362 Cases The Battle in Boise One would not expect Idaho, a state with fewer than 2 million residents, to be highlighted nationally as an example of heightened conflict among physi- cians and hospitals. Nevertheless, competitive pressures and the trend of phy- sician employment have profoundly changed the state's healthcare market. In 2012 about half of the 1,400 doctors in southwestern Idaho were employed by the dominant St. Luke's Health System or its smaller competitor, Saint Alphonsus Health System. St. Luke's is a regional health system consisting of seven medical cen- ters in southwestern Idaho. Its largest facility is a 399-bed hospital in Boise. The system has expanded in the recent past and controls hospitals in Twin Falls (228 beds), Jerome (25 beds), Ketchum (25 beds), and McCall (15 beds) (St. Luke's 2013). The system also has been aggressively preparing itself for the changes that will be instituted by the Affordable Care Act. Saint Alphonsus, on the other hand, belongs to Trinity Health, a large national system of approximately 30 hospitals. Saint Alphonsus has two facili- ties in southwestern Idaho: the 381-bed Saint Alphonsus Regional Medical Center in Boise and a 152-bed hospital in Nampa (Trinity Health 2013). By 2012, according to an article in the New York Times, many inde- pendent doctors were complaining that both hospitals in Boise, especially St. Luke's, had too much power and control over their medical practices (Cre- swell and Abelson 2012). The doctors accused St. Luke's of dictating which tests and procedures to perform, how much to charge, and which patients to admit. Independent specialists claimed that their referrals from the physicians employed by St. Luke's had dropped sharply and that patients frequently paid more for treatment at the hospital than they would pay at an independent physician's office. At the same time, employed physicians voiced growing pressures to meet the financial goals the hospitals had set for them, which in the physicians' opinions often entailed unnecessary tests, procedures, and hospital admissions. Although the two hospitals have competed for decades, their rivalry has intensified in the past few years. Saint Alphonsus, trying to slow St. Luke's perceived domination, even sought a court injunction to stop St. Luke's from buying physician practices. This legal maneuver claimed that St. Luke's market dominance allowed them to raise prices and to demand exclusive or preferential agreements with insurance companies. As an example, Saint Alphonsus claimed that the price of a colonoscopy had quadrupled and that St. Luke's charges for laboratory work were nearly three times the fees charged by others in the market. Saint Alphonsus argued that St. Luke's dominance was hurting Saint Alphonsus's business and creating steep declines in hospital admissions and referrals from physicians employed by St. Luke's. Cases 363 St. Luke's justified its ac ...

1. 362 Cases
The Battle in Boise
One would not expect Idaho, a state with fewer than 2 million
residents, to
be highlighted nationally as an example of heightened conflict
among physi-
cians and hospitals. Nevertheless, competitive pressures and the
trend of phy-
sician employment have profoundly changed the state's
healthcare market. In
2012 about half of the 1,400 doctors in southwestern Idaho were
employed
by the dominant St. Luke's Health System or its smaller
competitor, Saint
Alphonsus Health System.
St. Luke's is a regional health system consisting of seven
medical cen-
ters in southwestern Idaho. Its largest facility is a 399-bed
hospital in Boise.
The system has expanded in the recent past and controls
hospitals in Twin
Falls (228 beds), Jerome (25 beds), Ketchum (25 beds), and
McCall (15
beds) (St. Luke's 2013). The system also has been aggressively
preparing
itself for the changes that will be instituted by the Affordable
Care Act.
Saint Alphonsus, on the other hand, belongs to Trinity Health, a

2. large
national system of approximately 30 hospitals. Saint Alphonsus
has two facili-
ties in southwestern Idaho: the 381-bed Saint Alphonsus
Regional Medical
Center in Boise and a 152-bed hospital in Nampa (Trinity
Health 2013).
By 2012, according to an article in the New York Times, many
inde-
pendent doctors were complaining that both hospitals in Boise,
especially St.
Luke's, had too much power and control over their medical
practices (Cre-
swell and Abelson 2012). The doctors accused St. Luke's of
dictating which
tests and procedures to perform, how much to charge, and which
patients to
admit. Independent specialists claimed that their referrals from
the physicians
employed by St. Luke's had dropped sharply and that patients
frequently paid
more for treatment at the hospital than they would pay at an
independent
physician's office.
At the same time, employed physicians voiced growing
pressures to
meet the financial goals the hospitals had set for them, which in
the physicians'
opinions often entailed unnecessary tests, procedures, and
hospital admissions.
Although the two hospitals have competed for decades, their
rivalry
has intensified in the past few years. Saint Alphonsus, trying to

