More health systems launch insurance plans despite caveats

Premier Health, part-owned by Catholic Health Initiatives, took its first step into the insurance business last year. After acquiring a state insurance license in 2013, the system in Dayton, Ohio, offered its own health plan for its 17,000-plus employees and their family members.

Premier's employee benefit plan was a laboratory for expanding its capacity to manage the health of enrolled populations, said Mike Maiberger, CEO of Premier Health Plan and chief value officer of the five-hospital, $1.9 billion system.

This year, Premier Health Plan is moving beyond its employees. It now covers 7,100 Medicare Advantage members and 2,000 individuals and families, most of whom signed up through the federal insurance exchange in Ohio. “For us, the insurance business is just a vehicle to cover as many lives as we can in our service area with our population health initiatives,” Maiberger said. “We're not out to be one of the large national players in the insurance market.”

Provider-owned health plans like Premier's continue to spring up or get larger as more hospitals and physician groups are moving to take on financial risk for their patients under value-based and capitated payment contracts. Providers see the financial and quality advantages of controlling premium dollars from beginning to end and steering patients toward their services. It frees them from having to share with insurance companies any savings they generate from improved quality and efficiency.

“If you can demonstrate that you offer more quality at an effective price point, you can take (market) share,” said Joseph Marinucci, a health insurance analyst at ratings agency Standard & Poor's.

But for every potential advantage of starting a health plan, there is an “equally robust list of cons,” said Chris Myers, a director at consulting firm Navigant Healthcare.

Once hospitals “get into product design and pricing and all of the nuanced areas, you can get into trouble reasonably quickly,” said Greg Maddrey, a director at the Chartis Group, a consulting firm.

Leaders of established provider-owned plans say it's a long slog to positive margins. Plans need to watch out for attracting too many sicker members who may be drawn to the system's providers. And many hospital executives are leery of antagonizing insurers whose provider networks they want to participate in by competing with them for insurance customers. As an alternative, some health systems such as UCSF Medical Center in San Francisco are seeking partnerships with insurers.

Consequently, many health systems are taking a cautious approach to entering the insurance business, at least partly because they don't want to repeat hospitals' financial losses in the 1990s, when many jumped into the risk business. Recently, Partners HealthCare in Boston and Fairview Health Services in Minneapolis have suffered sizable losses with their health plans.

Cleveland Clinic has considered applying for an insurance license but has not yet done so. Any talk of launching a health plan is “very premature,” a Cleveland Clinic spokeswoman said.

“We are going to do our insurance products through established health plans” such as Anthem, said UCSF CEO Mark Laret.

Dignity Health in San Francisco is exploring a limited state license to accept full-risk payments from health insurers, but it does not intend to create its own health plan. “I think that's ill-conceived,” Dignity Health CEO Lloyd Dean said last year. “I think it's ultimately not going to be successful.”

The safest option for provider systems for now, some experts say, may be offering insurance products that serve a narrow population, such as a Medicare Advantage or Medicaid plan, or creating loose partnerships with insurance companies. Some hospitals have co-branded, limited networks with national insurers.

“The average organization does not necessarily want to start out (with) their own health plan,” said Frank Williams, CEO of consulting firm Evolent Health. His organization advises provider systems on how to operate plans. It's partly funded by 2.5 million-member UPMC Health Plan in Pittsburgh, which is owned by the not-for-profit UPMC health system. “But to move to a population health model, they have to have enough scale.”

There were 698 hospitals that had an equity stake in an HMO in 2013, up 11% from 2012, according to the American Hospital Association. But because that figure includes many hospitals within the same health system, the total number of provider-sponsored plans is more likely to be about 90, Navigant's Myers said.

Financially, provider-owned plans are doing as well as other health insurers or better. They had a 3.2% average profit margin in 2013, and that margin has hovered above 3% since 2010, according to a February report from ratings agency A.M. Best Co. The entire health insurance industry had a similar 3.2% profit margin in 2013, but that was down considerably from 2010, when the average margin was near 4.5%.

Premiums collected by provider-owned plans rose faster in 2013 (5.5%) than at publicly traded insurers (2.4%), Blue Cross and Blue Shield plans (2.5%), and others in the industry (3.2%).

The A.M. Best analysis looked at about 150 provider-owned plans, which included several subsidiaries within the same insurer. Many of these statistics, however, may be skewed toward the well-established provider-owned plans such as Kaiser Foundation Health Plan and UPMC Health Plan.

Provider-owned plans cover less than 10% of the entire privately insured market, but their membership is growing. Total enrollment jumped to 19.1 million people in 2013, a 4% increase from 2012 and a higher growth rate than for other types of plans. This is especially the case in the Medicare and Medicaid markets, where in 2013 Medicare beneficiary membership in provider-owned plans rose 8.2% and Medicaid beneficiary membership grew 15.3% compared with 2012, according to A.M. Best.

For instance, Presbyterian Health Plan, owned by Presbyterian Healthcare Services in Albuquerque, increased its Medicaid membership by 18% to 193,000 in 2014. It was one of four health plans selected to manage care for New Mexico's Medicaid population, which grew because that state expanded eligibility under the Affordable Care Act.

Paul Levy, former CEO of Boston-based Beth Israel Deaconess Medical Center, said hospitals are starting health plans because handling both sides of the premium dollar helps them better understand the enrollment risk pool and medical cost trends. They're also doing it to gain dominance in their market. “I just don't think most of them are thinking about getting into insurance for the sake of better patient care,” he said.

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