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Transformation toward value-based healthcare is reshaping the delivery of care, patient expectations, and payment structures.
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As the country makes the shift to value-based care, many hospitals and health systems are contemplating how best to start managing population health under risk-based payment arrangements. As part of that equation, some organizations are considering whether their chances of succeeding in the emerging business model would be enhanced by developing, acquiring, or participating in provider-sponsored health plans.
Such plans typically are owned and controlled by one or more hospitals or health systems and can be a significant strategic asset in certain markets. But the decision whether to take on management of a health plan is a complex one. There is great variability from market to market, and careful evaluation, planning, and execution are essential. In many instances, it may be best to decide not to proceed.
For provider-sponsored plans to be successful, they must have appropriate scale and be underwritten, operated, and marketed in a manner consistent with the organization’s overall strategic plans.
Provider-sponsored health plans proliferated in the late 1980s and throughout the 1990s, when several hundred hospitals and health systems entered the health insurance business. The surge was driven by numerous factors, including the anticipated movement to capitation under managed care, a lack of competition among insurer-owned health plans, and the hope of achieving the margins enjoyed by those companies. Most provider-sponsored health plans formed at that time either failed or were sold. Only about 100 to 150 sizeable plans remain.
Today, many of the factors that drove interest in provider-sponsored plans 20 years ago have resurfaced with the implementation of the Affordable Care Act (ACA) and the transition to a value-based payment model. These forces, combined with the advent of health insurance exchanges this fall, have generated even greater interest among providers that want to offer a health plan directly to their patient population.
Several factors contributed to the inability of provider-sponsored plans to succeed in the 1990s, including the failure to achieve enough scale to manage risk, the lack of an adequate provider network, and poor underwriting. Providers currently considering entering into the health insurance market can learn from their predecessors. Past efforts suggest that a provider’s success depends on its ability to:
In addition, for plans to be formed by multiple provider sponsors, the sponsors must be able to both compete and jointly govern a health plan.
Organizations today that are considering whether to move into the health insurance business should carefully consider their options. Seeking outside expertise is recommended to help identify and evaluate existing provider-sponsored health plans in the region, and determine the best path forward based on a solid strategic-financial analysis.
Opportunities may exist either to join an existing multiprovider-sponsored plan or to merge an existing plan with another provider-sponsored plan. Such arrangements allow hospitals and health systems to more quickly achieve the scale required to assume utilization risk. As noted previously, however, the long-term viability of plans with multiple provider sponsors may be uncertain. The chances of success are greatly improved if potential partners serve different patient populations and if they maintain individual control over underwriting decisions and sufficient financial risk for services provided in their respective markets.
Developing a new provider-sponsored plan poses more challenges, and the associated risks likely are too great for most hospitals and health systems. Competition may be formidable from large established commercial health plans that have experience, large capital reserves, and economies of scale. In most cases, it may be advisable to consider partnering with an existing payer to form a narrow network product, or work with an outside firm that specializes in developing health plans. Even so, each opportunity is unique and requires thorough evaluation. Provider-sponsored health plans may be able to gain niche positions in given markets, but controlling out-of-area claim costs will continue to be a challenge.
Organizations that opt to establish new plans should engage in comprehensive planning to mitigate potential risk from the very significant capital investment, actuarial, and management expertise requirements. They should be prepared for losses that could be much greater than investment costs and returns, even in the long term.
Developing an insurance offering for the health insurance exchanges that are opening for consumer enrollment in October under the ACA may be the right-sized playing field for certain provider-sponsored plans due to their defined geographic scale. Again, rigorous planning is required to mitigate financial risk.
Mike Finnerty is a managing director with the mergers and acquisitions practice of Kaufman, Hall & Associates, Inc., Skokie, Ill.
Publication Date: Wednesday, May 29, 2013
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