open signs of competition were really only two years ago, and those were pretty tentative," Urban said.
Competition simply hasn't had a chance to prove itself, he said.
Still, Urban agreed that collaboration could have its uses: "It's pretty clear there is lots of room for cooperation on quality initiatives."
On the other end of the spectrum is Peter Robinson, COO of Strong Memorial, who said the time for collaboration has come and gone. "Most of the studies that have been done suggest that there is some excess capacity," he said.
"Our view is that it is very difficult to establish some kind of community planning forum and actually reduce capacity," he said.
"Everyone's focusing on the competition vs. collaboration debate, but the real issue is what's going to motivate the marketplace, and we think that's information," said Albert Charbonneau, who heads the Rochester Health Commission.
"Bringing information to the community and teaching the demand side-businesses and communities-how to use it forces competition on meaningful items, i.e., value," he said.
But he also said there is room for collaboration. "We need a blended approach," he said.
Not everyone in Rochester would agree. But over the next several months, they will be talking about it.