Healthcare Matters

The following article is re-posted with permission from the Kaiser Health News. Thanks to Roni Caryn Rabin who collaborated on this article with the Washington Post.

Michael Dowling, a burly Ireland native running one of New York’s largest hospital networks, is preparing to turn his business model on its head: He wants to keep his hospital beds empty, rather than full. That’s because the North Shore-LIJ Health System, with 16 hospitals and more than 300 outpatient centers in Long Island and New York City, is laying the groundwork to be an insurer, as well as a provider of health care. Like other hospital chains across the country, it’s under intense pressure from public and private insurers, as well as employers, to accept flat-rate payments for care, rather than reimbursements for every service. And that puts pressure on hospitals not just to manage costs, but to keep people well – in short, to act more like insurers.

“This is a huge, dramatic cultural shift,” said Dowling, president and CEO of North Shore-LIJ, who expects it will take several years to market coverage to the general public. Once the system becomes an insurer, picking up the tab for a hospitalization rather than generating revenue from it, more resources will be devoted to preventive care, Dowling said. “The last place I’ll want you to be is in the hospital,” he said. “I’ll be doing everything to get you to take care of yourself.”

Hospitals from Colorado to Virginia are exploring similar strategies spurred by rising costs and incentives in the health law. An estimated 20 percent of networks market an insurance product, including MedStar Health, serving the Washington-Baltimore region with Georgetown University Hospital and eight other facilities. Another 20 percent are exploring doing so, according to a survey last year of 100 hospital leaders by The Advisory Board Company, a research firm.“This trend is definitely picking up steam across the country,” said Chas Roades, the firm’s chief research officer.

Driving the change is the transition from fee-for-service payment schemes – which pay for each doctor’s visit, appendectomy or CT scan separately – to one that pays providers a global, or lump sum per-person-per -year. This will shift more of the financial risk of medical care from insurers to providers.

Once hospital systems are paid this way, “they’re sort of halfway toward being an insurance company,” Roades said. “The more hospitals take on risk and manage the care, the more they look like insurance companies. And ultimately you have to ask: Why do we even need an insurance company sitting between a health system and an employer?” Of course, Americans rebelled against an earlier iteration of this model, known as managed care, when insurers ran the show. “The big wild card is: how will patients view it?” he said. “Is it just going to be viewed as managed care 2.0 and engender the same kind of backlash, or will people engage with it because it can help them live healthier lives? “I don’t think it’s a slam dunk one way or another.”

Managed care redux?

One change, experts say, is technology. Electronic medical records and a wealth of health databases that did not exist during the first wave of managed care can now guide appropriate medical treatment. In the ’90s, “we were flying blind,” said Paul Keckley, executive director of the Deloitte Center for Health Solutions. “Now we’ve got a whole wave of clinical algorithms to know what’s an appropriate referral.”

Several large hospital networks — like The Ford Health System in Detroit and UPMC in Pittsburgh — have entities that sell insurance policies.  But that can complicate relations with insurance companies, and health systems like North Shore-LIJ, which depend heavily on contracts with commercial plans, would not want to jeopardize those relationships.  Dowling said he might partner with an insurer to market a North Shore-LIJ insurance product; he envisions a hybrid system that would continue to contract with numerous plans in the future.

It can get tricky, though. UPMC, for instance, has been embroiled in a nasty legal dispute with Highmark, a large insurer, over its acquisition of a rival hospital network in Pittsburgh, though the parties reached an agreement in May. Texas Health, which experimented with health plans in the 1990s, found the business a distraction from their primary mission and have sold them off.

“Hospitals think this is a way to cut out the middle person, tailor care more closely and save a lot of extra money, but there’s a history to this and it generally doesn’t work,” said Howard Berliner, a visiting professor of health policy at NYU. “It sounds easy, but it winds up being incredibly complicated.”

Several DC-area health systems already market plans or self-insure their employees.  Besides MedStar, Sentara Health Care, a Norfolk, Va.-based health system that owns Sentara Northern Virginia Medical Center in Woodbridge, Va., markets Optima Health, a health plan with 433,000 members.  And Inova Health System, a hospital network based in Falls Church, Va., recently announced it would partner with Aetna to establish a jointly-owned health plan that will start selling insurance products in northern Virginia next January.

The transition is complex and fraught with risk for hospitals, experts say. Insurance is a different business from health care, and requires a different mind-set and skills; Hospitals will have to change the way they are run and radically alter the way they take care of patients, possibly taking on powerful interests – like doctors.

To become licensed as an insurer, a health system also needs to have millions of dollars in capital reserves, and must run a regulatory gauntlet to prove it has an adequate provider network and can deliver required benefits.  And a hospital system cannot dip into the health plan’s reserves to fund new services.

“Many hospitals sold their insurance plans even though they were profitable because the hospital had better use for the money – the money sitting in insurance reserves could be better devoted to building the tower,” said Paul Ginsburg, president of the Center for Studying Health System Change.

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Here’s the rub:

As an insurer, the health system may also have to make tough decisions that rub physicians the wrong way or reduce their income, Dowling said. “If I find out that instead of surgery there is a more efficient way of doing something with better outcomes and less cost – I have to manage the doctors,” he said, referring to a study that found that inserting stents into narrowed arteries was no more beneficial for stable patients than standard drug therapy although it generates enormous revenues for doctors and hospitals.

“You can blame the insurance company now,” Dowling said, “but if you are the insurance company, now you’re the one telling your own doctors to do something they don’t want to do.”

This article does a wonderful job teeing up follow up coverage of the hybrid models that are bound to emerge. Those hybrids will no doubt be operationally creative and technology-enabled –no flying blind stuff as in managed care version 1.0.

—Tom Finn