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Launching a Provider Led Health Plan?

Deciding to Build, Buy, or Partner to Go to Market

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Many U.S. health systems have now become convinced that there are significant strategic and economic benefits to health plan ownership. Currently, 13% of U.S. health systems offer plans in one or more markets – Commercial, Medicare Advantage, or Medicaid Managed Care. Another 28% of the nation’s hospitals (according to a recent study by Evolent, a population health management technology provider) are expecting to launch their own health plan licenses in the next five years. This paper focuses on those provider systems seeking to move upstream into the health plan business, either through developing/acquiring their own plan, or by partnering with an existing payer.

Begin with a Readiness Assessment

The skill sets related to running a successful health plan are foreign to most provider systems. This means a typical provider system wishing to offer its own health plan product will be faced with a range of “make-buy” decisions in terms of how to acquire the infrastructure, IT systems, and management skills needed to successfully bring a plan or product to market.

It is likely that many providers seeking to enter the health plan business will already have substantial experience in population health management, through the Medicare Shared Savings Program, Commercial shared savings contracts, or at-risk provider network contracts with health plans. There are now over 600 Commercial and Medicare Shared Savings ACOs in operation, and while many do not cover the total cost of care, these contracts still require providers to have developed an internal managed care skill set, or to have a substantive relationship with a Third Party Administrator or Managed Care Partner. These skills include:

  • Physician Alignment and Care Management Capabilities

  • Data Warehousing, Analytics, and Predictive Modeling

  • Network Design

  • Contract Management

  • CMS Compliance in Medicare and Medicaid ACOs

  • Member Communication

  • Access to Capital

For a provider system to move up the risk curve and succeed as a plan/product sponsor or owner, they must have substantial additional capabilities, including:

  • Product Design capabilities to ensure proper balance between price, consumer attractiveness, and adverse risk selection

  • Financial Risk Management Skills

  • Market Segmentation Capabilities

  • Actuarial Pricing and Bid Capabilities

  • Marketing, Broker, and Plan Operations

  • Revenue Management Skills to optimize risk management and capture quality bonuses

  • Care Management Model including integration of post-acute care and behavioral health into plan operations

  • Additional Access to Capital to fund risk based capital reserves

  • Greater Regulatory Compliance Capabilities

The Readiness Assessment will provide a baseline of the capabilities the provider system will need to obtain to bring a health plan product to market.

Build/Buy vs. Partnering Options

The major options for acquiring the skills and management infrastructure to operate a successful health plan are to build/buy (including outsourcing), or establish a partnership with a Commercial health plan. The decisions on which approach to select should be based on an objective assessment of the capabilities of the provider system, the resource requirements for successful market entry, and tradeoffs associated with a build/buy vs. partner solution. Importantly, the decision to build/buy vs. partner can, and should, vary based on product.

For example, Partners HealthCare in Massachusetts, which already had committed a significant portion of its Commercial business to Total Cost of Care capitated contracts, decided to enter the health plan market by acquiring the local Neighborhood Health Plan, a local and mostly Medicaid HMO.

MemorialCare in California, which owns six hospitals and more than 200 ambulatory sites in Los Angeles and Orange Counties, has a multi-faceted approach. They own a large physician network that contracts with multiple health plans; they own the Seaside Health Plan which offers Medi-Cal, Medicare Advantage, and Commercial coverage; and, they participate in a joint venture partnership with Anthem Blue Cross and six other competing health systems to offer employers in the Los Angeles market a low-cost health plan product designed to compete with Kaiser Permanente. MemorialCare also has an ACO-like contract offering Anthem’s Enhanced Personal Care program for its PPO members in Orange County and the greater Long Beach market.

The build/buy approach, of course, offers the greatest autonomy and economic contribution. There is the added benefit that health plan profitability may be counter cyclical to the hospital’s performance, frequently reporting profits in years when hospital margins are pressured. Sentara Health’s Optima Health Plan, which offers a range of Commercial, Medicaid, and Medicare Advantage products, has been a steady contributor to the system’s profits in years when hospital margins have been down. The Presbyterian Health Plan in Albuquerque, a subsidiary of Presbyterian Healthcare Services, has provided similarly positive results.

A partnering alternative, while somewhat less attractive financially, distributes risk, may be quicker to market providing the ability of leveraging existing infrastructure and licenses, and may have the advantage of bringing existing enrolled lives to the table. (See Figure 1 for comparison of market approaches.)

Figure 1. Comparative Market Approaches

Build/Buy and Partner options have pros & cons; generally Build/Buy offers more autonomy and Partner reduces launch time and up-front investment.


  • Offers autonomy

  • Leverages system brand

  • Promotes physician alignment

  • Leverages full value of the network

  • Quick to market with ability to leverage existing infrastructure, license, etc.


  • Full financial control allows for P&L target setting and ability to remain not-for-profit

  • Lower start-up costs

  • Diversifies risk


  • Set benefit designs

  • Control sales & marketing

  • Gaining additional health plan functionality

  • Ability to access existing infrastructure and expertise


  • Likely takes 24-36 months

  • Partners want to differentiate on price; thus rate concessions usually required

  • Puts existing payer contracts under strain

  • Partner has for-profit strategy


  • Start-up costs including capital requirements

  • Accepting full risk

  • Adopt health plan SG&A including normally expensive distribution model


  • Regulatory requirements can be challenging

  • Must build health plan sales & marketing, actuarial and pricing

  • Requires utilizing partner’s people, process and systems

Commercial payers generally want to differentiate their product based on price, so some rate concessions should be expected in any partnership arrangement. Partnerships can also create pressures to match discounts on existing payer contracts, and the deal may require using the payer partner’s people, business processes, and systems.

