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Health systems turn to provider-sponsored health plans to increase revenue, meet value-based models

Key considerations include a significant upfront investment and profits that are years away, PwC report says.

Susan Morse, Senior Editor

As margins are squeezed, interest in provider-sponsored health plans continues to increase. The expectation, according to a new PwC report, is that half of health systems will be applying or will consider applying for an insurance license.

In the past two years, the number of provider-sponsored plans has more than doubled, from 107 in 2014 to 270 currently in operation today, according to the report from the PwC Health Research Institute.

The reasons is that with more money being put at-risk under value-based models for care, providers are looking for new ways to manage costs and generate income.

The move made sense, Ascension's Chief Strategy Officer Eric Engler told PwC. The St. Louis-based health system acquired US Health and Life Insurance last year.

[Also: Hospital operator Ascension buying insurer U.S. Health for $50 million]

"For us, the acquisition of a health insurance company provides another vehicle to participate in the value we are creating," Engler said.

In addition to new revenue, a health plan gives providers access to clinical and financial data that's needed to identify high-risk patients and areas of high utilization for today's population health models.

However,  providers face significant capital investments upfront, likely losses early on and added pressure on existing relationships with insurers, according to PwC.  Profit is likely years away.

"This is not for the faint of heart," Dennis Laraway, executive vice-president and CFO of the Houston-based Memorial Hermann Health System, told PwC. "There must be collective commitment to the strategy across the enterprise because it requires significant bandwidth and financial resources to build a health plan. It's a clear change in strategy and operations from fee-for-service arrangements with third-party payers to the full-risk model of managing to a premium dollar – for both medical and administrative functions."

[Also: Memorial Hermann says risk pays off as ACO revenue rises]

The PwC report gives recommendations on what providers need to consider before launching a health plan. At the top of the list is prior experience, strong leadership, financial reserves and strong networks across the continuum of care.

Health systems need to know whether to build, buy or partner in a health plan, and how integrated a model they should pursue.

The fastest and least capital-intensive way to get to market is to partner with an insurer, the report said. Risk is spread between both organizations, minimizing the downside, but the health system also sees less upside because the healthcare dollar is still shared.

The three primary models for provider sponsored health plans vary by level of integration with the health system. The least integrated is a network model in which the health system remains the primary focus. A bare bones plan is built to market the system and drive patients to it, according to PwC.

At the other end of the spectrum, a health plan in an integrated model is highly intertwined with the provider system. In this model, the system and plan work together to manage use of services, lowering the cost of care. Risk is shared, providing clear incentives to keep costs down while maintaining quality.

The profit center model lands in between these two extremes. In this model, the health plan stands independently of the health system.

PSHPs can differentiate themselves by delivering more innovative health plan products and value-based reimbursement models tailored toward their communities, the report said. Yet not all markets are conducive to launching a health plan.

Providers need to define their reasons for wanting to start a plan. Three common motivations are increasing utilization, diversifying revenue or bending the cost curve.

For the report, the Health Research Institute interviewed executives at leading provider sponsored health plans and surveyed members of the Health Plan Alliance, an association representing 49 regional health plans in 27 states. Forty of the Alliance's plans are provider-owned. 

Twitter: @SusanJMorse

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