Governance of Teaching Hospitals: Turmoil at Penn and Hopkins

3. Kelley the Builder

c h a p t e r t h r e e Kelley the Builder The Philadelphia Medical Market ‘‘One of the most di≈cult markets in America’’∞ was the description often given to the Philadelphia medical scene by the mid-1990s, a time producing severe problems that William Kelley would face as his tenure at the University of Pennsylvania progressed.≤ Throughout the decade, enrollment in HMOs and preferred-provider organizations grew, payments from indemnity insurance decreased, and, although the use of hospital beds declined, Philadelphia’s less successful hospitals persisted in staying open, producing a surfeit of unoccupied beds.≥ Almost unique to such a large area with as many people as in the Delaware Valley, only two carriers, U.S. Healthcare∂ and Independence Blue Cross, provided the health insurance for 80 to 90 percent of the private market as well as the majority of Medicare and Medicaid recipients enrolled in managed care.∞,∑,∏ Why Philadelphia has so few health insurers intrigues medical economists . ‘‘U.S. Healthcare started here, so its dominance is idiosyncratic,’’ according to Mark Pauly of Penn’s Wharton School. ‘‘The Blues have long had preferred positions in the East and Midwest, thanks to their political positions and special enabling legislation.’’∑ Kelley the Builder 29 Increasingly, one insurer was leading the Philadelphia market. Independence Blue Cross, claims Fred DiBona, its chief executive, held 72 percent of the privately insured market* in the region as the new century began, a position that he sees as a mixed blessing.∫ As DiBona explains, ‘‘The biggest chip we have is not bargaining [with a hospital], but the second we won’t contract, we put them in a di≈cult position, and we can’t deal with that politically.’’∫ Blue Cross is then put under great pressure from the state legislature and public interest groups. ‘‘The bigger you get,’’ says DiBona, ‘‘the larger the responsibility .’’∫ To some extent, Blue Cross remembers with pleasure, when U.S. Healthcare was larger. ‘‘Then,’’ say the Blue Cross executives, ‘‘everybody hated them. Now we bear 100 percent of the heat.’’π-Ω† Health care costs more in the Philadelphia region than in many other parts of the country. Blue Cross executives attribute this to inordinately high utilization of medical services and ‘‘the heavy presence of medical school/teaching institutions.’’∫,Ω They suggest that one reason for this finding is the relatively slow invasion of managed care into the Delaware Valley, which has delayed hospital executives’ instituting the administrative and financial discipline required by this method of payment. CEOs from elsewhere taking jobs in Philadelphia hospitals ‘‘have been astonished by the ine≈ciencies and poor management ,’’ according to senior o≈cers of the insurer.π-Ω Also contributing to the high utilization, medical practices, to a degree unusual in many cities, continued to operate in a fragmentedπ,Ω,∞∞ manner since Philadelphia has fewer multispecialty groups, which tend to operate more economically than smaller practices.Ω These explanations do little to calm hospital executives in the region , most of whose charges were losing money caring for Blue Cross patients as the twenty-first century began.∞≠ As befits the city with the nation’s first hospital and first medical school, Philadelphia has become a center of political medicine and medical training. Several professional medical organizations have headquarters in Philadelphia. *Because of the large amount of traditional Medicare business in the Philadelphia region, however , Independence Blue Cross provides only 30 percent of all hospital revenue.π †Aetna Life and Casualty (now Aetna Inc.) bought U.S. Healthcare, a Philadelphia-based HMO, in 1995 for $9 billion, later said to be three times its value.∂ Retaining 30 percent of premiums for administrative expenses, marketing, salaries, and profits, U.S. Healthcare in the mid-1990s had one of the industry’s lowest medical loss ratios (the amount the insurer spent for health care as a fraction of its income from premiums). During the last half of the 1990s, Blue Cross absorbed much of U.S. Healthcare’s penetration in the Philadelphia region’s market due, in part, to Aetna’s loss of its ‘‘locally based experts,’’ according to consultant Gerald Katz.∞≠ 30 University of Pennsylvania About one-fourth of the country’s doctors have worked in the city at some time during their careers, as medical students, trainees, practitioners, or faculty members.∞,∞≤ Only two other states provide more graduate medical education than Pennsylvania.∞ As the 1990s began, Philadelphia was home to six medical schools* and their teaching...