As health care delivery and payment models continue to evolve, some hospitals have decided to take more control over their private payment options and offer their own health plans. By cutting out the middleman of other insurers, these integrated hospital systems are able to oversee health care spending and ensure that patients receive the services they need. Through an interview with David M. Kaufman, partner at Freeborn & Peters, LLP and key member of its Health Practice Group, this Strategic Perspective analyzes the qualities, viability, and future of these health plans.
Plan Size, Features, and Margins
In 2014, provider-owned health plans covered 15.3 million patients. Most of the growth in provider-owned health plans since 2010 has been in Medicaid managed care. According to a McKinsey & Company (McKinsey) analysis, Pennsylvania, Michigan, New York, and Texas have over a million members enrolled in provider health plans. Although the plans remain small compared to the overall market, they have about a 16 percent market share for Medicare Advantage and 31 percent of the total managed Medicaid market. Operating margins for such plans are narrow, averaging 1.3 percent for managed Medicaid. Plans with fewer than 100,000 enrollees and those with over 500,000 enrollees have fared the best (averaging 1.58 percent and 2.95 percent, respectively), while those in the middle range have operated at margins of 0.53 percent.
In a 2015 survey, McKinsey asked over 2,200 people what features they would like to see in an integrated delivery network (IDN), which seeks to provide comprehensive care supported by an internal health plan. The most appealing features were flexibility in appointments (such as after-hours, weekends, and guaranteed appointments) and robust electronic health records (EHRs). They wanted providers and their insurer to (1) be able to see all of their health data in one file, (2) share that data easily between providers, and (3) have coordinated care. Health systems that include health plans have the opportunity to tailor health services to patients’ desires and take advantage of a health system’s strengths.
In an interview with Wolters Kluwer, David Kaufman pointed out that large health systems with a wide range of services are likely candidates for forming their own health plans, and noted that joining an accountable care organization (ACO) to test taking on more risk is a logical first step for hospitals not yet ready to fully implement a health plan.
Why have hospitals chosen to create their own health plans?
A: Hospitals that have formed their own health plans are seeking greater control over health care financing and the ability to provide comprehensive services and care to their patients. Larger systems provide a broad spectrum of services with medical groups, outpatient clinics, long-term care centers, hospice, and home health services in expanded geographies. Adding a health plan to such systems may be a logical next step. A hospital owned health plan also provides greater control over payment sources than other new arrangements such as ACOs formed by established insurance companies.
Some systems have seen opportunities to serve niche markets, such as Medicaid, where expansion has broadened eligibility and capitated arrangements allow systems to focus on managing a specific market segment with which they are familiar. Since marketplace consumers appear to be motivated by price as much as brand, the Affordable Care Act (ACA) (P.L. 111-148) marketplaces have provided an effective place for new plans with tailored offerings to be marketed.
How does the integration of care delivery and insurance operations work?
A: The goal of integrated health care delivery systems is to provide a full range of services in a user-friendly, one-stop-shopping environment that eliminates intermediaries and improves patient satisfaction, wellness, and health outcomes at a reasonable cost of care. Success depends on many factors, such as a strong relationship between hospital management, the physicians, and management of the insurance operations. It is critical to establish a system of care and quality management that allows efficient coordination between the different parts of the organization. Forging partnerships between traditionally fragmented segments of the health care system is critical to the success of an integrated system.
How do the systems ensure that quality of patient care is prioritized over cost?
A: The transition from fee for service reimbursement to paying for value will help ensure that quality of patient care is prioritized over volume of care. Under the traditional fee-for-service system, a specific amount is paid for each service provided so that providers are reimbursed for the number of services performed regardless of quality of outcomes. Payors developed methods, such as requiring prior authorization and pay-for-performance measures, to add quality and outcome measures to fee-for-service reimbursement methodologies. In the years since enactment of the ACA, alternative payment models have been developed to link quality and outcomes to reimbursement amounts. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) (P.L. 114-10) has introduced new value-oriented payment options in the Medicare program. The Merit-Based Incentive Payment System (MIPS) and incentive payments for participation in certain Alternative Payment Models (APMs) will transform the Medicare fee for service reimbursement system. Similar methods in the private insurance market include episode-of-care or bundled payments, in which a single amount is paid for all of the services provided to patient during an entire episode of care. That method encourages providers to coordinate care and be efficient in providing services. Capitation is another reimbursement option that provides for efficiency of treatment and also provides an incentive to limit episodes of care. Providers are at risk in a pure capitation model and as a result may have an incentive to avoid patients with multiple or expensive-to-treat conditions unless a guaranteed issue requirement precludes such conduct.
To ensure that providers are not encouraged to withhold services, payments models may provide for the additional reimbursement for outlier patients, rewards and penalties based on outcomes, and public reporting and measurement based on quality ratings. In addition, mechanisms such as risk adjustment provisions or condition-adjusted capitation can also address concerns of covering more expensive-to-cover patients.
Which implementation approaches are proving to be the most effective and why?
A: The most effective implementation approaches are those that are tailored to and take into consideration the characteristics of the specific hospital(s), physicians, and population of the market in which the integrated system will operate. Successful integration requires partnering and buy-in between the different stakeholders in an integrated system. Collaboration is essential requiring the efforts of people with diverse skills who share a vision and are willing to innovative. Understanding who is utilizing services most intensively and how best to manage the care of that group is critical to success.
How are providers reacting to participating in an integrated system? What benefits to providers or areas of concern for providers are commonly noted?
A: Doctors are increasingly forming and joining larger groups, including joining integrated systems. The advantages for doctors are that they can focus on the practice of medicine rather than having to address operational issues and take the financial risks associated with running a solo or group practice. In addition, in a larger, well-financed system, doctors can gain access to the modern equipment, imaging devices, administrative support, and financial and intellectual resources needed to stay current with the changing state of health care.
What options are available for health systems that want to enter the market but are not ready to create a health plan?
A: Health systems considering taking on some risk but not ready to establish a full-blown health plan with all of its financial and regulatory requirements have several options. They can start building care management capabilities by working with their own employee benefit plans. Those interested in taking on risk in a limited fashion can start with targeted markets, like Medicare Advantage and Medicaid. Another alternative to mitigate concerns relating to taking on risk and the possibility of antagonizing insurers (resulting in less access to the insurers’ customers) is to partner with established insurers by forming ACOs and similar arrangements.
What are the fundamental issues causing insurers to pull out of the marketplace, and what can health systems learn from their mistakes?
A: A significant issue causing certain insurers to pull out of the ACA marketplace is that the individuals covered under the exchange plans generally have had higher risk profiles than those covered under employer-based plans. Carriers have reported Medical Loss Ratios in the individual marketplaces of over 100 percent, which is not sustainable for any insurer long term. However, all carriers are not suffering losses. Carriers who have traditionally managed Medicaid covered populations are demonstrating financial success and are expanding into new markets. The exit of certain large traditional carriers indicates that marketplace participants should utilize a business approach for managing a significantly higher risk population within the ACA regulatory structure.
Large hospitals may be the most efficient insurers of their own care. Yet even as they implement their health plans, these systems must keep in mind that they are dependent on other payers. Provider-owned health plans must find a balance between creating benefits for both patients and the hospital without alienating other insurers and staying financially viable while potentially covering an expensive patient base. Hospitals may find a market opening as marketplace options narrow and consumers search for alternatives, but the risks may be a deterrence for some systems.
Attorneys: David M. Kaufman (Freeborn & Peters LLP).
Companies: McKinsey & Company
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