Hospitals and health systems in the U.S. have been facing a new challenge lately: taking on risk. Many organizations are taking on risk through new contracts with payers, but others are taking risk-baring to another level: becoming a provider-sponsored health plan.
After provider-sponsored plans became widespread in the 1980s and 1990s, a few organizations' plans have stood the test of time: Kaiser Permanente in Oakland, Calif., Danville, Pa.-based Geisinger Health System and UPMC in Pittsburgh come to mind. But recent events in the industry have made the concept attractive to many health systems once again.
Nearly every hospital is projecting utilization of their inpatient services to drop in the years to come, according to Phil Kamp, CEO of Valence Health, a value-based healthcare solutions company. Insurance companies benefit from this decreased hospital utilization, so forming a health plan can help provider organizations capitalize on what would otherwise be a revenue loss. "It's about taking the dollars that are getting paid today," he says.
In addition to benefiting from lower utilization, provider-sponsored health plans also allow the provider organization to plan benefits specifically for their community, something they cannot do when forming risk-based contracts with commercial payers. Along with meeting the clinical needs for population health, provider-sponsored plans also let health systems have a role in financing care.
For instance, one children's hospital with its own health plan for Medicaid patients noticed a prevalence of premature births among Medicaid moms. "So they developed programs around reducing prematurity," Mr. Kamp says. More specifically, the hospital created a program that offered educational baby showers for patients with incentives for attending, along with incentives for their prenatal visits. As a result of the new benefits, the hospital saw a reduction in premature births.
Further, provider-based health plans tend to excel when individuals make their own insurance decisions — rather than an employer making it for them — because the network does not need to be very large, because people tend to look for providers in their immediate area.
Though there are many benefits of forming a health plan, some hospitals are better-suited for the task than others. Mr. Kamp notes the following three types of organizations:
• Children's hospitals. Children's hospitals are prime candidates for forming their own health plans for Medicaid patients. Individuals make their own insurance choices for Medicaid coverage, which is ideal for provider-sponsored health plans, according to Mr. Kamp.
• Rural hospitals. In a one-hospital town, most employers are looking for networks that include that hospital and its medical staff.
• Large systems. "In a big city, the bigger it is the harder it is to become a provider-sponsored health plan," Mr. Kamp says. But there is one exception: if an organization has an extensive network. If a system has a large amount of market share in a city and surrounding areas, a health plan is plausible.
Challenges
Though forming a health plan can be beneficial for certain hospitals, even hospitals in ideal situations still have to conquer challenges associated with forming a health plan. On top of state and federal regulatory concerns, Mr. Kamp highlights the following as challenges to consider as providers begin building payer capabilities:
• Payer reaction. "If you become a health plan, you're going to compete with health plans in the market," Mr. Kamp says. Commercial payers may choose to end contracts with a hospital that forms its own health plan, for instance, so hospitals need to be prepared for that possibility. However, Mr. Kamp notes that dominate providers in a market are in a better position, as other payers will still want or need them in their networks.
• Risk-based capital. In order to have a health plan, organizations need to build enough money in the bank to cover premiums, usually one-seventh of the revenue base, according to Mr. Kamp. "That's going to be a barrier for some organizations," he says, as many hospitals have trouble building that capital on their own.
• Knowledge. Hospital executives are good at running hospitals, but many have little to no experience running an insurance company. That lack of knowledge and experience is another barrier to creating a health plan.
In the future, Mr. Kamp expects to see groups of independent hospitals and physicians affiliating, without necessarily consolidating, to form health plans. This allows the participating organizations to gain scale and a large enough population base, because "the more lives you have, the less risk there is," he explains. Also, forming a larger organization also helps hospitals overcome the capital barrier. "They can build risk-based capital together," he says.