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Competing for consumers
Coming coordinated-care squeeze prompts providers to push into insurance market

By Melanie Evans
Posted: April 27, 2013 - 12:01 am ET

Residents of central Texas will see a new retailer muscling into their shopping malls and commercial strips this fall. Scott & White Health Plan, the insurance arm of a six-hospital system that also operates another six across the state, plans a major push to enroll people buying health insurance in the markets created by the healthcare reform law.

Scott & White plans to pursue these exchange shoppers, many of whom never considered insurance affordable or necessary before, where they live. They will build mall kiosks to vie for consumers' attention with Zumba videos or other health-related merchandise. “We have to have a retail presence,” said Allan Einboden, CEO of the Scott & White Health Plan.

Traditional radio and television advertising campaigns won't work. “As soon as you say health insurance, they tune out,” Einboden said.

Across the country starting Oct. 1, about 9 million consumers will turn to the new online markets or exchanges to buy health insurance, assuming they are up and running on time. Most will receive government subsidies to help make the plans affordable.

For health systems, the insurance expansion could increase the number of people seeking preventive and primary care, which they previously shunned to avoid medical bills.

For providers such as Scott & White Healthcare, the new insurance markets offer an alluring opportunity for the organization to expand or gain market share in its primary business —the provision of healthcare.

“We feel like we have to be out there or that whole new market will go somewhere else,” said Einboden, who estimated 270,000 people in communities surrounding the health system would be able to shop in the exchanges with subsidies.

Health systems' push to expand their insurance presence comes at a time when hospital systems are under tremendous pressure to make up for the anticipated loss of revenue that will come from better disease management and care coordination, which will keep more patients at home and beds empty at U.S. hospitals. Scott & White recognizes there will be a drop in demand for its high-end services because of more effective care coordination, Einboden said. “The desire is to cultivate ways to fill that excess capacity.”

Captive customer base

Other providers are pursuing the same strategy. Whether they had insurers or acquired them to compete in these new marketplaces, the goal is to capture a greater share of the overall healthcare delivery market by simultaneously insuring those potential customers. To do so, the plans may rely on so-called narrow networks, which can effectively channel those patients into their own facilities.

It mirrors the strategy long pursued by integrated systems such as Kaiser Permanente. By limiting patients' choice of hospitals and doctors to their own health systems, it not only creates a captive customer base, but also increases providers' ability to manage care and costs. The narrow network also allows them to potentially gain more business because they can offer lower insurance premiums, whether it is to the traditional employer market or through the exchanges.

“I think it's going to be a huge growth area in the exchanges,” said Jonathan Gruber, an economist and professor at the Massachusetts Institute of Technology who helped develop Massachusetts' reform and who advised the White House on healthcare reform. All health plans must meet new coverage standards under healthcare reform “so you differentiate yourself on network and price,” Gruber said.

While some health systems such as Scott & White exclusively sell narrow network plans, others will enter the exchanges with multiple plans that offer consumers choices on prices and the size of the network. For them, narrow networks will be tailored as an option for what are expected to be highly price-sensitive low-income consumers.

That is raising some concern that consumers in the narrow network plans will lack access to needed specialists or nearby care. “You don't need very many choices, you just need good choices,” said Cathy Schoen, senior vice president for policy, research and evaluation at the Commonwealth Fund.

Scott & White's health plan contracts with hospitals or medical groups outside its own growing constellation of hospitals and doctors to ensure patients have access to local care. But the insurers' narrow network is “very Scott & White-centric,” Einboden said. The health system operates the largest multispecialty physician group in Texas and is in talks to merge with 11-hospital Baylor Health Care System in Dallas.

Uncertainty about whether consumers will actually buy insurance, driven in part by ongoing concerns about the ability of the exchanges to get up and running, and how much providers will be paid has tempered some expectations about the potential size of the new market. It also raises questions about how the newly insured will affect profit margins.

Analysts say the size of the fees paid by exchange-generated patients remains a critical unanswered question. “It's very unclear how the pricing will work,” said Emily Wong, a senior director with Fitch Ratings. Exchange insurers could wind up paying less than commercial insurers.

While that's far better than the losses that hospitals now experience with uninsured patients, margins could shrink when large numbers of commercially insured patients move into exchanges. “It really all ends up being a discussion about pricing strategy,” said Standard & Poor's analyst Martin Arrick.

For consumers, providers' move onto the insurance exchanges could provide a welcome dose of competition in many markets. They will be competing with an insurance industry that has grown increasingly consolidated. In an October 2011 brief, Kaiser Family Foundation analysts described state markets as “highly concentrated with only modest competition.”

Health systems with insurance arms that compete in exchanges will not face barriers that typically shut out new commercial insurers from entering those new markets, said Gary Claxton, a vice president for the Kaiser Family Foundation and director of its healthcare marketplace project. Exchanges create almost an entirely new market. “You don't have to steal business from someone else,” he said. “You just have to beat them generally.”

In fact, providers may have significant advantages. Provider-owned health plans can set their own prices. Insurers entering a new market, on the other hand, must negotiate new contracts with providers and lack the customer base and leverage to negotiate price with independent hospitals.

