Health insurance is a competitive and volatile business, as some health systems that have entered the market have painfully discovered.
But they're making the leap because the payoff is often a bump in revenue at a time of slow growth for hospitals.
“In the next several years an increasing number of not-for-profit hospitals will enter the commercial health insurance business, looking to improve care management and gain market share,” said a report released last week from Moody's Investors Service.
And they're making the move even though it's straining their margins.
Moody's found that in 2014, not-for-profit hospitals with a health insurance business operated at noticeably lower operating cash flow margins, 3.7%, than similar health systems without insurance, 4.8%.
It's startup costs and short term losses that eat away at margins, the Moody's report said. “Hospital boards and management teams must carefully consider their appetite for lower margins in the near-term while pursuing long-term benefits.”
One benefit shows up in the median operating revenue for systems with insurance companies, which was $2.73 billion compared with $2.67 billion for those without insurers, the report said.
But that's only a benefit if the insurance operations remain profitable, and that requires expertise in underwriting and marketing, which health systems often lack, said Mark Pascaris, one of the Moody's analysts who authored the report.
“It's a completely different skill set running a hospital operation versus operating a health plan,” he added.
Some systems have hired insurance executives to help navigate their new space.
Still, even those with plans to expand broadly into health insurance, like Catholic Health Initiatives of Englewood, Colo., have hit speed bumps.
The system reported losses of $23.7 million on revenue of $377.6 million for its health plan for the fiscal year that ended June 30.
North Shore-LIJ Health System, based in Great Neck, N.Y., reported a loss of $12.4 million on its health insurance startup, CareConnect, during the first half of the year.
Its revenue, however, tripled during that time to $95.3 million.
Ascension, the largest U.S. not-for-profit health system, has publicly discussed a strategy to pursue large employers after acquiring a Michigan health plan this year.
Sutter Health, Sacramento, Calif., announced last week it was expanding its HMO into five additional California counties. The Sutter health plan was launched in January 2014.
But many health systems that opened health plans in the 1990s saw losses and closed or sold the insurance business.
Piedmont WellStar HealthPlans this week announced plans to exit Medicare Advantage next year, citing “premium deficiencies,” in a statement.
Piedmont Healthcare and WellStar Health System, which also sold employer health plans, had 12,000 enrolled in the Medicare managed-care plan. They will work with enrollees to find new options during open enrollment next month.
Piedmont and WellStar officials declined interview requests, but told providers that the plan failed to win enough business and generate enough revenue to be sustainable, Georgia Health News reported.
The system-owned plan is not the only insurer to drop Medicare Advantage, others have done so or scaled back benefits because of rate cuts, Modern Healthcare reported in August.