After HEP was terminated and RAHC reinvented, Rochester's hospitals did not soldier on in the tradition of collaboration for the benefit of the community. Rather, as Howard Berman, president (1985–2002) of Excellus BlueCross BlueShield, observed, “Rochester migrated toward the mean.” To understand why Rochester moved toward a competitive hospital environment, key changes in the local and national environments that promoted competition will now be considered. In chapter 10, the consequences for the Rochester community of three competitive hospital systems formed in the late 1990s are described and analyzed.

Rochester was late in migrating toward the competitive hospital environment that characterized many American communities by 2000. During the 1980s, when the Rochester-area hospitals were collaborating under the HEP prospective-payment, global budgeting system, important changes in health care occurred in the nation. One was a shift of “services previously given to inpatients to outpatient service or other treatment outside the hospital.” A second was growth in managed care. Though the Rochester-area hospitals were aware of both changes, they were insulated from them because of their flexibility under the HEP prospective payments to shift revenues between inpatient and outpatient services.

Changes at the national and state levels were also noteworthy. One was the set fee-per-case diagnosis-related groups system under Medicare, authorized by Congress in 1983. Medicare withdrew from participation in HEP in 1987, and the RAHC hospitals were thereafter included in the DRG system. Prior to implementation of Medicare DRGs, several states, New York among them, under Medicare waivers, had experimented with ways to contain rising hospital costs. Ultimately, “payment under the new DRG system proved to be more lucrative than under the waivered status of their own systems.” This eventually led to major policy changes in many states. The New York State Legislature, in 1988, enacted the Prospective Hospital Reimbursement Methodology (NYPHRM)—a case payment system, modeled after DRGs, thereby contributing to the demise of HEP.

Aside from these changes in the ways hospital services were delivered and reimbursed, economic trends influenced the post-HEP environment. Starting in the 1980s, Rochester began to move away from its historical reliance on manufacturing and large employers.