Reform Update: CHI moves full-bore into insurance market

With healthcare reform radically reshaping the economics of U.S. healthcare delivery, providers large and small have to decide how they will survive, and hopefully prosper, in a new business climate. One major system, Catholic Health Initiatives, based in Englewood, Colo., is going beyond talking about a new business model to making an aggressive move into health insurance, with pending applications to sell commercial health plans in five states next year and 18 states by 2016, assuming regulatory approval.

The move builds on the system's recent health-plan acquisitions in Washington and Arizona, and could position it as a strong rival to existing insurers for employers' business by contracting directly with health-plan networks of its own hospitals and doctors.

The private insurance initiative rapidly follows the system's expansion into Medicare managed care. Last month, the 93-hospital system announced plans to enter Medicare Advantage markets in Kentucky, Nebraska, Ohio and Tennessee.

“We think because we are both a health delivery system, a population-health management organization, and we have the kind of products and services that are typical of the health plan and the (third-party administrator) domain, we are in the position to work with employers,” said Juan Serrano, CHI's senior vice president of payer strategy operations. Third-party administrators manage health plan operations for large employers that finance their own health benefits.

CHI's aggressive push into health insurance further cements its place among the industry's aggressive risk-takers as health reform remakes markets. New incentives under Obamacare have sought to reduce avoidable hospital visits, which has squeezed health-system margins and accelerated health-system investment in primary and ambulatory care. More Americans are also buying health insurance thanks to the Affordable Care Act. Roughly 8 million customers entered the health-insurance exchanges created under the ACA, including 4.8 million uninsured, according a Kaiser Family Foundation estimate.

Insurance deals could mean new profits to offset pressure on hospital margins, said Liz Sweeney, a senior director and analyst for Standard & Poor's. Owning a health plan may also help the system capitalize on the growing number of U.S. insured.

But systems have failed before to make the leap from hospital operations to health-plan management, which requires underwriting expertise to maintain margins. “It's an open question as to whether or not they'll be successful at managing risk,” she said.

Another issue could be the temptation to run insurance operations in such a way that they benefit the hospitals financially while hurting the insurance plans' own bottom lines, leading to longer-term financial issues for the system as a whole.

CHI officials say the changes will position the company for contracts with employers and other health insurers with incentives to contain health spending and promote prevention and disease management.

“It's a lot about the portfolio,” said Kevin Lofton, Catholic Health Initiatives' CEO, during a recent interview.

Deals since 2012 have added health insurance companies to the health system in Washington and Arkansas. CHI, which operates hospitals and clinics across 70 U.S. communities, also added a home-care company to its holdings in 2010, with the $43 million acquisition of Consolidated Health Services, and is part-owner of two reference laboratory companies.

“We are looking at everything from a continuum of healthcare and the fact that our role in the future will be to keep people healthy,” Lofton said.

State insurance commissioners have not yet granted Catholic Health Initiatives' license to market private health plans, Serrano said. He also declined to name the states identified by CHI as its first targets.

Fitch Ratings released this stark recap detailing how the nation's uneven Medicaid expansion has so far played out:

• Eight of nine hospitals and health systems whose credit ratings improved so far this year are located in expansion states.
• Five of 10 hospitals and health systems that were downgraded by analysts during the same period are located in states that did not expand Medicaid. “Several of those downgrades were driven by operating performance declines related to funding and reimbursement pressures, which may have been lessened by Medicaid expansion,” the rating agency said.

Analysts also cited figures released by the White House Council of Economic Advisors that estimate an $83.6 billion increase in federal funding for expansion states through 2016. States that do not expand Medicaid will forgo $88.1 billion.

And the future looks increasingly grim. “We expect these trends to continue and become more severe after 2014,” the Fitch report said. “The reimbursement reductions in the ACA will be phased in over time. Hospitals and health systems will continue to feel the brunt of further reimbursement cuts to Medicare payments, as well as expected reductions to federal funding of Medicaid disproportionate share in 2015 and 2016,” Fitch Ratings reported.

The Congressional Budget Office did not significantly change its long-term projection for federal health spending (PDF) in a newly released outlook.

Federal spending for Medicare, Medicaid, the Children's Health Insurance Program and insurance exchange subsidies will account for 8% of the nation's gross domestic project in 2014, up from 4.8% this year. The CBO's last outlook, released in September (PDF), also projected federal health spending to account for 8% of the economy, up from 4.6% of GDP in 2013.

These figures, however, are subject to change, warns the CBO and others. “Health spending growth is one of the key drivers of the nation's long-term fiscal outlook,” wrote Louise Sheiner and Brendan Mochoruk for the Brookings Institution. “It also is one of the most uncertain, a point emphasized in the Congressional Budget Office's latest report on the long-term budget outlook.”

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