The Blurring Line Between Hospitals and Insurers

An article from Modern Healthcare today on hospitals getting into the insurance business caught my eye. This follows a slew of recent articles documenting the trend, including from Kaiser Health News last August and the WSJ last December, but perhaps surfacing as early as 2010.

10% of community hospitals already own their own insurance plan, and 20% of top 100 hospital leaders in 2011 said they planned to own one soon, according to the WSJ report. The hospitals and health systems that have launched their own plan within the last few months include North Shore-Long Island Jewish in NY, Sutter Health and MemorialCare in CA, and a collaboration between Piedmont and Wellstar in GA. More recently, Florida Hospital announced plans to offer an insurance product by 2014, and in New Mexico, Christus St. Vincent’s CEO just announced the possibility of launching a health plan yesterday. Here’s a map:

There are a number of possible rationales for health systems to get in the insurance business, including:

  1. The logical extension of the “vertical integration” game to its ultimate end goal. As a hospital, if you already control your pre-acute (e.g. primary care docs, physician groups) and post-acute (e.g. nursing homes, home health) providers, why not manage the financing of health care as well?
  2. More control over population health. For some systems, especially those already part of or eyeing Accountable Care Organizations, being able to incentivize patients through benefit design to seek preventive care and be more health-conscious can negate higher treatment costs down the road.
  3. More visibility into data. Traditionally, insurers have had access to all of the claims data, while hospitals have been left in the dark.
  4. Concern about the future of hospitals as a viable business model. With margins deteriorating and payers doing everything they can to keep patients out of the hospital, why not jump ship and capture the “premium dollar” back from the insurers? (Especially if you can–deviously–capture all of the healthiest patients.)

“[Providers who depend solely on fee-for-service revenue] will eventually have a slow death.” -Michael J. Dowling, CEO, North Shore-Long Island Jewish Hospital (Source: WSJ)

That said, getting into the insurance business is not something that is easily done. Health systems have tried it before and failed. The challenges are multifold, and include:

  1. High fixed costs. Starting an insurance company ain’t cheap.
  2. Competing against the same insurers that you’ll likely still have to contract with, at least for some patients. That’s awkward.
  3. Managing risk. Hospitals historically have sucked at it. Without the scale and expertise, a few high-cost patients could bankrupt your entire business.
  4. Jumping through numerous regulatory hoops, including attending a class and passing a test, obtaining a license, purchasing insurance for your insurance company, and other requirements. Here’s a brief list.

It’ll be interesting to see if more health systems jump on the bandwagon as the year progresses, especially with the new Health Insurance Exchanges–I mean, “marketplaces”–slated to come online in 2014, potentially offering a new opportunity for market entry.

Next up: insurers buying up hospitals.