Should Your Health System Sponsor a Health Plan?

With new payment models, shared savings, and care quality all taking center stage under health reform, hospitals need to ensure their care model is equipped to handle the risks before launching a hospital-sponsored health plan.

As health reform and new payment models continue to change the competitive healthcare landscape, hospitals and health systems must face the sobering reality that they will bear the bulk of the burden to reduce overall costs in the system and, as a result, assume more risk in their relationships with payers.

If hospitals and health systems have been adjusting their delivery models to meet these new market realities, sponsoring a health plan can help them continue transforming to operate more efficiently within this new landscape. “When a health system considers whether to sponsor a health plan, it must understand that its cost structure must allow the plan’s premiums to be competitive. Purchasers of health plans are price-driven: They won’t pay substantially more because it’s sponsored by a health system, says Paul H. Keckley, managing director of Navigant Center for Healthcare Research and Policy Analysis.

Offering a health plan can also push providers to focus more directly on better coordination of care, the cost of care, and added emphasis on safety and quality.

Considerations Before Launching a Plan

If hospitals believe their operations are sound enough to enter the health plan market there are questions that must be answered before making the leap.

Will it require attention to costs? Most health systems launch plans for their own employees, individual employers, and Medicare or Medicaid as their initial targets. Most require hospitals to effectively manage their cost structure, so knowing the types of care where you can confidently manage costs is a vital consideration for your plan customers. One hot area for cost reduction is total joint replacement, but if starting with only a couple of specific programs, expect to increase the number offered in coming years.

Are hospitals’ missions aligned with offering health plans? Remember that to run competitive health plans, hospitals must be willing to balance both cost and care quality. Some organizations simply aren’t willing or prepared to make the necessary trade offs. For example, one academic teaching hospital decided that its reputation and mission meant they didn’t need to shed costs in order to compete, Keckley says. Knowing a hospital’s mission and what generates demand for its services are key considerations.

What is the timing? Running health plans requires different infrastructures and different skill sets among staff. So most health organizations should plan for a couple of years to get their organizations aligned to launch a plan and build the IT infrastructure and staff, says Keckley. Another route is to lease backend capabilities from an existing health plan (e.g., Aetna, Blue Cross Blue Shield) that can handle customer service and claims. Some health systems that already offer plans, like Sentara Health, provide access to their backend processes for other hospitals as a de facto management services organization (MSO).

Preparing to Run a Health Plan

The following are key steps for hospitals and health systems that plan to sponsor a health plan.

Start with the board of director. Keckley notes that most not-for-profit hospital boards tend to be “brick-and-stick”—groups that measure success through metrics like admissions, volume, and length of stay. Creating hospitals that are capable of running health plans requires paradigm shifts to instead focus on delivery of evidence-based care, outcomes, and cost of care. An open dialog with board management that clearly details both the upside of running health plans and the risks based on hospitals’ current models can help drive the changes necessary in organizations.

Evaluate care redesign. Most care designs and workflows are still firmly rooted in the fee-for-service world. Care redesign represents a significant opportunity to improve the efficiency of care and to drive out costs. Much of the care that is delivered in the acute care setting today is unnecessary and largely driven by how the hospitals are staffed, Keckley says. One simple example is the coordination between the care team and the diagnostics lab. Does the lab return results within 45 minutes to an hour, or are they routinely delivered the next day before the morning rounds? That difference can result in an extra patient day in the hospital with no care delivered while waiting for the test results. Established workflows like this—and others—contribute extra cost without delivering additional quality and would eat into the profitability of the system’s health plan.

Managing your underlying cost structure. It is surprising to some, but reducing costs to be more competitive in the insurance market isn’t significantly affected by what hospitals pay their doctors. Most of the opportunity for savings is found in hospitals’ fixed costs and in their supply structures. For example, 50 percent of all prescription medications are filled in the acute-care setting and that specialty pharmaceutical costs in hospitals alone jumped 12.9 percent last year, Keckley says. So developing programs that have tight formularies and medication management systems, and focus on prescribing the right doses at the right times while also not overprescribing medications is one way to maintain or improve care quality while appropriately managing costs. This results in new roles for hospital pharmacists. Instead of only filling prescriptions, they become an integral part of care planning.

While choosing to launch health plans should not be the fundamental catalyst for change within health organizations, establishing health plans can help strengthen financial structures and educate providers in the system to be attentive to costs in conjunction with providing quality care. Provider-based health plans also force hospitals’ costs to be low so that their plans’ premiums are competitive in local markets.

“Premiums matter,” Keckley says. “You can’t expect the doctors to take a big cut because you are going to have a plan and you can’t expect the hospital to continue to operate the way it always has and be attractive if premiums are too high. This tension is what drives the balance of cost and quality. That is where the real upside is.”

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Chris Anderson is a freelance writer who covers payers, new care models, healthcare IT, and precision medicine.

Interviewed for this article: Paul H. Keckley is managing director, Navigant Consulting, and a member of HFMA’s Tennessee Chapter.

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

• What drivers would make your hospital or health system consider starting a health plan?
• What would be some of the biggest challenges to your hospital in implementing a health plan?