Western Pennsylvania has a hospital network that owns a health insurance company and a health insurer that runs hospitals.
That’s unique in America, though the rest of the country is beginning to catch up.
In response to upheaval in the health care business, led in part by changes under President Obama’s health care law, hospital systems from California to Massachusetts are making plans to offer insurance products, something UPMC has done for more than 15 years.
Insurers across the nation are watching Highmark, which became the first, and so far only, insurer to take a major step into the hospital business when it purchased seven medical centers this year.
“Every insurer and Blue Cross plan in the country is taking a close look” at what’s happening in Pittsburgh, said Ted Schwab, partner at the health and life sciences practice of Oliver Wyman, a New York-based management consulting firm.
“If this one is successful, you’re going to see activity at an unprecedented level,” he said.
Hospitals and health insurers increasingly are jittery about maintaining revenue and profit as customers and the government demand that the health care system rein in costs and improve quality.
Diversifying their businesses, either into insurance or medical services, is a way to take greater control over managing change and spreading financial risk.
“There’s a lot of anxiety and uncertainty about what’s going to happen to the business model for the insurance industry and hospitals,” said Steven Shortell, professor of health policy and management at the University of California Berkeley School of Public Health.
A better model
ObamaCare and the government’s Medicare program are driving a move away from reimbursing hospitals and doctors for each visit or procedure, a payment scheme known as fee-for-service, to one that bases payments on keeping patients healthy, or value-based payments. That’s expected to lower costs by reducing volume and to produce better health outcomes. During the transition, hospital profits could decline.
Having their own insurance plan gives hospitals a revenue stream and greater control over patients.
Insurers, which need to hold down costs to keep customers, see taking control of hospitals and doctors as a more direct way to control cost and quality.
“There has to be a better way, a better model that allows care to be delivered more affordably,” said William Winkenwerder, CEO of Highmark, the state’s largest health insurer.
Although Highmark’s $1.6 billion health system is a first of its kind, large national insurers in recent years made similar, smaller moves.
Louisville-based health insurer Humana Inc. in 2010 paid $790 million for Concentra, a Texas company that operates urgent care clinics. A year later, WellPoint Inc., a for-profit company that owns Blue Cross plans in more than a dozen states, paid $800 million for CareMore, owner of clinics in California and other western states.
Hospitals are ratcheting up the activity. At least six hospital systems have announced plans to create health insurance products or have acquired a health plan in their markets in the past 12 months.
Among them are two Atlanta-area systems that are partnering on a health plan they expect to begin selling on Jan. 1.
“Having a health insurance entity is going to facilitate the doctors we have being able to practice medicine the way they were trained,” said Dan Styf, senior vice president for operations for Piedmont WellStar Health Plans, the company formed in December by Piedmont Healthcare and WellStar Health System.
Styf said Piedmont and WellStar, which each own five hospitals in Georgia, want to pay doctors for quality rather than number of procedures. Having an insurance company allows them to do that.
“In value-based care, it shouldn’t matter if you do one visit or five, you should practice in a way that makes that patient healthier,” he said. “Having an insurance company within the system will allow them to invest that time.”
Leading the way
To help manage its insurance business, Piedmont WellStar hired Evolent, a Washington company formed by UPMC and The Advisory Board Co. in 2011 to provide technology and management services for health systems.
Evolent CEO Frank Williams said the company is working with 15 hospital networks that are developing insurance products or partnering with insurers.
“The market has moved much faster than we initially anticipated,” Williams said. “This trend is definitely sweeping the country.”
UPMC, the largest hospital system in Western Pennsylvania, started its UPMC Health Plan in the late 1990s as a way to try to better manage patients’ health, said Scott Lammie, the health plan’s chief financial officer.
To do that, it developed a software system called Identifi that can analyze all the data UPMC collects on its patients and insurance customers, said Marybeth Jenkins, the health plan’s chief operating officer.
“We’re glad the industry is focused on what we’ve been doing here in Pittsburgh,” Lammie said.
Highmark, UPMC’s chief rival, got into the hospital business not only to keep West Penn Allegheny Health System’s five hospitals from falling into bankruptcy, but to transform health care in the region, Winkenwerder said.
“It gives us a real unique opportunity to offer lower costs, high quality and great service,” he said of the insurer’s Allegheny Health Network.
The company recently announced it will pay primary care doctors in its network bonuses for keeping patients healthy and out of the hospital, where health care is most expensive.
That kind of investment takes deep pockets, because fewer patients in hospital beds means less revenue for hospitals whose financial health Highmark is trying to restore. Yet Winkenwerder is confident Highmark will succeed.
“I do believe that we are on the leading edge of change here in Pittsburgh,” he said.
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