EconSouth (Third Quarter 2000)
Big Business — Big Transformation
Health Care Trends in the Southeast
The 1980s and 1990s were periods of rapid change in health care. Most of these changes revolved around cost issues. As premiums for health care insurance plans rose, businesses sought alternatives to traditional employee health insurance. Individual hospitals responded to the new managed care environment by forming alliances, selling to other companies and working to attract a niche patient clientele. In addition, advances in technology altered many medical procedures, challenging hospitals to provide more services using new treatment methods.
ealth care is big business — and it keeps getting bigger. In 1970, national health expenditures totaled $73.2 billion. According to the Census Bureau, that figure rose to $699 billion in 1990 and over $1 trillion in 1997. Nationally, more than 9 million people are employed in health service work, over 1.2 million of those in the Southeast (this total includes only businesses that directly provide health care services to consumers).
During this period, technological advances and changes in the way health care is delivered and paid for have transformed the industry both nationally and in the Southeast. Today, procedures like cataract surgery, which used to mandate weeklong stays in the hospital, are now performed on an outpatient basis. Drugs like Taxol, to fight cancer; Pravachol, to help reduce the risk of first heart attacks; Depo-Provera, for birth control; Zithromax, for treatment of bacterial ear infections; and Avandia, to reduce insulin resistance, that were not available 20 years ago are now widely used. Consumers also can search for information about diseases and find a doctor on the Internet.
Hospitals are attracting new patients by focusing on specific segments of the market and seeking bargaining power through cooperative partnerships while some have been acquired by hospital management companies. Also, the growth of managed care companies has slowed the rapidly rising costs of health care and altered the way consumers access care.
Managing growth and care
In 1997 (the most recent year for which figures are available), the average consumer spent $1,841 in total health care expenditures — health insurance premiums, medical services and prescriptions — a figure that is up from an average of $730 per year in 1980 (see table 1). As health care costs climbed, employers and consumers began to seek some relief from increasing premiums and out-of-pocket expenses. The relief came in the form of managed care.
While the term HMO, or health maintenance organization, is now a part of the national vernacular, in the late 1970s few people knew what the term meant. In 1980, HMO enrollment in the United States stood at 4 percent of the population. This figure grew to 13.5 percent in 1990 and 28.6 percent in 1998. In the Southeast, outside of Florida, however, enrollment in HMOs did not grow as rapidly as in the rest of the country (see table 2).
Interestingly, as the number of HMO enrollees began to grow in the Southeast, the number of companies licensed to offer HMO insurance grew very slowly. From 1989 to 1994, the number of HMOs licensed to do business in Alabama, Georgia, Louisiana and Mississippi grew by only one corporate applicant per state while Tennessee and Florida had only two and four applicants, respectively. In contrast, during the same period, the number of preferred provider organizations (PPOs), which are provider networks that allow consumers to use doctors outside of the network for a higher fee, more than doubled (see table 3).
Some newspaper articles detail the reluctance of some doctors and hospitals to do business with HMOs. But other sources indicate that the number of HMOs grew slowly in the Southeast because inexperienced companies that began to offer HMO coverage often found the HMO market to be unprofitable.
William Flaherty, chairman of the board of Blue Cross and Blue Shield of Florida, recalls this trend in Florida. “During the 1980s, there were a large number of new entrants offering HMO coverage. By the late 1980s, there had been such a string of losses by these companies that most evaporated. A new round of competition with the major traditional health insurers who had sponsored HMO development took place in the late 1980s and early 1990s. We are now consolidated down to a market where the bulk of the HMO business is with four of these insurers.”
During the mid-1990s, many HMO companies continued to struggle for profitability. In Georgia, only one HMO in 1996 earned more than it had the previous year. Nationally, HMOs throughout the region, most in Florida, Alabama and Louisiana, lost money in 1998 and 1999. While some of the losses can be attributed to changes in Medicare business, including changes in the Balanced Budget Act of 1997, some reports argue that the losses are the result of HMOs offering low rates in an effort to gain members while doctors and hospitals have been negotiating higher reimbursement rates and more patient control.
In an effort to stem losses and increase profits, some HMOs began raising their prices. In 1998, Georgia HMOs raised prices between 5 and 8 percent. This trend was not limited to Georgia, however, as HMOs in Florida and throughout much of the United States also raised their premiums.
Despite rising premiums, some HMOs are still struggling. In 1999 alone, eight HMOs went out of business in Florida. Florida HMOs experienced combined losses of $67 million in 1997 and $183 million in 1999 and have gone from enrollment gains to enrollment losses between 1998 and 2000, according to the Florida Hospital Association HMO Indicators Report.
