Hospital Systems Branch Out as Insurers

originally appeared in The Wall Street Journal:

A increasing number of hospital systems are moving to start their own insurance plans, aiming to broaden their roles and prepare for the changes coming under the federal health-care overhaul.

Piedmont Healthcare and WellStar Health System, both in the Atlanta area, are set to announce a jointly owned insurance arm, with the goal of marketing coverage to employers and Medicare recipients in 2014. They also will consider selling coverage on a health exchange, one of the online insurance marketplaces required in each state by the health-overhaul law.

Piedmont and WellStar said their health plan would be built largely around their 10 hospitals and hundreds of affiliated doctors, and they will offer a competitive premium. We're broadening the reach of our delivery system, according to Piedmont's interim chief operating officer, who added that he expects the strategy to clearly have a positive impact on the quality of care.

In recent months, northern California's Sutter Health and New York's North Shore-Long Island Jewish Health System have said they would start selling health plans. A 2011 survey of 100 hospital leaders by health research firm Advisory Board Co. found that 20% of them intended to market an insurance plan. In 2010, around 10% of community hospitals owned, or were part of systems that owned, health plans, according to the American Hospital Association.

Typically, the new entrants will offer health-maintenance-organization-style plans that allow patients limited access to doctors and hospitals outside their network.

Some systems that have had limited insurance operations are expanding, including MedStar Health in the Baltimore-Washington area, which will add Medicare plans next year and is likely to have a plan on the Maryland health exchange, and Indiana University Health, which expects to start offering health plans to employers in 2013.

The moves reflect a broader blurring of the lines between those who provide health care and those who pay for it, as both sides increasingly aim to provide more efficient, seamless care. The hospital systems themselves are the product of a consolidation that brought together many hospitals and doctors.

Driving the trend is the mounting pressure to reduce costs, as well as the changes set to be unleashed by the health-care overhaul. In addition to adding coverage for millions of people, partly by expanding Medicaid, the federal-state health program for low-income Americans, the law will cut back on hospital payments by Medicare, the federal insurance program for the elderly. Some hospitals are starting their own plans for Medicaid recipients.

The hospitals expect to get a shrinking slice of reimbursements from the fees insurers and others pay for specific services. That payment system has been blamed for fueling rising health costs. Providers who depend solely on fee-for-service revenue will eventually have a slow death, according to the chief executive of North Shore-Long Island Jewish.

He said his hospital system intended to offer its own exchange plan, perhaps in 2014, the first year the health exchanges are supposed to be running. I want to go upstream as much as possible and take the premium dollar at the source, he said.

Because insurers pay claims for all doctor visits, lab tests and other care, they get a full view of their members. Hospital systems say they need direct access to that data, which they can get by offering their own plans, to manage patients better, avoiding duplication and detecting and treating problems early to head off pricey procedures later.

It's so much better for us to have, at least for a slice of our business, a total picture as to what's going on, according to a senior vice president at Sutter Health.

Still, most hospital systems have been stopping short of getting an insurance license, often taking more limited steps like striking reimbursement deals with insurers that reward them for providing more efficient care. Some are also forging partnerships with insurers that sometimes involve jointly selling a health plan built around the system.

Some hospital operators, including the University of Pittsburgh Medical Center and Intermountain Healthcare in Utah, long have had health plans. Others, including some health systems considering them now, have tried and failed with them in the past. The failures in part reflect the difficulties of reconciling conflicting interests: Hospitals typically make money when they fill their beds with patients, and health plans pay the bills for those admissions.

Another factor: Patients revolted against HMOs in the 1990s, when they were popular with employers, because they felt that HMOs limited their choices of providers and access to care.

The hospital systems may also create new fault lines as they compete against the other insurance companies that pay them, though their size and market power will make it tough for insurers to shut them out.

Aetna Inc.'s partnerships are lower cost, more flexible and more scalable for systems than building health plans from scratch, according to the chief executive of Aetna's Accountable Care Solutions business. Aetna's network includes providers who operate their own networks, but if a system became a significant competitor, competitive dynamics might push us…in a direction where we might not want to contract with them in a preferred state, or favor the system in Aetna's own plan designs.

Many of [the hospital systems] are also folks we do business with, according to Blue Shield of California's senior vice president for network management. There's a potential for that to be difficult.

Like insurers, which are building lower-cost narrow network plans for the exchanges, the hospital systems are betting that consumers will be willing to accept a smaller choice of health-care providers in return for the promise of smoothly integrated care and premiums that are likely to be lower. The hospital systems plan to build their coverage around their own networks, but may fill them out with other providers as well.

Hospital systems say their focus is on providing high-quality care, and they think that the better technology that helps them closely track patients will ensure they avoid some of the financial pitfalls of decades ago. Also, today there is financial urgency, according to the chief executive of Evolent Health, which is advising many hospital systems pursuing integrated operations, including Piedmont.

Piedmont and WellStar together have about 30% of the inpatient market share in the Atlanta area. Working together will spread out the fixed costs of starting a health plan, as well as offer greater reach in the combined network, according to the chief executive of WellStar.