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When providers become payers

What hospitals should consider before building a new business model

Tammy Worth, Contributor

Jim Bonnette, managing partner of strategy consulting at The Advisory Board Company, says every organization looking at someone else’s business thinks there is a tremendous amount of waste, and believes they could do it better if given the opportunity.

This is just as true for healthcare as for any other industry.

“Providers think payers have excessive margins and providers are getting squeezed,” he said. “Providers believe if they had ownership (of the insurance company), things would ease up and they would be competitive and make it difficult for other payers to squeeze them.”

In some cases this is true, but with insurance, margins are only about 5 to 6 percent and it is a notoriously difficult industry in which to run a business.
Still, providers are increasingly moving into the insurance industry. And for some, it has been a good addition to their business model.

Why dive in
One relative newcomer to the insurance industry is Sutter Health, a Northern California nonprofit that operates 24 acute-care hospitals. In January of this year, they created an HMO insurance product, Sutter Health Plus.

Steve Nolte, the plan’s CEO, said many assume the Affordable Care Act is triggering hospitals’ move toward the insurance business. For Sutter, however, their entry into the market was based on a desire to provide more community benefit as a nonprofit. 

“We were evaluating our future and logically asked, ‘What is our role? How do we maintain our position as a leader going forward?” Nolte said. “It became clear that part of that was to invest in a health plan to put the resources we had at our disposal into the community in a more impactful way.”

One of the biggest benefits Sutter has seen from the move is using the population data they now have to improve care and engage providers. They are increasingly able to close the gap between quality and cost by looking at how resources are deployed in the delivery of care in real time, Nolte said.

“There is no reason not to open up the black box of data at the payer level, which is what we needed to create better margins,” he said. “And we closed the gap between purchaser and delivery agent.”

Before diving in
There is a whole array of considerations providers should consider when determining if they may want to enter the insurance industry.

First, this is not something to do as a “side gig.”

“This is not an experimental thing. Don’t dip your toe in the water to see if you want to do it,” Nolte said. “There has to be commitment in terms of going in, well before you complete the process of building out a new business.”

Providers should expect that time and expense will be involved in creating insurance plans. Nolte said providers should plan for a two-year process. If they plan to launch a Medicare plan, it could be two to three years from conception to the time the plan is ready for unveiling.

It is also an expensive business proposition. Building an insurance product and getting it on the market could cost anywhere from $30 million to $50 million, depending upon the plan, Nolte said.

“Many people in the provider space underestimate how expensive it is,” he said. “No two insurance plans are alike; you can’t just buy one off the shelf, drop it into a market and expect it to sell.”

A third factor is name recognition. Bonnette said that, unless an organization is Mayo Clinic or Geisinger, it cannot rely on it’s brand to sell the insurance.

“Most people don’t realize how difficult it is to actually sell the insurance,” he said. “Just because you have a relationship with patients in the delivery of care, that may not carry over as a payer.”

Plans that sell do so because of competitive pricing, quality and delivery, Bonnette said.

For this reason, determining the right kind of plan to offer is critical. Providers must define what the goals of their insurance business will be – is it to supplant other hospital payers or to be one more option for patients? Will it be commercial or would Medicare or Medicaid be a better option for the patient population? How should it be priced to be competitive?

The easiest way to determine much of this is by hiring a professional in the managed care business. Nolte said payers are a completely “different animal” than providers, and a managed care executive can help hospital leaders understand the kind of plan that will work best for their business. An insurance professional can weigh the economics, determine the benefits to offer, the plan’s operating design, mission and the infrastructure necessary for the business.

“If (providers) can accept this is a different business and they have to have a different team running that business, it can be successful,” Bonnette said. “If they try to run this as a part-time job, it could cause both systems to fail.”

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