Reform Update: As insurance deals lure hospitals, Dignity Health isn't biting

Dignity Health has not balked at big gambles to diversify its operations, moving into retail with CVS Caremark and expanding into 17 states with the 2012 acquisition of an occupational health and urgent-care company. But there's one bet Dignity Health won't take: health insurance.

“Absolutely not,” Lloyd Dean, president and CEO of Dignity Health, San Francisco, said this week during remarks at the Standard & Poor's Healthcare Conference in New York.

Dignity Health is one of the largest U.S. health systems with assets of $15 billion and 37 hospitals in three states. Dean clearly voiced his doubt that hospital systems will thrive as they seek to build large regional or national health insurance companies. Dignity Health's peers such as Catholic Health Initiatives, Englewood, Colo., and Ascension Health, St. Louis, have bought or are in talks to acquire insurance companies. Major regional health systems, too, have muscled into the insurance market in the past few years.

“I think that's ill conceived,” Dean said. “I think it's ultimately not going to be successful.”

The health insurance industry's expertise with projecting the demand and cost of medical care for a group of people, or population, is increasingly sought after by hospitals and medical groups. Providers are entering or considering contracts that reward or penalize them on their ability to manage health spending for a population, where such expertise would prove valuable. Medicare introduced and has expanded such contracts under the Patient Protection and Affordable Care Act's Shared Savings Program. Similar incentives are being used by a growing number of Medicaid and commercial insurance.

Dean said hospitals lack the expertise of insurers and Dignity Health's capital would be better spent elsewhere. Instead, Dignity Health will seek out partners with existing insurance companies.

He was equally skeptical of insurance companies' ability to become healthcare providers. (Highmark's acquisition of West Penn Allegheny Health System is a notable example.) “They ought to stay the heck out of running hospitals,” he said.

Dean described the current flurry of diverse acquisitions as a result of uncertainty over what will work and fear of being outflanked by competitors. “There's this hysteria going on,” he said. “Everyone is trying to be everything.”

The flurry of deals that have merged the traditionally combative healthcare sectors is “mixing apples and oranges,” Dean said. The results will be “inedible.”

However, Dean is not totally averse to sinking capital into insurance. Dignity Health will consider insurance investments in limited markets, where a deal can help to secure its position as a “mega player,” he said. That is the case in Arizona, where Dignity Health and Ascension Health jointly own Mercy Care Plan, a Medicaid managed-care company.

Dean made his remarks flanked by Dr. Glenn Steele, president and CEO of Geisinger Health System, and Wayne DeVeydt, chief financial officer of WellPoint. Geisinger, based in Danville, Pa., is a growing regional health system with a well-established health plan. WellPoint is one of the largest U.S. insurers.

Steele agreed with Dean. So did DeVeydt.

Steele rejected the notion that hospitals and insurance mergers are inevitable. “And I think much of it will fail. That's OK. Some of it will succeed.”

Geisinger was “wise or lucky” to have held onto its health plans over many years, Steele said. He was more doubtful about the prospects of entering the market now.

WellPoint recruited its newest chief executive from a large U.S. health system specifically to position the insurance company to work better in new partnerships with hospitals, DeVeydt said. That was Joseph Swedish, formerly the chief executive of Trinity Health (now CHE Trinity Health), who joined the company in March 2013.

None of this dissuaded Banner Health CEO Dennis Dahlen, who spoke later in the day at the conference. Banner Health officials are considering options that include building or buying a health plan. “We're not in the insurance marketplace in any significant way,” he said. “We're looking to grow that.”

The CMS Innovation Center's Pioneer accountable care program will wrap up its first three-year test in December. The program, created under the Affordable Care Act, named 32 organizations to test Medicare's most ambitious and risk formula for accountable care. Nine left after the first year. Those that stuck with the program are waiting now to see what the next iteration will look like and whether it will address what organizations consider significant challenges.

That includes Medicare patients' ability to go outside an ACO for medical care, said Banner Health CFO Dennis Dahlen. The CMS has listened but is slow to respond, he said. “I have gone from thinking they were reluctant partners with us to thinking we're adversaries,” he said during the Standard & Poor's Healthcare Conference. “I have to say our experience hasn't been great.”

That's the result of research in the latest Health Affairs, which looked at regional variation in 2006 health spending by Medicare enrollees who were not enrolled in managed care. Per-patient spending in the highest quintile was $2,834 higher than spending in the lowest quintile. Patient decisionmaking is an issue of growing interest among hospitals and medical groups. Patient preference accounted for $129, or 4.6%. Patient health and income and the supply of providers contributed more significantly, 12% and 23%, respectively. But the influence of patient preference over spending increased for end-of-life care to 7.6%. It was least significant for physician services at 2.8% of the spending difference. Laurence Baker, lead author of the study and a Stanford University health policy professor, said the data suggests that policymakers should consider carefully the role of preference and whether some options should be limited.

Follow Melanie Evans on Twitter: @MHmevans