Health systems with insurance operations have tough 2015

Not-for-profit integrated health systems continued to make money in 2015, but the margins were a lot tighter than the year before, according to a Modern Healthcare analysis of financial filings. In some instances, their operational surpluses were slashed by half or more.

These systems—which combine hospitals, doctors and health insurance operations under one umbrella—have become more common since the Affordable Care Act was enacted.

The law encourages more risk-taking from providers, and there's no greater risk than handling the entire insurance premium. But recent financial results show that the payoff won't be immediate.

Many delivery systems that stumbled in 2015 had either just started their own health plans or acquired one.

“We have seen some of the hospital systems new to insurance have really stubbed their toe,” said Jim LeBuhn, a senior director at Fitch Ratings who tracks not-for-profit hospitals. “And that is partly because they are just new to it, and they don't have as diversified a book of business.”

Several other factors have played into the declining finances, even for more established integrated health systems. The ACA's Medicaid expansion provided a large, positive jolt starting in 2014, but became less of a factor in 2015. High utilization on the exchanges and the decline in fully insured commercial plans, typically the most profitable segment for insurers, have continued as well.

Newer payer-provider systems include UnityPoint Health, based in West Des Moines, Iowa. UnityPoint posted a 1.7% operating margin on $3.89 billion in revenue in 2015, compared with a 3% operating margin on $3.7 billion in revenue in 2014. UnityPoint executives said in their financial filings that “high levels of insured medical claims expenses” contributed to the weaker numbers.

Northwell Health in Great Neck, N.Y., posted a 1% operating margin on $8.72 billion in revenue in 2015, down from the already tight 1.2% margin from 2014. Northwell launched its insurance arm a little more than two years ago, but executives aren't worried about the results so far.

“Having an insurance base has great potential, but it's a long-term play,” Northwell CEO Michael Dowling told Modern Healthcare last year. “I look upon this as a five-year play before you're going to see any substantial results.”

Most analysts agree hospital-owned plans need to have several hundred thousand covered lives before the finances become sustainable. “There's a certain amount of critical mass you need to have to spread that insurance risk out,” LeBuhn said. “It's sort of easier said than done.”

But even the health systems that have operated insurance divisions for decades encountered troubles last year. Intermountain Healthcare in Salt Lake City posted a lower margin, thanks in large part to huge shortfalls in risk-corridor funding from the ACA's exchanges and the lack of Medicaid expansion in Utah.

The Carle Foundation, a prominent insurer and network of hospitals and doctors based in Urbana, Ill., had medical-loss ratios “running above 100%” in certain lines of business in 2015. Carle posted a 1.3% operating margin on $2.49 billion in revenue last year, a large dip from the 4.6% margin recorded in 2014.

Presbyterian Healthcare Services in Albuquerque greatly benefited from the state's Medicaid expansion in 2014, which resulted in a somewhat high 6.5% operating margin that year on $2.65 billion in revenue, said Dale Maxwell, Presbyterian's chief administrative officer. In 2015, as more insured patients started using services, the bottom line began fading.

Presbyterian closed last year with a 4.3% operating margin on $2.9 billion in revenue.

Presbyterian has seen an evolving payer mix, however, from both sides of the business. The number of patients who have commercial health insurance has either been flat or declining annually, Maxwell said. “We're just not seeing employers either growing in New Mexico or new companies coming into New Mexico,” he said.

Sanford Health, based in Sioux Falls, S.D., posted a 2.5% operating margin in the first nine months of its fiscal 2016 on $3.16 billion in revenue, down heavily from a 5.3% margin in the same period last year on revenue of $2.76 billion. JoAnn Kunkel, Sanford's chief financial officer, said the health plan operations are “definitely” the main challenge. But she said her system has invested in health insurance for a long time and won't waver from that focus.

“If you take the first dollar and kind of take out that middleman ... we do feel that's the way to manage the financial side of healthcare in the future,” Kunkel said.