Not-for-profit hospitals are following the for-profit hospitals trend to enter the insurance business, Moody’s reports. The ratings agency cited two drivers behind the move: reducing costs through improved healthcare management and to increase market share. Moody’s warned, however, that starting up a health plan isn’t without risk, including startup costs, required managerial and actuarial skills, as well as increased competition.

“Not-for-profit hospitals with a health insurance business…tend to operate at noticeably lower operating cash flow margins than similar health systems without insurance,” said Moody’s vice president and senior analyst Mark Pascaris. “Entering the insurance business inevitably suppresses hospital systems from the beginning.”

Moody’s warned that the recent insurance industry merger announcements—Anthem’s acquisition to buy Cigna and Aetna’s deal to acquire Humana, both still under Federal review—has “skewed negotiating leverage between commercial payers and hospitals decidedly toward the insurance companies.”

Our Take: We agree. Now may not be the best time to be entering the health insurance business. If the Anthem and Aetna deals go through, unless you are an attorney or economist working for one of those companies, you probably know that at least some markets will be less competitive. 

About two weeks ago, Aetna CEO Mark Bertolini and his counterpart from Anthem, Joseph Swedish, were grilled by a Senate Judiciary subcommittee hearing about the fate of insurance markets should the mergers be allowed to go through. Their response:

“We are not at all concerned about the lack of competition in local markets,” said Bertolini.

“There are many new players that have entered the market and continue to enter the market,” said Swedish.

It is difficult to read their prior testimony, as well as their comments last week, with a straight face. According to a Connecticut Mirror report, Bertolini said the merger would benefit Medicare, resulting in “positive changes,” and that “after the acquisition, Aetna will have a product portfolio balanced more evenly between commercial and government products.”

The AMA and AHA have vigorously opposed the merger on anti-competitive grounds, with good data backing them.

What Berolini’s means about “positive changes” to Medicare is that in the world of value-based contracting, bigger is better—that a larger insurer would have a larger repository of data available to providers to improve care and reduce costs for more people under Medicare Advantage.

The data suggest otherwise. Take one ACO quality measure, the Diabetes Composite Score. A simple scatterplot of the latest MSSP performance data reveals no relationship between the size of the ACO and this metric.  Some of the largest ACOs are performing well on this measure, others not as much. Similar results are found when comparing beneficiary counts to most other ACO quality metrics.

Of course, this implies that assigned beneficiaries is a good proxy for system size, which isn’t necessarily the case. We and others have previously reported on the struggles that Brewer, Maine-based Beacon Health has had in growing from about 10,000 beneficiaries in 2012 to more than 100,000 in 2015. 

Whether for-profit or not-for-profit, health systems are looking to the insurance play for several reasons. First, as Moody’s notes, health systems view having an insurance component as making them more competitive in their markets. Second, health systems with an effective EHR implementation have better data management capabilities, which should allow them to be more accurate in managing risk, making insurance a more realistic service line to offer. Finally, a health plan provides the system another revenue stream, which can offset any negative effects on margins stemming from provisions in the Affordable Care Act.

In the face of these opportunities, any health system expanding into the insurance space must ensure that it is properly capitalized for startup, that it has the actuarial and managerial experience, that its data management systems are fully integrated, and that it can effectively implement an insurance business strategy.

 

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