Insurance policy

One of the lasting ripple effects of healthcare reform has been the drive toward consolidation—with health systems increasingly looking to take more control over the entire spectrum of care.

But as healthcare providers have been challenged to work around new payment models, many are finding that being truly “integrated” means more than just adding wellness centers and post-acute-care services.

Providers are realizing that to stay competitive, they need to have a hand not only in healthcare delivery, but also healthcare financing. And many systems are finding that the best way to do so is through launching their own insurance plans.

It's a strategy they've used before. Health systems entered the insurance market in the 1980s and '90s as a response to pressures from HMOs.

“It's coming back, but it's coming back in a slightly different form,” says Jon Kingsdale, director at Wakely Consulting Group.

Instead of insurance companies taking the lead on new payment systems such as accountable care organizations, “the health system is kind of on top, if you will.”

Yet whether systems will be successful in operating their own health plans is still an open question—certainly many providers opted to get out of the insurance market as quickly as they entered it in the early years of HMOs. But new technologies and shifting priorities under healthcare reform mean that systems are willing to take another look at their options.

In the past, “the potential conflict was greater than it was today,” says Joel Michaels, who leads the health industry advisory practice at law firm McDermott, Will & Emery. He adds that there was tension between “providing the service and policing the service.”

“In today's environment, I think hospitals are more forward-thinking,” he says. “There are a number of things that are changing in how hospitals relate to health insurers.”

Sutter Health, Sacramento, Calif., is one of the systems that operated its own health plan in the late-1980s and early 1990s, before it became a “management distraction” and was sold for a big profit. Now it wants to get back in.

“It was a different world back then,” says Peter Anderson, Sutter's senior vice president of strategy and business development. Now with 24 hospitals and 5,184 staffed beds, the system also operates medical groups, outpatient clinics, long-term-care centers and hospice and home health services. “We're quite a bit bigger and we've filled a lot of holes in our geography.”

Last August, the system applied for a state license to operate its own health plan in the Northern California market; it expects to receive approval in March with open enrollment as early as the fourth quarter. It plans to focus primarily on commercial beneficiaries.

“We do have some good name recognition,” Anderson says. “That reduces the barriers to entry.”

Piedmont Healthcare, Atlanta, and partner WellStar Health System, Marietta, Ga., also expect name recognition to help attract enrollees when their joint health plan is launched next year. The systems expect to list their plan on the state's health insurance exchange as one avenue for generating customers.

“You definitely start with your own name as a visible brand,” says Reynold Jennings, WellStar's president and CEO.

Michaels, of McDermott, Will & Emery, notes that the systems most likely to be successful in the insurance market are those that are dominant in their regions and can attract a large enough number of patients to share risk across the covered population. “The critical mass is going to be important,” he says.

In a more fragmented market, patients also expect to have the freedom to choose from different providers, which can make it harder for systems to be an exclusive provider organization.

Holly Meidl, managing director and healthcare practice leader at Marsh, a New York-based insurance brokerage and risk-advisory firm, notes that unlike two decades ago, systems also control significantly more pieces of the healthcare delivery process—pointing, for example, to the increased activity around acquiring physician groups. “Owning more parts of this chain allows them to succeed,” she says.

The Patient Protection and Affordable Care Act—the key impetus behind the drive toward new payment models—has also leveled the playing field for hospitals through the creation of health insurance exchanges.

“It's another marketing avenue and a way to put themselves out there as a choice,” Meidl says. “And they have the brand recognition.”

Health systems and insurers are already collaborating in a number of ways, from forming ACOs to setting up joint ventures to launch new insurance plans. Michaels notes that insurers are often the ones approaching hospitals with a willingness to explore new insurance products, from an HMO-type model to a “super-preferred” provider organization.

“What you may find down the road is insurers competing with healthcare delivery systems,” Michaels says.

Yet not all systems plan to compete head-to-head with traditional insurance companies.

