Fragmented Health Care Market Shows Signs of Coalescing

Illustrating the fragmented nature of the Los Angeles health care market, scores of hospitals and numerous physician practices are scattered across a vast and congested area that is home to 10 million people.  With the exception of Kaiser Permanente, hospital systems and physicians organizations tend to operate in isolated silos without an extensive footprint across the country. Emerging market trends and expected changes under national health reform are prompting many providers to pursue new strategies to insure their viability.

 Key developments since the last study was conducted in 2008 include: • Intense competition for physician. Physician organizations, hospitals, and others are seeking new, tighter affiliations with physicians to gain patients, compete with Kaiser Permanente, and prepare for health reform. The two largest physician organizations, HealthCare Partners and Heritage Provider Network, are growing both their medical groups and independent practice associations (IPAs). In November 2012, national dialysis provider DaVita purchased HealthCare Partners, which also operates in other states.

 • Growing interest in affiliations among hospitals. Although the market is generally considered to have excess inpatient beds, some hospitals face capacity constraints. Hospitals are starting to consider affiliating or even merging with each other, in part to help adjust capacity, expand referral bases, organize service-line strategies, and improve care coordination. The more prestigious and financially healthier hospital (including UCLA) has been at the forefront of these activities.

 • Fresh leadership for country’s safety net.  New health department leadership is redesigning the extensive county-operated delivery system, which includes hospitals, outpatient centers, and primary care clinics, collaborating with private hospitals and community centers. These changes are intended to help both public and private safety-net providers remain financially viable, use existing capacity efficiently to serve more patients and improve patient care, especially as the country prepares to enroll many uninsured residents into to Medi-Cal under reform

Market Background Los Angeles County’s diverse economy helped insulate the community from significant job losses and declining rates of private health insurance that affected many other California communities during the economic recession. With approximately 10 million residents, Los Angeles County is the most populous county in the United States and home to more than a quarter of California’s residents. After rapid growth between 2000 and 2005, the county’s population has stabilized in recent years. Still, the greater LA Region is the most densely populated urban area in the country, and significant traffic congestion leads many to seek medical care close to home, contributing to the fragmented nature of health care market.

Los Angeles is also known for its racial and ethnic diversity. Compared to California overall, the county has a lower percentage of White residents and higher proportions of Black, Latino, Armenian, and Asian residents. The county attracts many foreign-born residents and people with limited to no English language skills, creating serious challenges for providers to serve them effectively. Notably, the rest of California is catching up with LA in population diversity, as immigrant population grew faster in other parts of the state between 2007-2009.

The socioeconomic status of LA residents is somewhat lower than in the rest of the state.  In 2009, the percentage of LA residents Living in poverty was higher than the state average (22.7% vs. 17.8%), and the portion of uninsured residents (17.0%) and those with Medi-Cal or other public coverage for low-income people (24.6%) were higher than state averages of 14.5% and 21.4% respectively. The county’s unemployment rate has tracked the states, peaking at about 13% in July 2010 and declining to 11.8 in March 2012.

Socioeconomic status varies significantly across the county, however. The more affluent areas include San Fernando Valley, West LA, San Gabriel, and South Bay, while South LA and the Metro areas have the lowest incomes. West LA and South LA display some of the starkest differences in socioeconomic status. For example, in 2009, the percentage of uninsured residents in West LA was significantly lower than South LA (11.6% vs. 26.4%), and 8.1% of residents in West LA lacked a usual source of health care, compared to 22.3% of South LA residents.

Efforts to Align Physicians While hospital-physician alignment has been historically week in this region, hospitals and physician organizations are seeking more and closer relationships with physicians for a variety reasons.  As people lose private insurance, hospitals are redoubling efforts to shore up admissions and patient referrals. Hospital and physician organizations interviewed also view physician alignment as an important component of participating in ACOs and other new payment arrangements. Strengthening physician alignment is also a way for non-Kaiser providers to compete with Kaiser Permanent’s integrated delivery system, which includes Southern California Permanente Medical Group with almost 2,000 physicians.

