What was HEP? It was, in brief, a locally driven, locally designed response to the financial pressures in the 1970s affecting not only Rochester-area hospitals but hospitals throughout the state and the nation. The successor to MAXICAP, the nine-county western New York hospital reimbursement demonstration project in 1976–78, HEP retained MAXICAP's basic design. Its features were a “predetermined, guaranteed annual budget, a constant revenue stream, and greater flexibility to deliver care in more cost-efficient ways without losing income.”

If HEP had not been an experiment or demonstration project, it would have violated antitrust laws. “Until the 1970s,” according to Sue Stewart, attorney for RAHC, “longstanding federal policy was that anti-trust laws didn't apply to nonprofit organizations, including hospitals.” That began to change in 1975, when the federal courts, including the United States Supreme Court, ruled that the cooperation in the hospital industry violated antitrust laws. “By the time HEP was conceived, exemption as an experiment was the only way to get around the anti-trust laws.” As a prospective-payment demonstration, HEP was exempt from antitrust laws. Subsequent federal waivers from usual Medicare practices and Medicaid waivers from the New York State government enabled group planning and collaboration among hospital CEOs that would not have been otherwise permitted.

The first HEP contract resulted from separate, protracted negotiations between RAHC (representing the hospitals) and each payer. According to Stewart, the negotiations involved detailed discussions about issues and terms. The key point of contention for the New York State Office of Health Systems Management (OHSM) within the Department of Health was “control.” According to Stewart, who represented RAHC in the negotiations, “The State was not really sure it wanted to give up interfering. Even after preliminary agreements were reached, there was endless bureaucratic pushback.” The main consideration for the federal government was whether the HCFA would learn more from Rochester about prospective-payment systems than from experiments sponsored by the Department of Health, Education, and Welfare in other states. Blue Cross of Rochester was focused in the protracted negotiations on the details of the formulas governing the allocation of funds to the hospital consortium and to the individual hospitals.