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The Changing Hospital Sector in Washington, D.C.: Implications for the Poor

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The Changing Hospital Sector in Washington, D.C.: Implications for the Poor THE CHANGING HOSPITAL SECTOR IN Implications for the Poor BARBARA A. ORMOND AND RANDALL R. BOVBJERG The Changing Hospital Sector in Washington, D.C.: Implications for the Poor Barbara A. Ormond Randall R. Bovbjerg THE URBAN INSTITUTE Copyright ©1998. The Urban Institute. All rights reserved. Except for short quotes, no part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without written permission from the Urban Institute Press. Acknowledgments Support for this paper was provided by the Robert Wood Johnson Foundation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. The authors gratefully acknowledge Peggy Sulvetta and John Holahan, who initiated the project and supported it in all phases. We would also like to thank Judith Feder, Joan Lewis, and Virginia Fleming for their helpful guidance and useful comments; Susan Wallin for her timely contributions to the research; Chris Hayes, Brian Bruen, and Suresh Rangarajan for assistance in mapping; Niall Brennan for data analysis; and Matthew Schirmer for research assistance. The research could not have been accomplished without the cooperation of Washington hospital officials, community providers, and health care observers too numerous to mention, and we greatly appreciate their having taken the time to meet with us. Contents Executive Summary . .1 Introduction . .5 Context . .7 Socioeconomic and Demographic Characteristics . .7 Health Status . .7 Health Insurance and Supply of Providers . .9 The Hospitals . .10 Hospital-Specific Utilization . .12 Payer Mix . .12 The Hospital Market . .18 The Market for Insurance . .18 The Maryland and Virginia Hospital Markets . .19 The D.C. Hospital Market . .20 Suburban and Regional Competition . .21 Pressure for Change . .22 Pressure from Private Insurers . .23 Pressure from Public Payers . .24 Hospital-Specific Pressures . .25 Strategies . .26 Cost Reduction . .28 Patient Volume . .32 The Future . .37 Community Hospitals . .37 Tertiary Care Hospitals—District Options . .38 Tertiary Care Hospitals—Regional Options . .40 Tertiary Care Hospitals—Regional Service Competition . .42 Summary . .43 Discussion . .44 About the Authors . .51 Tables 1: Health and Demographic Data . .8 2: D.C. Health Care Resources . .9 3: D.C. Hospitals: Acute Care, Short-Term, Nonmilitary . .11 4: Hospital Utilization . .13 5: Hospital Financial Data . .14 6: Market Share . .16 The Changing Hospital Sector in Washington, D.C.: Implications for the Poor Executive Summary he Washington, D.C., hospital sector has an excess of hospital beds and a concentration of services at the high end. Four community hospitals; three academic medical centers; a large, nonacademic tertiary care hospital; five spe- cialty hospitals; and a public general hospital all compete to serve a city with a population of only 500,000. In addition, there are two military facilities. Forty percent of patients in this market are drawn from the adjacent Maryland Tand Virginia suburbs. The market is poised for change, driven by insurance market trends. The insurance market in the District is bimodal. At one end, coverage is generous, strongly influenced by the federal employees’ plan, which offers both fee-for-service and managed care and has historically subsidized the high end of the market. To compete for professional workers, private firms attempt to match the federal plan. At the other end, nearly one-fifth of the city’s pop- ulation is on Medicaid and another fifth is uninsured. Hospital overcapacity has given insurance plans the advantage in rate negotiations, and the consol- idation among the plans that has begun in the past year threatens to further increase the bargaining power of the plans. In the public sector, the D.C. employees’ plan has recently moved to managed care for new hires, and mandatory enrollment of Medicaid recipients in managed care has just begun. Hospital payer mix is determined in large measure by geographic location. While Medicare patients are fairly evenly distributed across the city, Medicaid patients are concentrated in certain geographic areas. Uncompensated care is 2 THE CHANGING HOSPITAL SECTOR IN WASHINGTON, D.C. also concentrated, largely by geography, but hospital mission is also a determinant. The city’s public hospital provides the bulk of the uncompensated care, but there are other important providers as well. Total uncompensated care provision in the city declined dur- ing the 1990s, and its distribution became even more uneven, with the city’s public hospital picking up more of the burden. Unlike many other cities, Washington has only one academic medical cen- ter that is a major provider of uncompensated care. Even unbur- dened by uncompensated care, the academic medical centers are financially insecure, suggesting that uncompensated care is not a driving force behind their poor financial performance. The community hospitals are widely distributed geographically. They are niche players, serving their neighborhoods and other cho- Washington has only one sen target populations, and are generally more stable financially than academic medical center the academic medical centers. Two important factors influence their that is a major provider financial health. First, they have greater flexibility than the larger of uncompensated care. facilities to identify and institute cost-reduction measures. The insti- tutions that have combined this flexibility with foresight are much Even unburdened by closer to achieving the level of efficiency demanded in the current uncompensated care, highly competitive market. Second, community hospital missions the academic medical do not require them to maintain as broad a range of services as spe- centers are financially cialization in tertiary care. The community hospitals have, therefore, insecure, suggesting that been able to concentrate on excelling in a narrower range of services. uncompensated care is not a driving force With increasing pressure from payers, rising competition from behind their poor both District and suburban hospitals, and changes in public policy financial performance. regarding Medicaid and Medicare, many District hospitals are strug- gling financially. They also face a growing for-profit presence, from a small community hospital that converted in 1992 and, since last year, from a major medical center. These changes affect different hospitals in different ways, depending on their patient base and payer mix. Hospital survival strategies are, nonetheless, fairly con- sistent across institutions and typically old-fashioned, concentrating on cutting costs and filling beds. Vertical integration of services is also being tried as a way to position the hospital as a unit of a con- tinuum of care rather than as the central provider. Hospital mergers might seem a logical strategy as well, but to date hospitals within the city have shown little propensity to affiliate with one another. More frequently, D.C. hospitals look to hospitals in the adjacent states, particularly Maryland, for partners, reflecting the fact that the mar- ket for tertiary care services is becoming increasingly regional. The Executive Summary 3 tertiary care centers are especially eager to expand their patient bases through affiliation with physician practices and hospitals in the Baltimore-Washington corridor, where the population is relatively affluent and population growth is relatively rapid. While some effi- ciencies might be expected from these affiliations, the dominant motivation appears to be to increase bargaining leverage with health plans and decrease competition for patients among the affiliated partners. Most observers believe that the hospital sector will look very different in the not-too-distant future, but there is little consensus on what it will look like. It has long been expected that at least one hospital will close, and many hospital managers seem to expect the closure to relieve market pressure and reduce the bargaining power of insurers. From a policy perspective, what is important as the sec- tor restructures is that the surviving hospitals offer an appropriate mix of services at locations that are geographically accessible to all, It is the need to ensure including the publicly insured and the uninsured, and at a price accessibility and afford- that reflects a balance of efficiency, quality, and access. It is the need ability that justifies public to ensure accessibility and affordability that justifies public policy intervention in the hospital market. policy intervention in the hospital market. The imminence of change argues strongly for intervention soon. The city needs to quickly end the near vacuum of policy brought about by its recent financial troubles and the leadership ambiguities created when Congress imposed Control Board authority over most city services. As the city regains financial sta- bility and a measure of local control over its services, it will need to make key decisions about health care, especially about hospitals that provide a large measure of the available indigent care. Market forces are currently being allowed to shape the hospital sector with little local public intervention. The interplay of market forces should lead to a more efficient provision of services, a favorable outcome for those whose insurance makes them participants in the market. However, for a large number of poor
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