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Crossing the Crevasse to Manage Risk: Managing Health Plans Within Provider Systems

Population Health News, March 2015

By Bill Eggbeer and Krista Bowers, Managing Directors, BDC Advisors

Health Systems are well on the way to becoming insurers. A recent McKinsey survey indicated 13% of the nation’s health systems already own their own plans. Other industry surveys have indicated that some 20% of the nation’s provider systems are contemplating securing insurance licenses in the next five years. Organizations which have tested the water with Clinically Integrated Networks/ACOs may enter the market with products in segments such as Medicare Advantage, Medicaid Managed Care or for the health insurance exchange marketplaces.

These health systems face the challenge of how to organize and operate their health plans within the context of provider systems. They need to integrate their risk-bearing insurance ventures with their provider business model, while not forgetting that a substantial segment of the enterprise is still driven by fee-for-service economics.

Provider-Sponsored Health Plans Offer Strategic Advantages

  • Direct Relationship with the Ultimate Customer. Owning a health plan with direct customer relationships gives provider systems a competitive advantage and an opportunity to build lasting brand loyalty for all of their system’s programs.

  • Counter-Cyclical to Financial Results of Hospitals. Health plans frequently have results that are counter-cyclical to those of provider systems, and rating agencies such as Fitch and Moody’s see geographic and product diversity as key credit strengths.

  • Better Physician Alignment. By developing physician leaders committed to the enterprise vision, the health plan helps shift organizational emphasis from a short term maximization of revenue to longer term value enhancement.

  • Learning Lab for New Business Ventures/ACO Support. Health Plans provide a built-in market for new outpatient business ventures, homecare, and DME, lab, and pharmacy services so long as the new products are competitively priced.

Two Major Business Models Used For Combining a Health Plan Within a Provider Systems

Successful provider systems of the future will increasingly envision themselves as population health management systems. Under this vision, overall system performance will be the measure of success, not individual unit performance. The speed of this transition depends on the organization’s philosophy, the competitiveness of the plan in the local market, and the ability of management to sell and implement its vision in a culture traditionally dominated by hospital business silos. We believe there are at least two different business models for provider systems with health plans to consider:

MODEL A: Operate the Health Plan as a Division of an Integrated Holding Company. This model has been adopted by most hospital systems with health plans. It recognizes the need for combined operating statements for the system, but treats the health plan as a separate business entity under the system umbrella. All staff functions such as human resources, finance, sales and marketing, and information technology report directly to the health plan CEO and are not matrixed to their counterparts at the system level.

MODEL B: Operate the Health Plan as Part of an Operating Company. Under this model, the provider system goal is to become an integrated operating company—a Kaiser-like organization. Because the business vision is to operate the system as a single entity, there is a matrixed management structure. Heads of selected health plan functions, such as human resources, finance, sales and marketing and information technology, have direct line reporting relationships to the system’s department heads, who have responsibility for the provider system’s performance as a whole.

There is a dotted line reporting relationship to the health plan CEO, even though the people filling these rolls will spend 90% of their time interacting with the CEO’s office on plan business. The business model the provider system chooses will be influenced by their strategic vision, operating philosophy, market requirements, and competition.

Market, Medical Management, and Network Requirements Impact System Integration The degree of integration between a provider-owned health plan and the provider system will be influenced by market and product selection, utilization and care management delegation, and the breadth of the health plan/system physician networks. In some markets, health plans will need to have product offerings covering geographic areas that extend well beyond their hospital or medical staff service areas. In other cases, the health system may organize a Clinically Integrated Network (CIN) for the voluntary staff that may contract with commercial plans which are competitors of the system’s own health plan—recognizing that the system will be dependent on relationships with multiple health plans.

If a health system launches a CIN, it will need to work through how to integrate clinical and cost performance responsibilities. The most direct question is whether the CIN should contract with other providers or whether it should be dedicated exclusively to the system’s own health plan. There are similar issues around the creation of utilization or care management capabilities in the CIN which could benefit competitive health plans in the market.

Keys to Health Plan/Provider Alignment

A provider system must address two key variables in aligning a health plan within its system:

  • Transfer Pricing. If a health plan is to compete successfully in a market, its hospital and physician rates must be on a par with its competition. In other words, the health plan can’t pay its owners any better rates than it pays any other provider in its network. Some hospitals owning health plans tried this in the 1990s and it was a recipe for disaster. The same is true for the rigor with which it applies its utilization and quality management metrics. If the health plan decides to “cut the provider system’s medical staff some slack” on enforcing care management protocols, it will be the same recipe for disaster.

  • Compensation. Developing the correct compensation policy is naturally of key importance in making the system vision a reality. While the organizational structures differ significantly, both systems manage their health systems and health plans through an executive team. All of the senior health plan executives are employees of the health system, in addition to their operational responsibilities in the health plan. Financial rewards are determined by a system compensation committee. All system executive salaries and bonuses are based on achievements against system goals—not the results of individual business units.

Making it All Work

  • Is your Plan Tracking to Build Critical Mass Quickly Enough? Systems launching health plans face a challenge transitioning from fee-for-service to global capitation. The biggest risk is for a system with a health plan to get stuck in the middle between payment models. A plan without a sufficient membership — or the right population mix — to support the care management and clinical informatics infrastructure cannot succeed as an insurance company.

  • Does your Plan Balance ACO/CIN and Health Plan Business Priorities. Generally, balancing the interest between and ACO or CIN will require the health plan to maintain appropriate control over the areas of its intellectual property such as clinical informatics, utilization review, or disease management programs that provide its competitive advantage. A health plan which delegates its medical management system to the provider system’s ACO or CIN may be helping the physician in that organization, but create an undesirable “free rider” effect if these organizations can then use these systems to do a better job managing contracts with competitive plans.

  • Are you willing to let your plan compete freely in the market? As per a prior discussion on how having correct transfer pricing policies and competitive network design is important to a plan’s market competitiveness, there is a secondary issue: Health systems building CINs and ACOs alongside their health plans face the problem of how these networks integrate with their health plans.

  • Is your vision understood and backed? The notion that a provider system’s future financial health will be dependent on its health plan’s growth will take time to get used to in systems that have long been dominated by their care delivery silo’s community settings. As much time as the provider system spends communicating—and it never seems to be enough—it is necessary to find as many means of rewarding collaboration and teamwork of people who back the system’s business vision.


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