It’s hard to be an insurer. Integrated Delivery Networks (IDN) have waves of popularity where hospital systems usually try to become an insurer. Occasionally insurers try to become hospital systems. We hear about Kaiser, Geissenger and a few other case examples on a regular basis as they should be able to align payer-provider incentives in a more coherent fashion as well as building deep, rich data sets which should power useful but non-obvious insights. I worked at UPMC Health Plan, part of a profitable IDN, before I came to Duke.
The Robert Woods Johnson Foundation recently released a review of the IDN’s that were created in the first half of the decade.
provider systems established 37 new health insurance companies and acquired five existing health plans….
it is not unusual for a startup health plan to lose money in its first years, only four of the new plans were profitable in 2015. Some
reported significant losses, and five have gone out of business. It has generally been a difficult time for health plan startups, as demonstrated by the demise of most of the health insurance cooperatives formed under the ACA and the large losses posted by companies like Oscar and Harken Health…..
Being an insurer is hard. Being both an insurer and a provider is even harder. The National Academy of Social Insurance looked at IDN’s in 2015 and made the following point:
There is scant evidence in the literature of either societal benefits or advantage accruing to providers from IDN formation. From the societal perspective, there is little evidence that integrating hospital and physician care has helped to promote quality or reduce costs….
From the provider perspective, the available evidence suggests that the more providers invest in IDN development, the lower their operating margins and return on capital…..
Moreover, there are few or no scope economies within health plans, hospitals, or physician groups —let alone between these lines of business contained within IDNs. Provider-sponsored insurance plans face similar problems regardless of whether they were formed by hospitals or physician groups: poor capitalization, lack of actuarial and underwriting expertise, limited marketing capability both to
employers and consumers, adverse selection risk, and an inability to reach minimum sufficient scale of enrollment.
To be a successful insurer, there is a chicken and an egg problem for open to the public IDN systems.
In order to gain good rates from providers, an insurer has to be able to promise a large and steady stream of patients. In order to build membership, the rates paid to the providers must be low enough to be reasonable for a competitive break even premium. A health plan needs members to get good rates, and it needs good rates to attract healthy members. Or it needs to be able to lose significant sums of money on bad contracts to buy significantly large membership for better contracts in the first renegotiation cycle. IDN’s can get around this to some degree if they price their own services at a significant discount to the rest of the market.
If they are selling commercial plans where they pay non-owned providers standard commercial rates but they only pay their owned providers Medicare like rates, this is a massive opportunity cost but not an explicit cash cost. This only works if the providers have both spare capacity and the ability to attract membership on their own. UPMC could do this as the hospital side of the system has a positive regional brand. A small community hospital chain in a quasi competitive region may not be able to do this.
Finally, the mindset needed to be a good insurer is very different than the management mindset of being a good hospital. The insurance side of the business will want to do as much as they can to keep people out of a hospital. Insurers want patients to avoid inpatient stays, they want patients to avoid hospital based testing, they want patients to avoid any service that comes within 1,000 feet of the hospital parking lot. Hospitals are expensive. Hospital executives, in most states, have strong financial incentives to find ways to get people to come to the hospital.
Managing this inherent tension between keeping people out of the hospital and putting heads in beds is a tough swing. Furthermore, the technical skills of being an insurer with good actuaries, good pricing, an aggressive knowledge of risk adjustment and pharmacy benefit management and a dozen other unique to insurance skill sets are not skills that many hospitals use. There is a significant learning by doing curve needed to build up a minimally capable skillset.
Being a new insurer, and especially being a new, small insurer that is attempting to bridge two worlds of being a provider and a payer, is tough. It’s a rough business model.
whereaway
I work for a large insurer who is, along with their IT arm, acquiring practices under an accountable care model. I’d be interested in your take on the mirror image to this discussion – insurers becoming providers.
Fair Economist
I find it surprising there’s no benefit to vertical integration, just because a large part of the waste in our current medical payment system is game-playing between insurers and providers. You’d think making them part of the same organization would cut down on the game-playing. I know there can be intra-organization conflict, but still, there should be *less*.
rikyrah
Mayhew,
Did you see the article about the GOP ‘ Moderates’ caving on Medicaid?
Key GOP centrists open to ending Medicaid expansion
06/07/17 05:20 PM EDT
GOP moderates in the Senate are open to ending federal funding for ObamaCare’s Medicaid expansion, but want a longer deadline for ending the additional funding than their leadership has proposed.
Sens. Rob Portman (R-Ohio) and Shelley Moore Capito (R-W.Va.) have proposed a seven-year phase-out of federal funding for the Medicaid expansion, beginning in 2020 and ending in 2027.