“We're being cautious”

Despite those inherent advantages, not all health systems that own an insurer are rushing into the market. “We're being cautious,” said Juan Serrano, senior vice president for payer strategy and operations at 55-hospital Catholic Health Initiatives. The Englewood, Colo.-based health system, one of the nation's largest by revenue, has launched an ambitious strategy to diversify into insurance markets.

CHI may sell exchange health plans, but not until 2015 at the earliest. It plans to use next year to monitor which states create viable exchanges through robust marketing campaigns. “If others are able to successfully move in and operate, it stands to reason that we, too, could stand in and offer an alternative,” he said.

Serrano said the system does not yet see competing providers entering the insurance markets as a competitive risk. “I don't know if competitive pressure is something we're ready to try to understand in year one,” he said. Markets will stabilize and mature in coming years, he said, and competition will become clearer.

At 10-hospital Sentara Healthcare, in Norfolk, Va., officials say consumer demand will be far less than originally projected in the markets thanks to new rules about what benefits must be included and limits on how widely premiums can vary between the young and old, said Michael Dudley, president ad CEO of the system's insurer, Optima Health.

Health plans sold through exchanges must include benefits across 10 categories of benefits under the Patient Protection and Affordable Care Act. New rules also limit the amount insurers can vary premiums between the youngest and oldest customers by a ratio of 3-to-1, which insurers have argued will raise premiums for young, healthy customers in order to stay within the narrow range.

“I am beginning to wonder about the affordability of the Affordable Care Act,” Dudley said. Plans will be too costly for low-income households, even with subsidies to buy insurance, and some will choose instead to pay the law's penalty for skipping coverage. Optima projects demand from 10,000 to 15,000 new customers instead of initial projections of 40,000 to 60,000 in the Norfolk market.

Sentara will sell an exchange health plan, but not establish a narrow network that limits customers to its providers in exchange for a lower price. Dudley said Sentara cannot risk possible financial losses by marketing a plan that may be priced too low to cover patients' medical expenses and would squeeze payments to providers. Any growth in market share under those conditions would lead to mounting health system losses, he said.

Indeed, consumers' preference for the narrower network that comes with the lower price remains unclear, said Mark Hansberry, senior vice president of strategy, marketing and communications for six-hospital Fairview Health Services, a Minneapolis-based health system. Hospitals have largely been shielded from competing for consumers based on individual shoppers' preferences because so many receive insurance from an employer.

But in the fall, the exchanges could generate a sizable consumer market for price-sensitive healthcare. Fairview owns half of insurer Preferred One, which will compete on the exchange with a narrow network against other health plans with broader networks and higher prices. “It's what you do as a consumer in almost every other element of our lives,” Hansberry said.

Hansberry says Fairview will be competitive on the exchange because the health system is investing in cost-reduction programs such as prevention and wellness in an effort to prevent unnecessary care. By gaining more patients, the health system hopes to capture more revenue to offset losses from those prevention efforts, he said.

Not all health systems looking to compete in the exchange say they will pursue a narrow network. “There's a few avenues that one has to be careful with wit0h a narrow network,” said Christopher Fanning, vice president of commercial sales at Geisinger Health Plan, Danville, Pa., which will sell broad-network options on the exchange. Narrow networks could potentially exclude providers based on cost, he said. “We are not comfortable restricting patient care on cost,” he said.

Not all provider plans to enter the exchanges are responses to anticipated drops in service revenue because of care-coordination efforts. “This is part of our growth strategy,” said Melissa Hayden Cook, president and CEO of Sharp HealthCare's health plan, which will enter the exchanges. The system's accountable care organization has increased Sharp's market share on its own, Sharp officials said.

Some system-owned insurers have invested in market research and marketing plans to compete for new consumers. Pittsburgh-based UPMC began 20 months ago and developed consumer profiles common among retailers that will help the health system's health plan effectively market and price its exchange options, said Kim Jacobs, vice president of consumer and product innovation. Western Pennsylvania shoppers in the new market are expected to total 412,000, he said. “For me, in my career, this is the largest open enrollment we'll probably see,” he said.

Their own networks

In some markets where there's competition between providers, systems without their own insurance arms are setting up their own narrow networks to compete. “We find ourselves in a little bit of a difficult situation,” said Jon Hersen, vice president of care transformation for Legacy Health system in Portland, Ore. “We're not an organization that has its own insurance product.”

Legacy's local competitor, 29-hospital Providence Health & Services, does, however. The exchange is yet another new front for competition and growth, said Barbara Christensen, chief sales and marketing officer for Providence Health Plans, the insurance arm of the Renton, Wash.-based system. “We definitely feel the competition and it's good.”

Legacy's response is to open talks with commercial insurers about possible narrow network plans on Oregon's exchange. Like other providers, the goal of the strategy is to offset revenue declines that are the inevitable result of the system's efforts to reduce avoidable hospital and emergency room visits.

Competition from Providence's health plans has forced five-hospital Legacy and commercial insurers into “good conversations that haven't been as fruitful as they could have been in the past,” Hersen said.

TAKEAWAY: Many health systems' insurance arms plan to push policies on the new insurance exchanges to expand their base of potential patients.

Follow Melanie Evans on Twitter: @MHmevans

Scott & White Memorial Hospital in Temple, Texas, is part of a health system that will vie for consumers looking for an insurance exchange. The health plan intends to have a retail presence in malls with kiosks that will offer health-related merchandise.

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