From Inside Health Insurance Exchanges
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For the 2015 plan year, 75 provider-led health plans (PLHPs) offered coverage on public exchanges — about 10 more than last year, according to AIS’s Directory of Health Plans (see table, p. 4). Some industry observers contacted by HEX say PLHPs are positioned to win market share and could dramatically alter the health insurance landscape. But others predict that history will repeat itself.
Three decades ago, hospital systems around the country began to début their own health insurance entities — designed to go toe to toe with the more established carriers. Few survived. The idea of cutting out the middleman emerged again in the 1990s as provider-sponsored organizations (PSOs) took on insurers’ Medicare managed care plans. Again, the strategy largely failed.
But dramatic improvements in technology, increased focus on quality and the elimination of medical underwriting called for by the Affordable Care Act (ACA) could make provider-led health plans formidable competitors in the post-ACA world. Moreover, the public insurance exchanges have created a platform through which smaller carriers can compete with much larger entities on a level playing field.
“It’s a bit of a déjà vu moment. I worked for an HMO consulting company back in the mid ’80s, and many of our clients were provider-led and religious-affiliated health systems that were getting into the HMO business,” says industry consultant Joe Paduda, a principal at Health Strategy Associates, LLC. Back then, he says, some hospitals thought they could easily slip into the health insurer role and work directly with employers and consumers. Many of them failed because they didn’t appreciate everything that went into operating an efficient health plan. “There was a degree of arrogance on the part of providers. And there is a real risk that providers today suffer from that same ailment,” he asserts.
Managed care consultant Peter Kongstvedt, M.D., a senior faculty member at George Mason University, agrees there was a good deal of overconfidence among some hospital executives in the early 1990s. Back then, “cut out the middle man” was a rallying cry among hospital executives, he recalls. But cutting out the middleman without fully understanding the middleman’s role can have negative results.
At the time, hospital leaders were more focused on keeping their beds full than managing health care costs. And despite becoming insurers themselves, hospitals continued to rely on a fee-for-service model, which caused problems when some physicians provided more services than necessary. But those same doctors also helped to keep the hospitals beds full and boosted margins by overutilizing care paid for by Medicare and commercial carriers. “If you cracked down on them, they might have decided to take their patients to a competing health system,” Kongstvedt says. Another problem was that hospital executives often didn’t fully understand the difference between patients and members. As a result, they wound up enrolling the sickest and most frequent visitors into their HMO, which created a deep pool of bad risk. And they generally didn’t have the reserve levels needed to counter the higher risk.
Rick Corcoran, an audit partner at KPMG who works with both payers and providers, agrees that hospital systems of the 1990s lacked the underwriting and actuarial skill necessary to understand the risks they were assuming. “They didn’t understand how to price [their coverage] to make sure they had sufficient resources.”
Hospital systems that operate a health plan could help bring more patients into their facilities while countering shrinking reimbursements from insurers, says Gunjan Khanna, Ph.D., a partner at McKinsey & Co. “There is recognition that they can either contract with large health insurers — at reimbursement rates that are nearly intolerable to some of them — or they may lose market share. What they are doing with these [PLHPs] is trying to have more control over their destiny.” Khanna recently co-authored a white paper titled, “Provider-led Health Plans: The Next Frontier — Or the 1990s All Over Again?”
Not all hospital-based health insurance entities crashed and burned. The ones that succeeded typically were also often affiliated with organized medical groups, which had a more realistic view of what it would take to succeed, or were health systems with a large number of experienced physicians, Kongstvedt says.
He points to the University of Pittsburgh Medical Center’s UPMC Health Plan as a success story. In the early 1990s, UPMC hired a large number of physicians and acquired the medical group of a group-model HMO, which Kongstvedt headed at an earlier point in time. Hospital systems of today are substantially larger than they were 30 years ago when just one or two hospitals were behind a health plan. Health systems that include dozens of hospitals and 1,000 or more employed physicians aren’t hard to find. That means they have more to offer potential members than they did in the 1990s though they still need to have strong, cohesive medical management. They also have much deeper pockets and are able to satisfy risk-based capital requirements as well as being better positioned to manage risk.
Case in point: North Shore-LIJ Health System, which owns CareConnect Insurance Company, Inc. (see story, p. 6), generates about $7.5 billion in annual revenue. It has about 20 hospitals, three skilled nursing facilities, more than 400 ambulatory and physician practices and 2,750 employed physicians.
While Khanna agrees that hospital systems are much better financed than they were two decades ago, having enough capital reserves is critical to the success of PLHPs. “In the world of today’s low interest rates, starting a health plan might seem more feasible than if the cost of borrowing were higher,” he says.
The cost of health insurance coverage also has changed over the past few decades, and people have become more comfortable with restricted provider networks if they translate to lower premiums. Khanna points to last year’s exchange enrollment where a majority of enrollees chose narrow-network bronze and silver options. Employers, too, are growing more comfortable with tiered and narrow network options if they can reduce coverage costs. Moreover, public as well as private exchanges have created new distribution channels, which give PLHPs access to consumers and employers, says Khanna.
In the past, the collective purchasing power of customers existed only through employers, Corcoran adds. Exchanges offer a channel through which individuals can combine their purchasing power “and access the market in a way that provides a better price point and perhaps higher value….It remains to be seen whether the exchanges will level the playing field,” he says.
Also different this time around is the level of health insurance experience among PLHP executives. Most of the PLHP executives contacted by HEX have worked for one or more large health insurance companies.
While the ACA did away with medical underwriting, PLHPs might lack an understanding of some nuanced skills that are critical to running a health plan, such as utilization and provider practice patterns. “Anything that is done well looks like it is easy to do. And because of that, there is a lack of appreciation for health insurers on the part of providers. I think a lot of these [PLHPs] are going to make some of the same mistakes their grandfathers made in the ’80s,” says Paduda. What’s different this time around is the recognition that PLHPs can’t compete unless they achieve significant membership and market share. Mass, he explains, helps reduce technology costs and typically means better risk. “That’s something that wasn’t really understood 30 years ago,” he adds.
The McKinsey paper draws a similar conclusion when it comes to the importance of scale. It notes that unless a hospital system acquires a health plan with a substantial membership, it will need to invest “considerable capital” in back-end functions such as claims management and service operations infrastructure.
“The ones that are going to be successful will be the ones that fundamentally understand health-risk management and population-health management at a deeper level than health insurers,” Paduda says. “If PLHPs don’t make the mistake of thinking they understand health insurance, and if they focus on population health management, I think provider-based health plans are going to be quite successful.”
To see a copy of the McKinsey paper, visit http://tinyurl.com/ow9b3mh.
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AIS’s Directory of Health Plans: 2015, coming soon from AIS, includes insured and ASO medical membership in commercial, Medicare and Medicaid sectors. For information or to reserve your copy, visit http://aishealth.com/marketplace/aiss-directory-health-plans, or call (800) 521-4323.