MemorialCare Health System, based in the Southern California city of Fountain Valley, plans to concentrate initially on Medi-Cal beneficiaries, the state's Medicaid population, as well as participate in the California Children's Service demonstration project, which focuses on pediatric patients with ongoing medical conditions. Later it will look at other options such as the dual-eligible population and Medicare Advantage, says Barry Arbuckle, MemorialCare's president and CEO.

“It's hard for me to imagine competing with the scale of Blue Cross in California,” he says. “They're a machine. It's not in our near-term plans.”

Sutter, after a three-decade hiatus, hopes to re-enter the insurance space. MemorialCare, whose flagship facility is 420-bed Long Beach Memorial Medical Center, had two licenses to operate managed-care plans in the 1980s but ultimately sold them, predicting that the capitation trend of HMOs would be a passing fad.

Yet two years ago, MemorialCare returned to an old discussion. And last November, the five-hospital system disclosed that it was buying certain assets of insurance company Universal Care and had filed an application to license its newly formed Seaside Health Plan.

If approved, MemorialCare aims to operate the plan starting in June.

“We look at it as one more element that a fully integrated health system should have,” Arbuckle says. “We wanted to be in a position where we can operate as either a health plan or plan-to-plan contracts.”

In the Atlanta market, while WellStar and Piedmont intend to build their plan from scratch, the systems have contracted with Evolent Health, a population health management services organization, to set up the infrastructure and other information technology, says Jim Budzinski, WellStar's executive vice president and chief financial officer.

Dr. Ronnie Brownsworth, CEO of the new health plan and former CEO of the Piedmont Clinic, said in December that having access to medical data is central to the systems' interest in entering the insurance market. The data will allow the systems to analyze treatment patterns and develop financial incentives for care coordination to keep patients out of its hospitals.

More advanced information technology—and the ability to store and analyze vast amounts of patient data—has increased the allure of entering the payer market, even for systems that previously sold their insurance assets.

Kaiser Permanente, perhaps the best-known U.S. health system that is a provider and financer of healthcare, has used the data it collects from patients to lower the cost of care as well as improve outcomes, such as decreasing the rate of sepsis at its facilities. Most of its services are prepaid, and at last year's Healthcare Financial Management Association annual meeting, Chairman and CEO George Halvorson said the Oakland, Calif.-based system has “a magic payment model” that incentivizes the system to keep patients out of the hospital.

Mark Karlson, practice leader for the financial and professional risk practice at Marsh, the insurance brokerage, notes that offering a health plan gives systems greater access to key population data and allows them to better manage costs.

“It's economics and quality of care,” he says.

Karlson estimates that Marsh has seen about 10% to 15% of systems lay the groundwork for health plans, and many others are looking at the possibility of doing so.

Yet even though times have changed, entering the insurance market is still risky. Not only will systems need to set up the infrastructure and hire talent, but they'll need to convince patients that there isn't a conflict of interest when they're ordering procedures as well as paying for them, Karlson says.

“They have to convince customers that they're not the ones who are going to get the short end of the stick,” he says.

Meidl also highlights a number of other risks to systems entering the insurance business: increased liability associated with claims management, the need to negotiate and contract with physicians and other providers outside the network and compliance with new insurance regulations under the healthcare reform law.

“They're stepping into something at the height of insurance regulation,” she says, adding that while hospitals are used to operating under federal regulations, operating a health plan means they'll also be subject to a number of state regulations.

“I think hospitals are dealing with a conflict,” Kingsdale says. “They've got one leg in the current environment—which is heads on pillows—and one leg in the other model. It's really switching from revenue maximization to managing the global well-being of the patient.”

Yet Karlson notes that providers might be stepping into the insurance area not so much to realize financial upside, but to avoid potential downsides associated with a changing healthcare environment—such as declining reimbursement, losing customers and being shut out of a rapidly consolidating market.

WellStar's Jennings similarly notes that failing to respond to the changing healthcare environment means facing a “dramatic downturn in your profitability” over the next few years. “Embedded within the Affordable Care Act there are already risks,” he says. “We're taking a guarded, calculated risk in entering the (insurance market).”

TAKEAWAY: Health systems are returning to the insurance market as pressure grows to fully integrate.