Other than Kaiser, no private physician organization has a footprint over the entire Los Angeles market. Most physicians practice in small or midsized groups and participate in IPAs that negotiate health maintenance organization (HMO) contracts. Independent primary care physicians (PCPs) tend to belong to one or two IPAs; specialists tend to participate in multiple IPAs to gain to sufficient patient volume. Physicians — primarily PCPs — increasingly are moving to exclusive relationships with IPAs as physicians become comfortable with a given IPAs  payment rates, information technology, and volume of referrals. Los Angeles hospital also are pursuing physician by expanding medical foundations, affiliated physician organizations, and faculty practices and by aligning with IPAs.

The largest physician organizations in the market focusing on Medicare and commercially insured patients— HealthCare Partners and Heritage Providers Network—both primarily IPAs but also own medical groups and have a presence beyond Los Angeles. In LA, HealthCare Partners contracted with about 3,900 physicians through IPA employs 700 physicians in a medical group. Heritage has approximately 1,800 physicians in an IPA and employs another 700 physicians in medical group. Since 2008, both physician organizations have expanded their physician network significantly.

Fragmented and Overbedded Hospital Market Of the more than 80 hospitals in Los Angeles, many are standalone facilities, while some belong to one of 14 systems with two or more hospitals.

The largest hospital-affiliated physician organizations include the faculty practices of UCLA Medical Group (1,500) Physicians, Cedars-Sinai Medical Delivery Network with about 900 physicians aligned through a medical foundation, and USC Medical Group (500) Physicians).

Providence Health & Services (a large system with five hospitals) sponsors a foundation called Providence Medical Institute, which has grown appimately 200 physicians.  The health systems also operate a joint venture with 650 independent physicians called Providence Partners for Health, to promote clinical integration and data sharing.

These hospitals and systems have particularly strong reputations and resources, making them attractive to physicians. In addition, the hospitals strive to be physician friendly and take multiple approaches to alignment.  For example, Cedars0Sinai has half-dozen options for physicians under its foundation, including a medical group, an IPA, an exclusive contract with a hospital group, and three specialized physician organizations focused on particular conditions (heart transplants, hematology, and patients with workers’ compensation claims).

Large Role for Private Clinics, CHCs, and FQHCs In addition to its county facilities, Los Angeles has an extensive array of private, independent clinics and community health centers (CHCs) that serve low-income people. More than 200 sites—excluding school-based clinics—serve low-income patients across the county. More than half of these facilities qualified health center (FQHC) or look-alike status. Health centers collaborate under both countywide association— the 47 member Community Clinic Association of Los Angeles County—as well as through smaller regional clinic association within the county.

Preparing for Reform Anticipating health reform’s Medicaid expansion in 2014, Los Angeles is well along in implementing a Low Income Health Program (LIHP): a county option under the state’s Medi-Cal waiver to transition low-income uninsured people into Medi-Cal-like arrangements.

There is considerable onus on providers to screen patients for eligibility and to help enroll them, which has been time-consuming and challenging for providers.  Also, even with county funding to help private community health centers perform this role and expand capacity, market observers remained concerned about having sufficient capacity to care for additional people as health reform is implemented.

Issues to Track

• Will physician organizations continue to take the lead in aligning with physicians and participating in ACOs or will hospitals catch up? How will alignment activity affect providers’ leverage with payers and care delivery?

• Will there be more consolidation and/or tighter affiliations among hospitals, and if so, how will that affect hospital capacity and geographic reach?

• What impact wills new health department leadership and strategies have on the safety net? Will the reopening of Martin Luther King Jr. (MLK) Hospital relive safety-net providers in South LA and significantly improve access to care for residents in the that community.

• What will be the impact of Medi-Cal ACO’s on patient care and costs? To what degree will Medi-Cal ACOs reshape the delivery of care for low-income people?

• To what extent will LA County’s active transition of uninsured people into Low Income Health Program pave the way for significant numbers of un9nsured people to quickly gain coverage when Medi-Cal eligibility expands I 2014?  Will Providers be able to meet demand as more people become insured and seek care?

Authors: Laurie Felland, Ann O’Malley, Divya Samuel, and Lucy Stark of the Center for Studying Health System Change (HSC).

Source: California HealthCare Almanac is an online clearinghouse for key data and analysis examining the state’s health care system. For more information visit: www.chef.org/

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