Ironically, as businesses began using HMOs to help contain health care costs and the number of people enrolled in HMOs continued to grow, the percentage of uninsured people in the United States rose from 13 percent in 1987 to 16 percent in 1998. In the Southeast, the percentage of uninsured people rose during the same period from 16 percent to 17 percent. James Dalton, president and chief executive officer of Quorum Health Group Inc. of Nashville, Tenn., a hospital management company, notes, “We still have 40 million people who do not have adequate health insurance protection. As a result, all of the other people who pay for health services are subsidizing those 40 million people.” The rise in the number of uninsured people and the way many of the uninsured seek care — emergency rooms as opposed to doctors’ offices — is one factor contributing to rising health care costs.
A study by the National Coalition on Health Care found that the cost of health insurance premiums for employers in 1990 had increased from the previous year by 17.1 percent. This annual rate of change had fallen to only 0.2 percent in 1997, but the rate of price increases has been rising since that time (see the chart). More recent anecdotal evidence suggests that health care insurance costs are on the rise again. According to the Aug. 9, 2000, Beige Book, a Federal Reserve publication that examines economic conditions throughout the United States, the Southeast noticed price increases in the health care industry, particularly for insurance premiums, which continued to escalate at double-digit rates.
The rising costs of health care and pharmaceuticals, the difficulty some managed care companies are having in making a profit without raising enrollment costs, and the Balanced Budget Act are putting pressure on managed care companies.
As these companies have tried to reduce operating costs and lower fees paid to doctors and hospitals, hospitals have responded by consolidating operations and joining ranks to increase their bargaining power.
New trends change hospital operations
The advent of managed care meant that health care providers, including hospitals, would have to change the way they did business. Hospitals began forming alliances and marketing to a niche clientele in an effort to maintain customers.
From 1993 to 1998, the number of hospitals joining forces in alliances and mergers and the number of acquisitions of hospitals by hospital management companies climbed sharply. By forming these relationships, hospitals have sought additional leverage when negotiating contracts with managed care companies. These relationships can also offer additional benefits to the hospitals. For instance, hospitals that are aligned with or owned by a hospital management company or are part of an independent hospital alliance have negotiating power with pharmaceutical and equipment vendors and can attract additional referrals to their services.
Many hospitals in these arrangements also share medical and research information as well as specialized equipment and centralized processes for some administrative tasks. Columbia/HCA, a hospital management company based in Nashville, recently began funneling all business operations — billing, collections, patient registration tracking, cashiering and payroll — for five of the company’s hospitals in the Nashville area to a central service center. HCA has also created a regional center for accounting services in Atlanta that provides billing and collection services for HCA hospitals in Georgia, South Carolina and North Carolina.
Another way that hospitals are seeking to increase their customer base is by marketing their services to fill a particular health care need or reach a specific patient demographic. For instance, many hospitals, like Northside Hospital in Atlanta or Woman’s Hospital in Baton Rouge, La., have sought to capture a large share of the adult female market by specializing in women’s health issues.
Over the past five to 10 years, Woman’s Hospital has promoted some old services in new ways while adding new services to better reach potential consumers. According to Teri Fontenot, president and chief executive officer of Woman’s Hospital, the company’s mammography outreach centers that were added in strip shopping centers have led to an increase in mammograms from 25,000 in 1993 to an expected 50,000 in 2000. Woman’s Hospital also recently developed a comprehensive reproductive endocrinology service in response to requests from patients.
Amidst this landscape, some smaller, community hospitals are struggling to continue to provide services. Even in heavily populated metropolitan markets like Atlanta, some smaller hospitals that are not a part of a hospital management company or a member of an alliance are having difficulty maintaining market share because managed care companies sometimes draft exclusive contracts with larger providers.
Hospitals in rural markets are also experiencing problems. Throughout the Southeast and the nation as a whole, the number of community hospitals in rural areas continues to decline. From 1990 to 1997 the number of community hospitals in the Southeast fell from 884 to 823. While some of these hospitals were able to provide only limited services, the loss of these facilities forces rural consumers to travel greater distances to receive care.
Technology spurs changes
In addition to the change of working with managed care companies and striving to attract customers, another factor bearing on hospitals has been the drive to provide increased service coverage and to offer access to the latest advancements in medication and techniques. According to Dalton, trying to apply technology in a cost-effective manner is a challenge in the current health care environment.
The drive to offer advances like cryosurgery, laparoscopic surgery, laser vision correction surgery and telemedicine has led to breakthroughs that were almost unheard of 20 years ago.
