Hospitals as insurers: Competition, costs, and considerations [Special Report]

By Joanne Finnegan

In a growing response to changes brought by the Affordable Care Act and the move to value-based payments rather than the traditional fee-for-service model, many hospital systems opt for a new strategy: launching their own health insurance plans.

In fact, a 2013 survey by the Advisory Board found 28 percent of hospitals hope to launch their own insurance plan within five years.

It's a dramatic shift, with health systems not just seeking reimbursement from insurance companies for services they provide, but also receiving and paying those insurance claims.

However, establishing an entirely new form of business isn't easy and isn't for everyone.

In this special report, FierceHealthcare takes an in-depth look at hospital systems that have become insurers and what organizations must consider before taking on this business line.

University of Pittsburgh Medical Center: Long-time insurer

Becoming an insurer is a complicated business, says Diane P. Holder, executive vice president at the University of Pittsburgh Medical Center (UPMC), who also serves as president of the UPMC insurance services division, and president and CEO of UPMC Health Plan. 

"It's a lot of moving parts. You have to be committed to changing the traditional paradigm you have as a health delivery system. You need to round out a different approach," Holder, pictured, told FierceHealthcare in an exclusive interview.

Many hospitals and health systems look to UPMC and hope to repeat its success. The health system first launched its own health plan in the early 1990s and is now the nation's second-largest hospital-owned health insurance plan, serving $2.6 million members, primarily in Pennsylvania. In fact, many hospitals and systems interested in launching their own insurance business turn to UPMC as a model.

A big advantage for hospitals is that they can take the premium dollars and invest them in ways that make sense to them, instead of getting paid for each claim by an insurer.

Many providers want to eliminate the redundancy between payers and providers and "go right to the top of the food chain," says Holder. "They think, 'I might as well own the premium and try and figure out how to live within that cost structure and then I can be more flexible in how I develop care programs'. We've seen a lot of provider systems developing their own health plans."

MedStar Health: Three health plan offerings

For MedStar Health, the largest non-government healthcare provider in the Baltimore-District of Columbia region, the health insurance business is one piece of an overall strategy to help guarantee success into the future.

It's part of a shift from competing by offering integrated, comprehensive medical services to offering lower cost preventive care in which it receives payment to keep people well.

"We wanted to have an enduring strategy for MedStar that didn't depend on whatever came out of the legislative process," Eric R. Wagner, pictured, MedStar's executive vice president for insurance and diversified operations, told FierceHealthcare during an exclusive interview.

"Our view was things had to change in healthcare and we saw the population health management approach as being a component of that change," he says. For MedStar, a key initiative to new growth was becoming a large healthcare insurer, not just a provider.

The move made sense as it already had a foothold in the insurance business. In the late 1990s, MedStar started a small Medicaid health plan that served about 25,000 low-income people. It performed well in terms of quality and utilization metrics, as well as finances. But about six years ago, the company looked at its strategy for the future. "We realized that just being a provider organization and getting paid a fee-for-services or 'payment per click', if you will, was not where we ultimately need to be," says Wagner.

"We wanted to be in a position to benefit as we brought down cost, utilization of care, and raised the quality of that care. The insurance vehicle is one way to do that," he says.

With its decision to expand that insurance coverage, MedStar sought licenses in the District of Columbia and Maryland to launch a general health insurance plan. MedStar Family Choice, the original Medicaid HMO, has grown to more than 115,000 enrollees.  It has also added MedStar Medicare Choice with about 6,500 enrollees and MedStar Associates Health Plan that insures about 45,000 employees and their dependents.

"We don't think of it as just insurance. It really is built around population health management. But to truly be in the space you have to have an insurance license because you are accepting risk," says Wagner.

North Shore-LIJ Health System: Care Connect

The skill set to run an insurance company is different than the skill set to run a hospital or healthcare system and requires people with insurance experience to build the new model, says Howard Gold, executive vice president and chief managed care and business development officer for New York-based North Shore-LIJ Health System, which is among the latest health systems to venture into the insurance business.

MedStar had experience with its Medicaid health plan and continued to run that internally. For its two new ventures, it decided to collaborate with Evolent Health, a company that helps providers build a health insurance plan. UPMC started Evolent, although it is an independent company.

But North Shore-LIJ, which includes 20 hospitals in its system, introduced its CareConnect subsidiary insurance company in 2013. That meant building the infrastructure to get a license to operate an insurance company from the state of New York.

"We see ourselves as a provider, but this is just one other tool to diversify our population base and funding stream," says Gold, pictured right. But he warns that is not an easy road.

"This is not a trivial thing," he says, about launching a health insurance company. It requires resources and managerial and administrative expertise. "This is not an easy business."

Opportunities and challenges

Provider systems may have some advantages when it comes to population health management over traditional insurance companies, says Wagner.  When you are marrying the insurance side with the provider side you can take advantage of the capability to figure out what is a better way to deliver care, he says.

For example, a provider who manages the care of diabetic patients can help them avoid expensive emergency department visits and hospitalizations. A health system can be proactive in getting diabetic patients into care with its providers--setting up doctor appointments and ensuring someone monitors the patients' sugar levels and regularly checks their eyes and feet to avoid progression of the disease. Another example is working with pregnant women to ensure they schedule prenatal visits and reduce the number of low-birth weight babies.

But Wagner agrees, getting into the insurance business is not one that hospitals should take lightly. There's a big investment in reserves and those numbers can get quite large, before you actually generate income, he says.

"It is a very difficult business. There is more volatility associated with insurance. You need to be prepared mentally to take on that volatility and truthfully not to panic when you have a bad month," he says. For instance, a bad flu season that hits in February can mean lots of claims and high costs that make that month's bottom line look bad.

Insurers can predict their revenues for January once the open enrollment period closes. But then you must manage your expenses and help manage your patient population. "It's a mind-set change," says Wagner. "We're fond of saying, 'it's called risk for a reason.' You have to be prepared to mitigate against that and also manage that."

"Don't have the rose-colored glasses on when you evaluate it," he says. Holder agrees. "Go into this with your eyes wide open," she says. 

If a health delivery system is looking to take on an insurance component, it must invest in that new business, says Holder. It will require financial infrastructure and technical support.  Be sure you understand insurance regulations, as it is a highly regulated business, she says.

Providers also need the right kind of talent, enough money in the bank to ride through the storms, and need to think through how it fits with their mission.

"It's important to strategically check out different approaches and get some advice and support," she says. Do a strategic assessment to determine if you have a large enough footprint and enough market share to make such a choice feasible. If not, think about creating alliances and putting together a network. 

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