Provider-Sponsored Health Plans—a Cure for Health System Woes or “Out of Their Wheelhouse”?
We have been here before; some have succeeded, or at least gotten by, while many have failed. At what? Building an integrated model where the health system is both the provider and the payer. Lessons were learned, yet today’s economic uncertainty, rising costs and hospital financial performance coupled with major insurer reluctance to continue fee-for-service (FFS) rate increases have hospital and health system executives thinking about their path to managing the health care premium dollar. Indeed, there are different ways to go about that, with provider-sponsored health plans (PSHPs) being one option. Vizient’s value transformation team has had many discussions recently about PSHP feasibility, understandably so. A comparison of stock performance between major insurers and for-profit health systems from 2010 to 2023 begins to answer why the health plan space is interesting to providers. However, starting, growing and running a PSHP isn’t that straight forward.
Source: Yahoo!Finance website. Accessed January 2023.
What can we learn from existing PSHPs and those that have tried and failed? Broadly, the lessons learned fall into four categories:
- Meeting enrollment projections and growth goals is not a given.
- The scale of national plans is formidable.
- Start-up takes time.
- Plan versus provider identity friction is real.
Meeting enrollment projections and growth goals is not a given
Decisions made in the development of a plan’s products, benefit design, pricing and network structure are key, but the enrollment life cycle makes these initial decisions and go-to-market strategy a must-win situation. Starting with your own self-funded employees, where you already hold the risk is one of the easier first steps. Expanding your plan to other employers, via an administrative services only (ASO) approach can be the ultimate direct-to-employer strategy, but be prepared for fierce pushback and competition from the major payers. PSHP expansion requires carefully weighing trade-offs of aligned plan design with market needs to meet penetration goals and strategically position the plan for the longer term.
Medicare Advantage (MA), considered by many observers to be the darling of PSHPs, is a vastly different product from one where the organization is managing the health care benefits for its own employees. In addition to the different approach to population management, it involves adhering to strict timelines, regulations and requirements specific to MA, though it has offered the highest margin across plan types in the recent past (learn more in our post on the controversy in Medicare Advantage).
Note: Gross margins per enrollee are the amount by which total premium income exceeds total claims costs, divided by the number of enrollees. Gross margins include administrative costs, tax liability, and profits. Source: KFF analysis of data from Mark Farrah Associates Health Coverage Portal TM.
Entering managed Medicaid as a managed care organization (MCO) is also an option in states where MCOs are offered. However, as with Medicare Advantage, the population is quite different from the population in plans systems typically start with; furthermore, entry as an MCO is not guaranteed and could take considerable time to enter.
The scale of national plans is formidable
Most PSHPs have struggled to achieve a level of scale comparable to large national plans. The administrative functions and infrastructure national plans can leverage across products allows them to price more competitively, innovate in different plans to gain advantage, grow in key markets to offset other losses, and expeditiously make decisions on entry or exit of various products within and across markets. Most PSHPs lack this level of scale and often encounter difficulty competing with major payers in the market. Options that can minimize this disadvantage include partnering via cobranding with an existing plan, engaging a health plan enabler or partnering across PSHPs in other markets.
It takes time
While the economics of PSHPs make a lot of sense, and health systems should be the best positioned to manage populations in this way, launching and sustaining a PSHP is time consuming and is not easy. It takes considerable time to plan and formulate a well-thought-out strategy, to enter different product markets and to nurture and grow a new plan. Benefit selection cycles occur in one-year increments, and there is low churn in many segments of the insurance coverage market. At a time of heavy financial pressures, the parent health system does not always have either the time or the financial resources to weather the run-up to succeeding as a PSHP. Plan for this build-up phase in a feasibility assessment and strategy for a potential PSHP.
Plan versus provider identity friction is real
It is difficult for providers to don the payer hat. The hospital and provider space is usually characterized in terms of volume rather than viewed through the lens of medically managing populations. The margin perspective must change when the organization is both provider and payer or risk holder. Payers typically achieve margin from managing utilization and optimizing networks and sites of care while growing the population served and keeping its members healthy. Providers, on the other hand, often achieve margin goals through increased volume. The two can quickly become at odds. And the PSHP arm—faced with the competition of large payers with national scale—will push to “pay” its provider sibling less than market rates to grow and compete with national plans. Further, health systems often fail to align their plan functions with their value-based care functions (eg, clinically integrated network, accountable care organization) to achieve a comprehensive strategy.
- Consider alternatives that will provide a strategic advantage, such as cobranding, partnering with another PSHP(s) or engaging an enabler/third-party administrator
- Conduct a PSHP feasibility study
- Fully explore product options (eg, system employees, commercial/ASO, Medicare Advantage, Medicaid MCO), timeline and phased approach to growth
- Understand how the plan fits with your value-based strategies and other payer arrangements
- Consider the cultural dynamics of plan versus provider
If your health system is feeling the pressures from primary care disrupters; payers entering the primary care, post-acute and other provider space; or generally rethinking broader payer strategies, reach out to our Value-Based Care Strategy Consulting team to discuss your planning and next steps.