How much it costs to start a health plan, and how big your health system should be.
Health systems in the United States are increasingly taking on risk for the care they provide. Some choose to enter into risk-based contracting with insurers, which many experts agree is a must-do for future success. However, other systems have decided to be more aggressive, launching their own insurance products. At the Hospital of Tomorrow leadership forum in Washington, D.C., on Nov. 5, four leaders of health systems with health plan offerings shared their experiences with operating health management organizations.
Is a new insurance product the right approach?
Sutter Health is one provider organization to recently launch a health insurance arm. In January 2012, the system applied for a Knox-Keene license to operate a health management product, and by January 2013, the system launched its plan, Sutter Health Plus. Despite the relatively quick launch, Stephen Nolte, CEO of Sutter Health Plus, said his biggest regret was not launching earlier. “Probably, we were late into the game by six months,” he said. “We made a decision not to participate in the health benefit exchange largely because we weren’t ready…I think I like having a seat at the table rather than not.”
Another health system represented on the panel, Inova Health System, took a different approach to its insurance product launch: it partnered with an insurer. Inova entered into a 50-50 ownership joint venture with Aetna in 2012, and launched its Innovation Health in Jan. 2013. When determining which insurer to partner with, John J. Moynihan, MD, CMO of Inova Fairfax Hospital in Falls Church, Va., said Inova looked for a company with a strong reputation and brand recognition as well as scalability and potential for market growth.
Steven Shapiro, MD, chief medical and science officer at UPMC, spoke on UPMC’s more than 15 years of experience in operating a health plan. He explained that, initially, UPMC developed its insurance product as a competitive strategy against dominant insurer Highmark, which managed care for roughly 70 percent of its market. However, what started as a defensive strategy has turned into a major advantage, as it’s allowed UPMC to better understand the costs of the care it provides. After all, healthcare reform and other forces will “create a price-sensitive consumer that’s going to force us to continue to have this migration from volume to value,” he said.
For all three executives, the opportunities afforded by developing capabilities around managing population health outweighed the costs to develop and launch a health plan.
How big do you need to be to launch a health plan?
Despite the advantages of launching a health plan, doing so requires a great deal of resources, which translates to high start-up costs.
Mr. Nolte said health systems should expect to spend at least $50 million to develop an insurance arm. When Sutter Health did this, it was forced to limit its other capital initiatives. “This is not a dip your toe in the water exercise,” he said. “Finding the right resources is very difficult. It’s a very limited commodity for the right people and systems.”
Therefore, systems must be large enough to have funds to cover start-up costs and enough potential covered lives for appropriate actuarial risk.
However, if they can do this, the benefits of operating a health plan are large.
“At the end of the day, I think we’re going to get a better care system for our patients, and for our caregivers, it’s still going to be one of the most rewarding careers possible,” said UPMC’s Mr. Shapiro.