Why Health Plan Integration Might Work This Time

Stung by heavy losses and health plan divestitures in the late 1990s, owning a health plan is back in the strategic good graces of health system leaders. This time it's different.

Once, at open enrollment, I was given wide choice among health plan companies. Unlike today's plan choices, which almost always come from a single insurer, 20 or so years ago, I got to pick the company I wanted to provide my health insurance coverage. This would be unrecognizable to most of today's employees.

It was so long ago that most people have probably forgotten that health plans owned by big hospital systems were once ubiquitous. I could choose, if I remember correctly, between a Blue Cross Blue Shield plan, Health 123 (Vanderbilt) or Health Net (Baptist Hospital and affiliates). Only one of the three still exists. Guess which one?

It was a market share grab that largely ended badly for small players—and local health plans were definitely small players. Once it became clear they were causing huge losses, provider-owned health plans were often divested as quickly as possible.

They were closed or sold for a pittance of the costs that had been sunk into them. "Never again," I heard many an executive profess. But more recently, and sometimes lost amid the consolidation binge we're seeing for healthcare services—many organizations are firing up their health plan offerings again, this time through the exchanges as well as through their accountable care organizations.

Has the industry forgotten the lessons of the past, or are different forces at work this time around that will make this sort of strategic investment pay off?

This Time It's Different
Bill Eggbeer, who leads the payer-provider innovation practice at Miami- FL-based BDC Advisors, and who has worked with such clients as Duke Health and Johns Hopkins Medicine as well as CHE Trinity Health, tells me it's different this time, and that whether or not hospitals or health systems choose to enter the health plan space, they must learn to think like health plans.

1 in 5 Health Systems to Become Payers by 2018

And if they're going to operate like the premium dollar is the engine that ultimately drives profits while services become the cost center, they might as well own one or even several health plan options. Or so the new thinking goes.

We have been down this road before, Eggbeer says, when I mentioned the way I once experienced open enrollment.

"It was prompted by a similar sense that cost was out of control," he says. "[Health plan ownership] was an approach that has in some notable cases, like Kaiser, proven to be very effective at delivering high quality care at a reasonable or controlled level of cost. But in many cases, it led to near disasters in provider systems. Interestingly, for those that stuck with it and have figured out how to do it, they are by and large very happy now."

He mentions several examples of so-called "provider health plans," that flourished: Sentara in Northern Virginia, Providence in the Pacific Northwest, Intermountain Healthcare in Utah, and Presbyterian in Albuquerque. Was it that these particular institutions, plus a few more, enjoy special advantages?

Not really. They just were quicker to understand the cost equation in healthcare and to get a handle on it, says Eggbeer.

A Deadly Lack of Data
Many of the plans that failed didn't have the information systems, or sometimes, the data that would enable provider systems to make decisions about best practices or to uncover areas of overutilization and inefficiency.

By contrast, legacy health plans "had this embedded in their business," says Eggbeer. "It got out of control."

He remembers one health system he once worked with that went more than a year without data about the cost of the pharmaceutical component of its health plan.

"When they finally got a handle on it, they were in deep trouble," he says.

A second major issue was the huge consumer backlash to restriction of access and restriction of networks.

"Hopefully we're smarter about that this time," says Eggbeer. "Though it's not entirely clear to me that we will be, generally some consumers are willing to make choices to control their cost exposure better."

Balancing Network Restrictions
The key difference may be that at least some consumers are making the choice to limit their own networks in return for premium savings. How that gets administered on the health plan side and who the providers and networks are is critical, however, as is the need to balance network restrictions. There's already pushback in California about narrow networks being too restrictive.

There are some tailwinds for those that wish to go down the health plan route, through various means.

One factor is the development and expansion of the individual market, that is, people who don't have health coverage from their employer who are seeking coverage through the Obamacare exchanges.

"I was talking to a health plan exec recently and he was saying they were still having a hard time selling narrow network products to large group customers because HR departments were still reluctant to impose restrictions on choice," says Eggbeer.

"But he said their individual narrow networks are selling like hotcakes. So just [the fact that] the consumer has some choice as opposed to it being imposed makes a big difference."

Indeed the government itself, healthcare's dominant payer, is playing a more active role in trying to cut costs. The Patient Protection and Affordable Care Act and Medicare Shared Savings, says Eggbeer, are really "health plan-very lite, where you've got a defined population, and some accountability for cost and quality, but not full accountability."

Many experts think Medicare Shared Savings will evolve over time into a more fully accountable plan design. Indeed, the much ballyhooed CMS announcement this week about Medicare payment reform shows movement in that direction. A follow-on announcement by several health organizations—most of whom have both a provider and payer arm—adds to the urgency.

Medicare also administers the Medicare Advantage program, which is a full-risk health plan model and has achieved much higher levels of penetration than its predecessors in the 1990s.

Finally, we're much further out on the cost limb than we were back in the late '90s, Eggbeer says.

Employers More Active
Exacerbated by the recession, during which employers experienced costs in every other sector of their structure as flat or declining, healthcare costs continued to rise at roughly the same clip.

"That was impacting their competitiveness," Eggbeer says.

Where they had been passive funders of healthcare coverage in the past, employers have been getting more active in healthcare cost management through their health plans. They're using different models, whether they be based on centers of excellence, bundled payments, partnerships with local provider systems, or a combination of all three.

As before, consumers will ultimately decide whether they want their health plans and their healthcare providers to be the same entity. That starts with preparation and doing the little things that will make it successful.

Eggbeer says health systems that may find success in health plans this time around will have invested significantly in making their physician networks high performing, which means effectively engaging physicians in governance, leadership, and refining clinical processes. They also need to invest in the IT capability that will allow shared data and education for those physicians across the group.

"The health systems that are just kind of acquiring or contracting with docs in loosely affiliated networks or federations of unaligned practices are not going to get enough traction," he says. "If you look at organizations that have made successful bets with health plans, they also have successful endeavors in physician network development. They go hand in hand."

The health plan business and provider business are fundamentally different. Their accounting is different, their cost structures are different, and the way the product is sold is different. Figuring out how to do that under one roof is challenging.

"You want to integrate the two, because what you're trying to do is create a seamless offering for the consumer. But if you don't understand the differences in the two and don't have the expertise and decision-making processes, you have problems," says Eggbeer.

Think Like a Health Plan
And that brings us to thinking like a health plan. If a health plan is part of your business model, it may help conceptually to think of all revenue as coming through the health plan, Eggbeer says. Most of that revenue will be used to support the cost of delivering the services. What's left over is margin, if there is any.

The simplicity of the business design may belie the difficulty of execution. Whether a standalone hospital or system ultimately adds payer capability of some sort to the mix, the trend is poised to affect, in some cases drastically, how business is done in healthcare.