Senate Majority Leader Mitch McConnell (R-Ky.) proposed a shorter, three-year phase-out that would end in 2023 at the Senate lunch on Tuesday.
http://thehill.com/policy/healthcare/336814-key-gop-centrists-open-to-ending-medicaid-expansion
Camembert
@Fair Economist: That’s not quite what this post is saying — what it’s saying is that the administration of either hospitals or insurance networks has different frames of mind when they’re running their own orgs. There is, of course, a frame of mind that can come from running an integrated org.
Barbara
What I have observed in my nearly 30 years of seeing wave after wave of this concept being tried, rejected, and tried again, is that it is very, very difficult but not impossible for a hospital to look at an insurer as anything other than a vehicle for goosing admissions. There are a small number of exceptions. Most plans created by hospitals end up getting sold to commercial insurers never having turned a profit, and often not having attracted a high number of enrollees net of the hospital’s own employees. Physician groups seem to be able to look at the concept more holistically, probably because they have less overhead and because only a relatively small percentage of physicians really rely on hospital admissions for the majority of their income. However, physician created plans often end up getting sold, but more because the payout is often too big to pass up.
BTW: My husband pointed me to this article: http://www.newyorker.com/magazine/2017/05/29/a-bipartisan-way-to-improve-medical-care
The New Yorker consistently has some of the best and most interesting coverage of health care issues.
Barbara
@rikyrah: They are spineless twits. All of them are just looking for cover, so they can keep up the pretense that they care when they don’t. If they really do repeal the ACA, Democrats should begin the campaign for Medicare for All. “We tried it their way and they won’t take yes for an answer. It’s time to try it our way.” I actually think Medicare is a lousy benefit structure because it encourages extreme fragmentation of care and out of control utilization, but it can be retooled and can continue to use a mix of approaches that will bring it into line with better managed care initiatives.
Barbara
@whereaway: This model is really what Kaiser and Geisinger are. At the top of the chain is an organization that receives a capitated payment for providing all care through all types of providers. This gives them an incentive — sometimes perhaps too great of an incentive — to avoid expensive sites of care, i.e., hospitals. When the hospital is at the top of the chain, its need for admissions influences how the insurer administers benefits. Just take a slightly less obvious example: Many hospitals have imaging centers that are huge profit centers but they are almost always way more expensive than the same tests when offered in a physician office or ambulatory care setting. A hospital owned insurer won’t fret about getting a higher percentage of such tests done at lower cost locations. Whereas, nearly every commercial insurer I can think of wages war with hospitals to either bring their pricing closer to the outpatient settings or make their outpatient testing facilities non-preferred.
Monala
Most of my adult life, i have been covered by insurers that also run medical clinics/centers. I have generally liked it–there are definitely advantages to having all of your medical service needs met under one roof, and for the whole family to be seen at one location. But these providers don’t run hospitals. Does that change the outlook?
Barbara
@Monala: Hospitals need patients to be sick and needy. It’s harder for hospitals to navigate the thicket of countervailing incentives between keeping itself afloat and keeping the cost of insurance down by reducing hospital admissions.
JaneE
Kaiser has been around for about 70 years. It started as an employee benefit for Kaiser Steel so they could get steelworkers from back east to move to their new plant in CA to make steel for warships during WWII. The Kaiser hospital was the company medical facility (steel work was really dangerous back then) and the doctors worked for the steel company. They were also out in the middle of nowhere – the facility was a pig farm before the steel plant was built, and vineyards and citrus groves went for miles. They started with a captive base of thousands and only became independent insurers offering care to outside employers later. When I worked for Kaiser in the early 80’s, the original hospital building was being used as the personnel office, and was finally torn down to build a new building. One of my co-workers could tell you whose office was the room he was born in.
I have been with Kaiser since I 1979, and they have had their ups and downs. They have always been fairly good about using outside doctors on contract until they could hire enough to meet their needs, and their education is really good (the are primarily a HMO, after all). They also have members who have been with their health plan literally all their lives. And once you have things working, it is relatively easy to expand it, or even to move into another area, but to start something like it from scratch – not so much. Kaiser covers 4.4 million people in Southern California alone. A lot of their cost savings wouldn’t be practical for a start-up with a few thousand people covered.
Arclite
@Barbara: Thanks for that article. I work for HMSA and we have a huge diabetes population out here. I’m going to propose we implement something similar.
Jay S
Group Health Coop of WA left the hospitals in favor of medical centers that are outpatient clinics. They weren’t filling enough beds to cover costs.
Kaiser bought them and is not currently changing that model. I believe there is at least one working physician’s coop that works on a similar principle. I believe the key is capitation and an integrated system rather than owning or not owning hospitals. With enough healthy members to make rates competitive.
Arclite
I was with Kaiser for years and really liked their system.
Buskertype
@rikyrah: I can’t tell what’s going on with Capito. 2 days ago I called multiple offices and couldn’t get a straight answer. Yesterday they said her position hasn’t changed on Medicaid, and today they were very clear that she was opposed to the 7-year phase out. Did she get scared off it?