Should providers become payers? 4 key considerations

Health systems across the country are exploring the benefits of vertical integration, and an increasing number of systems are choosing to offer their own health plans.

Between 2010 and 2014, the most recent year for which data is available, the number of providers offering health plans steadily increased from 94 to 106, according to a 2016 report by McKinsey & Co.

However, financial performance of provider-led plans remains mixed. Of the 89 plans analyzed for the McKinsey & Co. report, more than 40 had negative margins in some or all of the past three years.

Due to the risk involved, launching a health plan isn't the right choice for all systems. Daniel Krane and Matthew Amodeo, both partners at Drinker Biddle & Reath, recently spoke with Becker's Hospital Review about which systems are best suited to start an insurance plan and the challenges associated with provider-led insurance products.

Here are four key points shared by Mr. Krane and Mr. Amodeo.

1. Systems should take a gradual approach. When deciding whether to start a health plan, Mr. Krane says it's important for systems to determine where they fall on the risk spectrum. "On one side is fee-for-service and on the other side the healthcare provider forms an insurer and takes on complete risk." Other risk-based models like bundled payments fall in the middle of the spectrum, according to Mr. Krane.   

Once determining where they fall on the risk spectrum, systems should take an "evolutionary approach," says Mr. Amodeo. They should start with an agreement that has no downside risk like forming an ACO through the Medicare Shared Savings Program. The system should then gradually take on risk. If the system has success under those risk-based contracts, it is finally ready to consider launching a health plan. "The more experience they have…the easier it is for them to enter the provider-sponsored plan space," says Mr. Amodeo.

2. It can be difficult to make a profit. Depending on the kind of insurance product offered and market conditions, it may be extremely difficult for a system's health plan to make money. "Even for a fairly large system, there could be significant challenges, and it could lose money depending on the product," says Mr. Krane. Like other insurance carriers, most provider-led health plans have struggled to achieve profitability in the individual market on the Affordable Care Act exchanges.

3. Co-branded products are an option. When it comes to launching a health plan, a health system doesn't have to go it alone. A system can partner with an insurance carrier and offer a co-branded, limited network product, according to Mr. Amodeo. This type of arrangement helps drive volume to the system, as only its facilities are included as in-network providers under the plan.

4. There are opportunities for systems of all sizes. Starting an insurance plan requires a large financial commitment, which is why most provider organizations that launch health plans are larger, more sophisticated systems. However, there are opportunities for smaller systems as well. For instance, "five systems could form an insurance company together because none are large enough to do so alone," says Mr. Krane.

Mr. Krane also notes that insurance is a highly regulated industry. Therefore, no matter the size of the system, it must have seasoned management who have experience in the insurance space.   

More articles on healthcare finance: 

Cleveland Clinic's operating margin slips in first half of 2016
23 Massachusetts hospital CEOs, public officials named to state commission to study healthcare price variation
Northwell Health's finances steady despite insurance division losses





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