Provider-Sponsored Health Plans: Cautions and Opportunities

For some hospitals and health systems, establishing a provider-sponsored health plan (PSHP) may present an attractive option. Strong and long-standing examples include the PSHPs operated by Kaiser Permanente in California, Geisinger Health in Pennsylvania, and HealthPartners in Minnesota.

In 2010, the Affordable Care Act added new reasons for providers to form health plans by creating incentives for them to take on more risk, reducing the number of uninsured Americans, and establishing federal and state exchanges for individuals to purchase insurance plans. Although the number of PSHPs has steadily increased, relatively few providers have undertaken the steps needed to also become insurers. In 2015, there were 87 PSHPs operating in the U.S. commercial markets, an increase from 81 in 2014 and 75 in 2013, according to a Leavitt Partners analysis of data from the National Association of Insurance Commissioners and the Centers for Medicare & Medicaid Services (CMS).

Considerable challenges accompany the opportunities associated with PSHPs. For example, some providers view forming a health plan as a logical extension of the increased risk they are already assuming for patients through value-based payment models. However, for most hospitals and health systems, simply participating in value-based payment models is insufficient preparation for creating an insurance plan, because most do not have a significant portion of their revenue tied to downside risk, and because their incentives too often lack sufficient alignment with the payment model. Further, although a PSHP enables a provider to retain a larger percentage of premium dollars, it also mandates that the provider meet numerous infrastructure and regulatory qualifications before being able to enroll members.

The Case for Caution

A 2017 Robert Wood Johnson Foundation (RWJF) report issued a cautionary warning to any hospital or health system contemplating forming a PSHP. ^a The report found that out of the 42 provider systems that established insurance companies or acquired existing health plans since 2010, only four PSHPs were profitable as of 2015. Five of the 42 PSHPs had gone out of business, and a sixth has shut down since the report’s publishing. These findings may have contributed to some provider systems’ recent ambivalence toward PSHPs. According to a survey of hospital leaders published in the Society of Healthcare Strategy and Market Development’s 2018 Futurescan, 36 percent of respondents reported their organizations were very or somewhat likely to be licensed to sell their own health insurance products in the next five years, while 48 percent responded that their organizations were somewhat or very unlikely to receive such licensing. ^b

A variety of challenges exist for providers contemplating establishing a health plan. Among PSHPs cited in the RWJF report that sought to remain competitive by offering lower premiums, many felt compelled to do so by paying their providers less rather than rely on savings generated by care delivery changes incented by value-based payment models. This finding contradicts the premise that PSHPs make sense as an evolutionary next step to taking on risk through participating in value-based payment models. As of September 2016, few of the PSHPs created since 2010 had achieved adequate scale to manage risk and remain competitive. Only four plans had between 50,000 and 100,000 insured enrollees, four had between 25,000 and 50,000 insured enrollees, and all others had enrollment below 25,000. Finally, the changing regulatory landscape presents additional challenges for provider executives who may not have the necessary experience to successfully manage a health plan.  

Opportunities for PSHPs

Despite the RWJF report’s dose of caution, examples of successful PSHPs do exist, and forming a health plan may make sense for certain hospitals and health systems. Providers participating in accountable care organizations (ACOs) or other forms of value-based payment models are developing many of the competencies needed to take on risk, which encourages provider systems to think like both providers and payers of care. Assuming more downside risk requires providers to make changes in how they deliver care (e.g., by enhancing care coordination and shifting more care to lower-cost settings) and to increase their use of data and analytics to understand the composition and needs of their patient population. A natural extension of some providers’ population health management knowledge and increased health IT sophistication may be to establish a health insurance company. Nonetheless, caution remains the guide, because most provider systems today have only limited experience in managing risk as a result of having relatively little revenue subject to downside risk. 

Forming a health plan may allow a provider system to obtain a more competitive market presence and to retain money that otherwise would go to the insurance company. The RWJF report explains how hospitals and health systems that form a health plan can capture more revenue at a time when inpatient revenues are declining, given today’s emphasis on delivering care in the lowest-cost setting available. According to a guide by Valence Health (recently acquired by Evolent Health), PSHP’s may be well positioned to save money and offer lower premiums by eliminating some of the administrative costs that currently exist in insurance plans. ^c Moreover, provider systems may be better positioned to understand their community’s specific needs and may secure more trust from potential enrollees, who view their provider more favorably than their insurer. However, the goodwill consumers feel toward their providers could be short-lived and erode as the provider becomes the health plan. 

The Valence Health/Evolent Health guide for provider systems considering starting an insurance plan suggests that they first conduct a thorough self and market evaluation to assess the provider network size, response from existing payers, consumer interest, regulatory environment, and financial and market position of the organization. A strong balance sheet, an executable implementation plan, and strong physician incentive alignment are essentials for providers considering a PSHP.

A Range of Options

Although some opportunities exist for hospitals or health systems interested in establishing a PSHP, the litany of considerations to forming an insurance plan suggest such an undertaking be approached with significant caution. Even health systems participating in ACOs and other value-based payment models often do not yet have sufficient experience with managing downside risk. Moreover, the financial and regulatory barriers to forming an insurance plan are high. 

For those provider systems interested in a PSHP, pursuing a joint venture with an existing insurance plan—rather than building a health plan from scratch or buying a health plan—may present a viable option. ^d Another approach a hospital or health system should consider is simply to continue to gain experience with managing downside risk, thereby allowing more time to assess whether forming a PSHP is the right decision for the organization while also better positioning for success in the value-based payment environment.

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Lia Winfield, PhD, is a senior analyst, Leavitt Partners, LLC, Salt Lake City.

Footnotes

a. Baumgarten, A., “Analysis of Integrated Delivery Systems and New Provider-Sponsored Health Plans,” Robert Wood Johnson Foundation, June 2017.

b. Keckley, P.H., “Provider-Sponsored Plans: Current Trends and Strategic Implications for Hospitals and Health Systems,” Futurescan: Healthcare Trends and Implications, 2018-2023, Society for Healthcare Strategy and Market Development of the American Hospital Association.

c. Valence Health, Models of Value-Based Reimbursement: A Valence Health Primer, 2013.

d. Baumgarten, A., and Hempstead, K., “New Provider-Sponsored Health Plan: Joint Ventures Are Now the Preferred Strategy,” Health Affairs Blog, February 23, 2018.