There have been a flurry of articles in the past months about more hospitals becoming insurers and more insurers also becoming providers. In most of the articles, there is a comment that these hospitals are trying to become fully integrated payer-providers just like Kaiser. No they are not. The payer provider model has been around US healthcare for a very long time, but the Kaiser twist on it is very wierd and as far as I know, no one else does it quite like Kaiser.
Kaiser is a fully integrated payer provider with exclusive usage. What does that mouthful mean? It means Kaiser owns its own hospitals, owns its own labs, owns it own rehab places, and 99% of the doctors that its members see will be employed and receiving a salary from Kaiser. It also has an insurance arm. This part is not too unusual. Geissenger in Pennsylvania is like that. Steward in Massachusetts is like that. Medstar in Washington/Baltimore is like that. Sutter Health in Northern California is becoming an integrated payer-provider. This part of the model is fairly common, and it is becoming even more common as the large hospital groups which are particpating in ACO experiments realize that they need the claims and predictive modeling capacity of an insurance company, so selling insurance is a short leap.
However, the unusual part of the Kaiser model is the exclusivity. Kaiser only allows its insured members to use its facilities and doctors for non-emergency care. If there was a major crisis, Kaiser would open its doors to a trauma stream but on a day to day basis if you are not insured by Kaiser and you need an ACL repair, you are not allowed into the Kaiser hospital four blocks from your house. If you have a heart attack, the ambulance will drop you off at the Kaiser facility four blocks from your house and Kaiser will stabilize you to the point where you are capable of transport and then ship you out. This part is extremely unusual.
Medstar in Washington D.C. owns Georgetown University hospital. GUH would go bankrupt if it only treated Medstar patients, so GUH takes Medstar insurance plus most if not all of the other major carriers who have a presence within 100 miles of Washington D.C. Vivity in Southern California has several world class medical centers. None of those centers could survive on the projected Vivity membership census. So Vivity member hospitals will take anyone who can pay. Geissenger hospitals will accept other major carriers as well. These organizations, and almost all other non-governmental payer-providers are not exclusive walled gardens that systemtically seek to minimize interaction with the entire US healthcare delivery ecosystem.
Kaiser is different.
The only comparable large scale delivery system in the United States is the Veterans Administration. The VA owns their own facilities, they own their own labs, they own their own rehab places, and they employ all their own docs. VA members have a few more options as they can go out of network and get private insurance, but the VA pays only when its covered vets get services at VA facilities by VA docs. I can not go to a VA hospital for anything despite the fact that the regional VA hospital is, depending on traffic, sometimes the hospital the least time away from my house.
So what does this difference mean?
Is it a distinction without a difference? I don’t think so. I think the Kaiser model allows it to capture and internalize significantly higher percentage of preventive and care coordination benefits than most other integrated payer provider models and far more benefits are captured than segregated payer/provider models. It allows for a common focus and a shared focus on quality and risk minimization as aligning incentives to pay docs to not order a needless test actually makes sense in all scenarios. Other integrated payer providers that are not exclusive walled gardens hvae the incentive to perform high quality and efficient care on their insured members but wasteful care on patients who are insured by someone else. A Sutter doc who orders an MRI on a non-best practice basis for a Sutter member is costing the company money, but ordering that MRI for an Anthem or United Health insured patient is a a revenue gain. Most providers don’t change their patterns of practice on a patient by patient basis, that means aggregate performance on minimizing needless tests, minimizing preventable care incidents is conflicted with revenue maximization.
Very few if any current integrated payer provider will move to the Kaiser exclusive walled garden strategy as the hurdles to clear are enormous. If there was a current large scale non-exclusive integrated payer-provider that wanted to go to an exclusive payer-provider model, it would face several massive risks. The first and greatest risk is losing the heads in beds count. Hospitals and other large scale medical facilities operate on a financial basis like Las Vegas hotels.
Hospitals and most other medical practices are the same way. Just opening the doors is extremely expensive as the fixed costs are very high. However, the marginal cost of treating the next patient for most situations (high end drug treatments excluded) are not that high. Hospitals with high census or heads in beds counts are able to use the high usage of their facilities to cover fixed costs and then operating costs.
Most of the major payer providers are based on general purpose hospitals or major academic medical centers. The operating margins are not excessive (3% to 8% per year) unlike specialty physician owned hospitals. Margins have been under pressure for years due to the combination of Sequester cuts, lower private reimbursement rates, fewer admissions, more CMS penalties for low quality care, and the proliferation of Medicare plus a kicker Exchange plans. Most hospital chains will see lower margins in the future. Moving to an exclusive model would mean that a significant portion of the daily treated population can no longer be treated at that hospital. This is a massive risk.
The two options of revenue replacement are to either convert those commercial members from other carriers into commercial members covered by the insurance side of the integrated payer-provider OR replacing other carrier commercial members with more government insured individuals (Medicaid and Medicare primarily). The problem with the first strategy is that conversion is a tough sell unless the hospitals in the newly exclusively payer-provider system have an amazing price, prestige and hopefully quality difference than the next best alternative. People don’t want to change their docs, they don’t want to be restricted in choices, they don’t want the hassle of switching carriers unless they absolutely detest the other available options. The problem with the second strategy is that Medicare and Medicaid tend to pay significantly less per service rendered than other private commercial insurance. There will be some groups who switch to maintain access to the regional high prestige but high cost hospital, but a system can not count on a mass conversion. Some of this will be counteracted by bringing current system members into the sytsem instead of having them receive servivces at other in-network hospitals and providers. The math is tough to make work over a five year conversion process.
The revenue risk is the biggest risk that will stop non-exclusive mostly open payer providers from converting to a Kaiser walled garden approach, so I don’t anticipate seeing full conversions. There have been some rumors and rumbles that there will be at least a few payer-providers will install significant gatekeepers and low walls for their network to keep most of their members in and other people out but the walls won’t be high nor hard to hop over.
Kaiser is wierd in the American context, and I anticipate it will continue to be an unusual but highly successful implementation of a fairly unique non-governmental model.