More than four years ago, St. Agnes Hospital in Southwest Baltimore saw its patients being diverted into cheaper medical centers and began crafting a strategy to fight back. The hospital's strategy was bold -- it called for finding a way around the rules that had governed Maryland hospitals for two decades.
Its moves -- including buying an independent operating room that could offer reduced rates -- has put St. Agnes in the forefront among hospitals positioning themselves for Clinton-era managed care.
While some other Maryland hospitals lay off workers, St. Agnes is winning contracts from major insurers, as well as a steady stream of patients. And it's shaking up the state industry, where tight regulations have long protected hospitals from tough competition.
Now, with innovative health care companies draining traditional medical institutions of patients and signing up their doctors, dozens of Maryland hospitals are scrambling to follow St. Agnes' lead.
But St. Agnes President Robert E. Pezzoli already is angling for the next step: an alliance of health care companies that could deliver care to as many as 2 million people.
St. Agnes has taken the view: "If you can't beat 'em, join 'em."
The 407-bed hospital began changing in 1989 when its doctors noticed more and more patients, many from working-class families, joining health maintenance organizations organized by insurers and getting treatment elsewhere.
One competitor was a surgical center operated by a private company that charged cut-rate prices because it was not connected to a hospital.
"We realized we were not prepared for managed care," said Mr. Pezzoli, 45. As a hospital director in competitive arenas in Ohio and Indiana, he watched hospitals close because they hadn't anticipated the move to cheaper outpatient services or changes in hospital reimbursements.
Maryland hospitals cannot discount their charges for operations, X-rays and other services because the regulated rates are set high enough to cover the cost of the uninsured. To compete with cheaper, free-standing centers for large-scale managed care contracts, St. Agnes made two key moves:
First, it convinced the hospital's doctors to organize and bid for patients, promising cheaper care in a package deal to insurers that were organizing their own doctors and surgery centers. Staff doctors created a company to bid for patient care and agreed to take patients for a per-person fee -- a radical change that opens the doctors to financial risk even as they take responsibility for care of more patients.
"It's the Wild West of medicine right now," said J. D. Kleinke, a principal with HCIA Inc., a Baltimore health care information company.
Secondly, St. Agnes bought an unregulated competitor -- a set of operating rooms in neighboring Howard County, where it could legally discount surgery prices. St. Agnes is believed to be the only hospital that owns its own private, unregulated outpatient surgical center, although Sinai Hospital in Baltimore is part-owner of a free-standing center.
With its doctors willing to lower fees and the hospital offering outpatient surgery at prices 11 percent to 29 percent below market rates, St. Agnes is getting some patients other hospitals have lost as insurance companies scout for cheaper deals.
For the past eight months big insurance companies have courted the hospital, bidding for doctors and space at the new surgical center in Ellicott City.
The hospital and the doctors' group each closed five deals this month, including one with CFS Health Group Inc., the parent company for CareFirst and Free State health maintenance organizations.
The arrangement, in which St. Agnes doctors agree to care for 4,500 people for a pre-set fee, allows CFS to expand its membership. The primary care doctors refer patients to St. Agnes specialists, with whom the HMO has a separate agreement. The result: St. Agnes will get CFS inpatient business in specialties such as oncology.
CFS also gets a good deal at the Ellicott City outpatient facility, paying about half the cost of the hospital-based outpatient center at St. Agnes and its peers in the city.
"We try to use free-standing facilities because they are more cost-effective and user-friendly than the hospital bureaucracy," said Debbie Holloway, CFS vice president for professional services.
The insurer also was attracted by the ready-made physicians' group in a region it had targeted for growth. "We could have done it before, but it was harder, because you had to go to each doctor individually," she said.
What St. Agnes did wasn't easy. The toughest part was setting up the doctors' company -- it took 2 1/2 years.
"There was a lot of talking. We had to examine the risk and decide if we wanted to take it," said Carl Mech, a vascular surgeon and the president of St. Agnes Health Services Inc., the new 225-member hospital-based doctors' group. The group is jointly owned by the doctors and the hospital.
Essentially, the doctors are taking a chance that they can care for a certain number of people for a pre-set fee and still make a profit. "If we underbid the contract, we have to take the losses," Dr. Mech said.
Such arrangements mean that doctors must keep a close watch over expenses.
"We are very careful about repeating tests, for instance," Dr. Mech said, explaining that specialists check with primary care doctors to see what tests they have done. To cut costs, the doctors stopped using St. Agnes' physical therapists and signed a contract with an outside company that provides the service cheaper. They're also bypassing hospital lab work, magnetic resonance imaging and other services in favor of cheaper outside firms.
That carries a short-term risk, robbing St. Agnes of income as it develops its health care network. "We do expect some cannibalization," said John Koby, St. Agnes vice president of corporate development.
But by establishing links to cheaper services on its own or through its doctors, St. Agnes hopes to attract enough group business to regularly fill its acute-care beds.
The nonprofit hospital's financial position is strong -- revenues rose 6 percent last year to $148 million, and its margin over expenses rose 13.1 percent. Its confidence is also strong. St. Agnes is boosting space for acute-care and same-day patients. The $20.6 million project -- paid for in cash -- is scheduled to open in April.
Meanwhile, the Ellicott City surgical center has allowed St. Agnes to expand its service area. Already, the center accounts for one-fourth of all St. Agnes' outpatient services. The center can handle 3,800 patients annually and the hospital is prepared to double capacity if demand increases, as most believe it will.
The pressure on hospitals to bypass Maryland regulations and the emergence of unregulated, lower-cost medical providers raises questions about whether the regulatory system can survive wholesale mergers, consolidation and lower costs accompanying national health reforms.
To survive, hospitals must get their doctors to discount group rates and must ally themselves with lower-cost medical services that are not subject to price controls, says Arnold N. Scheinberg, director of the health care division at Walpert, Smullian & Blumenthal, P.A.
He predicted 90 percent to 100 percent of all doctors will be members of managed care companies in five years, compared with 25 percent now.
The regulatory system and the state's planning process must be reformed if hospitals are to compete with regional and national companies, Mr. Pezzoli says. The Maryland Hospital Association is working on a regulatory reform plan that would allow innovative arrangements such as those developed by St. Agnes.
Meanwhile, Mr. Pezzoli is pushing ahead.
He's examining joint ventures with outside health-care companies to expand the range of services St. Agnes can offer insurance companies at discount prices.
Referring to President Clinton's proposed health care plan, he said, "We want to be prepared before anything happens in Washington."