Advances in pharmacology have changed the health care system as well. New drugs that were not available 20 years ago have now become commonplace and are helping provide healthier lifestyles for patients. The push to create drugs that will provide better treatments for common conditions as well as the search for cures to virulent diseases has led to more research — and higher drug prices to pay for the research.
Even as recently as 1990, the idea that doctors could instantly share information and visuals about patients to help diagnose illnesses seemed like a scene from an H.G. Wells novel, but this process is now commonplace thanks to the Internet and interactive videos. In fact, telemedicine, the blending of the Internet and interactive video to provide patient access to doctors in other locations, is not confined to the region’s largest cities; doctors at rural hospitals also commonly use the process. The Shepherd Center, a specialty hospital in Atlanta for people with spinal cord injuries and related disorders, has even moved the technology from the hospital to the patient’s home so that individuals recovering from injuries can have access to doctors in the event that complications arise.
Some companies are even using the Internet to handle their business operations. Kids First Pediatric Alliance, a Georgia group that represents 150 pediatricians, is working to transfer its business operations to the Internet. Kids First’s goal is to provide a way for its members to use a Windows-based program to handle business functions.
One of the biggest changes in the health care environment that has had a far-reaching impact on everyday cost efficiencies is the growth of computer systems for handling patient records, billing and other administrative functions. Companies throughout the region develop and distribute software for various aspects of the health care process, including scheduling, patient information and billing. These programs and innovations are beginning to reduce administrative expenses, according to Flaherty. He adds that there is potential for enormous changes, including increased productivity and lowered unit costs for the industry.
The past 20 years have been marked by technological advances that have revolutionized health care. As Flaherty notes, “The demand for medical services will continue to increase as the public learns of new advances.” This correlation has led to the growth of companies seeking to develop new applications and respond to needs in patient care. Many of these companies are based in or have significant operations in the Southeast.
Managed care companies operate throughout the Southeast, although most have their corporate headquarters in other states. Several health care industry centers have developed in the Southeast, though, and are contributing to the local economy. Health care employment in Georgia more than doubled from 1985 to 1999, and health care employment in Florida, Louisiana and Mississippi also grew substantially (see table 4).
Miami, Sarasota, Tampa and Orlando are large centers of health care activity in Florida. In Tampa alone during 1999, 25 medical technology firms employed over 8,500 people. These firms produced a variety of health-related products, including lenses for eyeglasses, surgical instruments, medical equipment, laboratory testing equipment, pharmaceuticals and other medical devices. Orlando is the corporate headquarters of several hospital management companies, health care software companies and businesses that provide laser solutions for medical applications. These companies employ over 10,000 people in that area.
In Alabama, Birmingham is the center of health care activity. The city is home to a company specializing in manufacturing drug-delivery systems, companies that produce medical products and tools, and companies that provide technology and services to assist health care operations, including billing processes. In addition, some companies that work with the defense industry in Huntsville are now working to provide services to the health care industry in Birmingham.
Nashville is also a large health care center in the Southeast. According to the Nashville Health Care Council, an organization whose goal is to establish Nashville as the nation’s health care industry capital, Nashville is home to 17 acute care hospital and hospital management companies, nine billing service companies, 13 biotechnology companies, seven clinical testing and laboratory companies, 32 information systems and health care technology companies, 10 pharmaceutical companies, and 12 medical product and device companies. In 1995, these businesses employed more than 53,000 people representing 8 percent of the area’s workforce.
These and other areas of the Southeast function as hubs of health care activity, including technology and research centers, large hospitals, hospital management companies, and pharmaceutical and medical supply companies. All told, these businesses are helping fuel the Southeastern economy and are changing the way consumers throughout the region and the nation receive health care.
Industry in flux
The health care provider issues of the past 20 years — pressures to contain costs while striving to provide services and the latest advances to patients in a streamlined and efficient environment — remain concerns for the health care industry. According to a survey of small and mid-sized businesses conducted by National Small Business United and Arthur Andersen, the number of companies offering health insurance benefits to their employees decreased from 63 percent in 1998 to 51 percent in 1999; 49 percent of the respondents — compared with 37 percent in 1998 — indicated that health care reform is an issue that requires government attention.
The dramatic changes in the health care industry over the past two decades offer a preview of what’s on the horizon for health care providers, insurers, employers and patients. For the future, it appears that the health care industry should prepare to cope with dynamic change, rising costs, continued growth, and additional medical advances and technological adaptations.
Throughout this article, Southeast refers to the six states that, in whole or in part, make up the Sixth Federal Reserve District — Alabama, Florida, Georgia, Louisiana, Mississippi and Tennessee.