3. slow St. Luke's
perceived domination, even sought a court injunction to stop St.
Luke's from
buying physician practices. This legal maneuver claimed that
St. Luke's market
dominance allowed them to raise prices and to demand
exclusive or preferential
agreements with insurance companies. As an example, Saint
Alphonsus claimed
that the price of a colonoscopy had quadrupled and that St.
Luke's charges
for laboratory work were nearly three times the fees charged by
others in the
market. Saint Alphonsus argued that St. Luke's dominance was
hurting Saint
Alphonsus's business and creating steep declines in hospital
admissions and
referrals from physicians employed by St. Luke's.
Cases 363
St. Luke's justified its actions, saying it was positioning itself
to better
compete and improve its ability to coordinate patient care when
it becomes
an accountable care organization (AGO). ACOs require close
coordination
between hospitals and physicians and are predicted to cut
healthcare costs by
eliminating unneeded procedures and tests and keeping patients
out of the
hospital.
As a result, the Federal Trade Commission (FTC) and the Idaho

4. attor-
ney general began to investigate St. Luke's. Jeffrey Perry, an
assistant director
in the FTC's Bureau of Competition, was quoted in the New
York Times:
"We're seeing a lot more consolidation than we did 10 years
ago. Historically,
what we've seen with the consolidation in the health care
industry is that
prices go up, but quality does not improve" (Creswell and
Abelson 2012).
The number of independent physicians in the United States is
rap-
idly decreasing. In 2000, 1 in every 20 physician specialists was
a hospital
employee. By 2012, 1 in 4 was employed and 40 percent of
primary care
physicians were hospital employees. By one estimate, Medicare
is paying
upward of a billion dollars more annually for the same services
because hos-
pitals can charge more when their doctors are employees. For
instance, laser
eye surgery can cost $738 when performed by a hospital-
employed doctor,
compared to $389 when done by an independent doctor.
Likewise, an echo-
cardiogram can cost $319 if done in a hospital versus $143 if
performed in
an independent doctor's office.
Employed physicians in Boise also stated that they were
strongly
encouraged to refer to other doctors working for their employer,
even if

5. those doctors were not the best choice of provider for their
patients. (Hos-
pitals employing physicians have financial incentives to retain
referrals and
admissions.) In Boise, doctors employed by St. Luke's were
pressured to refer
only within the St. Luke's system, according to Saint
Alphonsus's complaint.
Saint Alphonsus claimed a 90 percent drop in admissions to its
hospitals by
physicians employed by St. Luke's. The complaint also
contended that inde-
pendent doctors in a nearby community often sent patients 40
miles away for
CT scans because of the much higher prices at St. Luke's.
Mr. Pate, St. Luke's CEO, stated in the New York Times that
prices for
some of their services had increased, but he justified the
increase by suggest-
ing that the services had been exceptionally underpriced. He
believed that
overall costs would decline at St. Luke's as a result of physician
employment
because St. Luke's would be better able to coordinate care,
prevent expensive
emergency department visits, and eliminate redundant tests.
Nevertheless,
many area physicians remained skeptical that patients would be
better served,
especially after the price increases.
Sources: Creswell and Abelson (2012); Jameson (2012).

6. 364 Cases
Questions
1. The Affordable Care Act encourages vertical integration and
consolidation to improve the coordination of care. However, too
much
consolidation can give one organization too much market
power. What
could be done to balance the need to coordinate care and
maintain
some level of competition?
2. What are the advantages to directing physician referrals
within one
system of care? Disadvantages?
3. Why could costs (or billings/charges) increase if services are
performed
within a hospital setting versus in an independent physician's
office?
4. How could virtual integration be used to coordinate care
without
raising fixed costs?
Page 1Page 2Page 3