Key CFO Considerations for Implementing Provider-Sponsored Health Plans

A plan typically needs to set aside 10-15 percent of top-line premium revenue for risk-based capital requirements.

In this interview, Eric Meinkow, a director at Navigant, discusses the valuable role that CFOs can play in guiding provider-sponsored health plans toward profitability.

On providers becoming payers. Approximately 13 percent of health systems offer a provider-sponsored health plan, Meinkow says. Currently, more than 100 health systems provide coverage to 18 million members.

Many providers have tested the waters with provider-sponsored health plans in the government market. Approximately 10 percent of Medicare Advantage and 25 percent of managed Medicaid lives are in a provider-sponsored health plan, whereas commercial market penetration is much lower, Meinkow says.

“Some ACOs are taking on the highest form of risk and choosing to become Medicare Advantage plans,” he says. “It is their success at managing the total cost of care while providing high-quality care that positions them to assume this level of risk.” In the Medicaid market, the uncertain future of the Affordable Care Act has left some providers questioning the volume of lives they could capture in a provider-sponsored health plan if their state ends or still chooses not to expand Medicaid coverage.

On the volume needed to justify the investment in a provider-sponsored health plan. A 2014 analysis by Navigant and the American Hospital Association found that plans optimize their investment in infrastructure at 400,000 or more lives. However, that number drops significantly for Medicare Advantage plans, which can justify their investment at 25,000 or more lives.

Typically, plans with smaller enrollments are more likely to experience higher administrative costs and poor financial performance. “Volume mitigates risk,” Meinkow says. “At higher volumes, outliers may have less of an impact, and a plan becomes more stable. Although volume is a critical success element for all health plans, focus will still need to be made on managing administrative expenses, total medical expenses, and revenue management functions [e.g., risk adjustment] to be financially viable.”

On choosing a partner or going solo. A health system’s market should determine if entering a payer-provider joint venture or buying a health plan would be a better solution than starting a new provider-sponsored health plan, Meinkow says. Specifically, CFOs need to consider the speed with which they can get a provider-sponsored health plan off the ground versus their competition.

Providers who choose to create their own plan may face resource constraints as well as a shortage of executive leadership needed to successfully implement the plan, he says. Typically, large, clinically integrated delivery systems are more likely to be successful creating their own plans, compared with smaller organizations that might not have command of the market or robust provider networks. Such organizations might fare better by strategically partnering with a health plan rather than starting up a plan, Meinkow says.

When considering potential partners, Meinkow suggests that CFOs review how well they can manage the costs of populations, maintain quality of care, and capitalize on revenue management opportunities.

On CFOs’ key considerations when building provider-sponsored health plans. Meinkow says CFOs need to review a number of strategic, ownership, operational, and financial considerations.

Strategic considerations. CFOs need to ask the following questions:

• What is the volume of lives that can be captured, either by taking share away from other payers or by the changing demographics of a population?
• What is the incremental value created by developing a provider-sponsored health plan?
• What will be the reaction of health plans already in the market, specifically those with existing contractual relationships with the organization? For example, if a provider-sponsored health plan takes away volume from a health plan, the payer may opt to squeeze their commercial rates.

Ownership considerations. Key questions for finance leaders entering a payer-provider joint venture should include the following:

• What should the payer-provider arrangement look like? Some CFOs may want to have the payer act as a third-party administrator and enter into a contractual arrangement. Others may want to enter into an equity ownership arrangement. “This can drive alignment between the system and plan, and mitigate any competing priorities,” Meinkow says.
• What is the distribution of risk across the participants? Determining how to share risk can be particularly tricky if arrangements include multiple provider organizations in different markets.

Operational considerations. CFOs also should review the following questions:

• Does the provider-sponsored health plan have the capabilities needed to manage the care of a population? One of the most important assets is a mature care management organization.
• Does the plan partner already have the sophistication and ability to scale to new populations or new markets? Both are needed for successful integration with a provider to optimize the health plan’s administrative loss ratio.

Financial considerations. Finance leaders should explore these financial questions:

• How much will it cost to start a provider-sponsored health plan? A provider may need $15 million to $25 million to cover startup costs.
• How much risk-based capital is needed to sustain operations under potentially adverse conditions? “A plan typically needs to set aside 10–15 percent of top-line premium revenue for risk-based capital,” Meinkow says.
• How long is the organization willing to wait to turn a profit? Although most provider-sponsored health plans see a profit after three years, some may not get into the black until their fifth year in business, Meinkow says.

On finding common ground.  When launching a provider-sponsored health plan, health system CFOs should consider their strategic relationships with their health plan counterparts and determine how best to align their goals. While CFOs may have their specific fiduciary responsibility, a payer-provider joint venture requires a focus on creating benefits that serve the whole, rather than each individual entity.

On sustaining results. Too often, CFOs with provider-sponsored health plans make the mistake of focusing on reducing administrative costs without seeing the big picture. “If you want to be a successful health plan today and tomorrow, you have to win on total cost of care,” Meinkow says. To that end, organizations need to invest in their care management, utilization management, and disease management programs so they can contain costs in a manner that does not sacrifice quality.

Strategic reinvestment of resources also is essential. For example, Medicare Advantage CFOs should continually invest in programs that help improve their plan’s Star ratings. “That’s a bar that keeps being raised,” Meinkow says. “You want to be proactive rather than reactive, because trying to revamp operations reactively is not an effective strategy.”

Interviewed for this article:

Eric Meinkow is director, healthcare, Navigant, Chicago.

This article is based in part on a presentation at the American College of Healthcare Executives 2017 Congress on Healthcare Leadership in Chicago.