Market Segmentation & Product Opportunities will Drive Decision on Market Approach

The calculus of build or buy vs. partnering for market entry will differ depending on the health plan products. For example, a self-insured employee health plan covering several thousand members might provide an opportunity for an organization to successfully launch a product without an outside partner.

Partnering with a Commercial payer around such products would reduce the potential of savings being driven by providers and would add to the administration complexity.

More risk is involved in offering products for the Individual Exchange markets which are price-sensitive and require competitive network design, greater marketing capabilities, and sophisticated medical management. In such cases, a provider organization might consider it more prudent to seek a partnership arrangement. (See Figure 2.)

Figure 2. Product Opportunity Build/Buy vs. Partnering Requirements

When considering the Build/Buy or Partner options; specific health plan products offer unique opportunities.


  • Likely takes 24-36 months

  • Partners want to differentiate on price; thus rate concessions usually required

  • Puts existing payer contracts under strain

  • Partner has for-profit strategy


  • Start-up costs including capital requirements

  • Accepting full risk

  • Adopt health plan SG&A including normally expensive distribution model


  • Regulatory requirements can be challenging

  • Must build health plan sales & marketing, actuarial and pricing

  • Requires utilizing partner’s people, process and systems

Partnering may reduce the risk of market uncertainty for Commercial products, eliminate the need for capital investment in infrastructure capabilities, and provide a recognized brand name. Moreover, the Commercial marketplace, especially among Small Groups, is highly competitive. Payer partners are likely to be protective of current margins in this “bread and butter” segment. Each market situation will require thoughtful examination of how the product will serve the market needs and the provider system’s business goals. Products for various market segments should be selected based on their ability to provide an optimal combination of price, benefits, and network configuration to attract customers to the provider system. The decisions on partnering should be based on an objective assessment of the experience and capabilities of the provider system, and the resource requirements for successful market entry. Each partnership should be carefully structured to mitigate risk and support a balanced business arrangement. (See box.)


  • Anti-steerage language to protect against volume shifts

  • Right of inclusion in all partners’ other narrow network products

  • Exclusive co-branding

  • Automatic price increases if volume is not delivered

  • Safeguards to protect providers from payers extending rate cuts from one payer segment to another

  • Review & approval of care model design

  • Mechanism for managing organizational conflicts

At times, multiple partnerships may be required. Trinity Health System, based in Livonia, Michigan, used market research to assess using partnerships in specific markets. Trinity determined some potential partners were more competitive around Medicare Advantage products, but not around Commercial products. As a result, Trinity used a range of payer partnerships and employer relationships to achieve its business objectives.

Deciding to Go it Alone?

The Medicare and Medicaid markets are likely to be the main sources of organic growth for most health systems in the next decade. The Congressional Budget Office has projected that by 2023 some 170 million Americans will be covered by Medicare and Medicaid, a 50% increase from 2013. By contrast, the number of people with employer-based coverage will grow only 2%.

Enrollment in Medicare and Medicaid Managed Care is expected to continue to increase along with the segment growth. Current CMS regulations make it impossible to enter the Medicaid Managed Care market before 2019 except by acquisition or as a sub-contractor.

So, Medicare Advantage would appear to offer the best potential for provider systems to either partner with or secure their own license. The Medicare Advantage market remains favorable, and plans with as little as 5,000 to 10,000 members can be viable. Well-managed plans with 4 or 5 STAR ratings can earn 5% or better margins, and the retrospective risk adjustment feature of Medicare Advantage makes the product substantially less risky than a typical Commercial plan.

Partnering will reduce the risk and avoid the problems of licensure, of course, but will significantly reduce the earning potential. Given the risks involved in partnerships or private label products, however, it is likely that partnerships will be the preferred means of making the transition to the emerging population health management market, but it may be possible to be too conservative.

A mid-sized health system in the Midwest with strong brand loyalty, its own well-established employee health plan, and contracts with a few other regional employers, recently decided to enter the Medicare Advantage market. The system already had TPA capabilities, a strong medical management system, internal psychological and behavioral health capabilities, and a large clinically integrated medical group. Any reasonable valuation of their skill set would have concluded they might not need a partner and could build any remaining marketing and customer management capabilities they might need. However, faced with the challenge of securing a new license, they decided instead to partner with an existing Medicare Advantage plan with a strong regional brand. Leadership’s calculus was that it was more prudent to be content with a more modest share of profits than accept full risk and build out the remaining organizational capabilities needed to be competitive in the market.

We would expect many provider systems to make a similar decision to avoid the heightened balance sheet risk which comes with plan ownership, but for provider systems with the right skill set and adequate access to a capital plan, ownership may make strategic sense. The experience of the 1990s, when a variety of provider systems launched plans only to see them fail and leave the market, is certainly cautionary. The trends in the healthcare marketplace indicate that by 2020 acute care hospital revenues will be less than 50% of many health systems’ revenues. Growth is likely to come mainly from the growth of physician revenues and ambulatory services, and access to health plan profitability.


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