A few health systems have struggled in the past year with their insurance divisions. Neighborhood Health Plan, owned by not-for-profit Partners HealthCare, lost $110 million in fiscal 2014 and had to book another $92 million in reserves for 2015. Executives said the losses resulted from higher-than-expected medical claims, high costs related to hepatitis C drugs and low Medicaid payment rates.
PreferredOne, jointly owned by Fairview, North Memorial Health Care, Robbinsdale, Minn., and a physician group, lost $21 million last year. Red ink from the individual market alone hit $139 million. Preferred-One had become the dominant insurer on Minnesota's insurance exchange in 2014 by offering the cheapest premiums. But that large market share came back to haunt the plan, which attracted a high proportion of sicker people and made medical costs “not sustainable,” according to the plan. PreferredOne exited the state exchange for 2015.
Maiberger said that because health insurance is heavily regulated and based on complex actuarial predictions, providers should not expect to quickly turn a positive margin. “You're on a five- to seven-year journey until you're really going to see profitability,” he said. He declined to provide financial projections for Premier Health Plan, and documents have not yet been filed with bondholders.
SelectHealth, Intermountain Healthcare's 30-year-old health plan based in Salt Lake City, illustrates the long wait for profitability. “It took us six years to break even back in the '80s,” said Greg Poulsen, Intermountain's chief strategy officer. “And if we hadn't believed there was a really important reason to do this, I don't think we would have continued to take the losses.”
Hospitals starting or acquiring their own health plans also run into what S&P's Marinucci calls “channel conflict” with legacy insurance companies. Starting their own health plan directly competes for insurers' premium dollars and can create tension when providers negotiate to be included in an insurer's network.
For example, after Catholic Health Initiatives in Englewood, Colo., entered the insurance business in seven states, including Nebraska, Blue Cross and Blue Shield of Nebraska ended its contract with CHI last fall. “We don't know for sure it's because we entered the market and got a license approved, but the fact is we're in a pretty rough, intense negotiation with them in terms of the network,” CHI CEO Kevin Lofton said.
Similarly, Dan Wolterman, CEO of Memorial Hermann Health System in Houston, said that health insurers are “not happy” about his organization starting an insurance arm, but it has maintained contracts with the insurers because they need his system.
“We try to be open to everybody, as long as it is a fair two-way discussion,” Wolterman said.
America's Health Insurance Plans argues that if providers want to get into the insurance business, they have to be willing to deal with many complex government requirements including maintaining hefty reserves and paying the ACA's health insurance tax.
“It is not likely that doctors' offices and hospitals will want to take on all of these responsibilities,” AHIP spokeswoman Clare Krusing said.
The potential for conflict with insurers is at least partly why many health systems are more interested in small-scale startups, experts say. Providers are particularly eyeing the Medicare Advantage business because they feel they know how to manage seniors' care.
Medicare's Pioneer and Shared Savings ACOs are giving providers the experience to manage risk, making fully capitated Advantage a logical progression, said Eric Hammelman, a vice president at consulting firm Avalere Health. With Medicare's Next Generation ACO program, announced in March, providers will be able to shift into full-risk contracts.
Providers already operate many of the highest-quality Advantage plans in the marketplace, based on the CMS' star ratings system. Most of the 16 plans with five-star ratings for 2015 are run by providers or integrated delivery systems, including plans owned by Kaiser Permanente, Providence Health & Services in Oregon, Gundersen Health System in Wisconsin and Group Health Cooperative in Washington state.
Medicare Advantage is a “relatively easy market” for provider-sponsored plans to enter because Advantage plans are marketed directly to individual beneficiaries, said Brigitte Nettesheim, a principal with the Chartis Group. An added attraction for providers is the ability to convert Medicare ACO members into Medicare Advantage enrollees. She said some of her clients are having discussions with the CMS on doing this.
But experts caution that it's essential first to invest in the insurance expertise, infrastructure and information technology needed to succeed in the health plan business. “It's years of trial and error,” said Lisa Goldstein, a senior vice president at Moody's Investors Service. “Even the ones that are established, they are still learning."
—With Melanie Evans and Beth Kutscher