There have been a series of articles recently on the latest fad in health care, the acquisition or creation of insurance companies by provider organizations. Here's one from the Washington Post. The financial theory of the case is as follows: If providers are going to find themselves with more at-risk contracts, why bother with an intermediary insurance company whose main goal in life is to extract a profit from the relationship between the provider and patients? Instead, create your own insurance business and use it to internalize all of the costs and risks of the business, permitting you to shift costs back and forth between the provision of medical service and the insurance function, all as part of a common bottom line.
This is not a bad concept. An oft-cited example, Geisinger Health System in Pennsylvania, has been successful with it. But it is not easy, as noted in the Post article:
“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 New York University. “It winds up being incredibly complicated.”
For example, the Post notes:
As insurer, the health system may also have to make tough decisions that rub physicians the wrong way or reduce their income, [Michael] Dowling [CEO of North Shore-LIJ Health System] said. “You can blame the insurance company now, 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.”
In fact, Vince Kuraitis at the e-Care Management blog, says that this is something best avoided. He suggests that health care executives should lie down until the urge goes away! Why? A summary:
This is the dumbest idea I’ve heard since “I’m going to invest all my money in Facebook’s IPO and get rich!” Here are six reasons why:
1) You’re too late.
2) You have bigger fish to fry.
3) Health insurance is a far more complicated business than you realize.
4) Becoming a health insurers will drain you of capital and management resources.
5) It’s beyond your core competencies and not in your DNA. Trust me.
6) Do you really want to risk waking the sleeping giants in your neighborhood, i.e., the existing health insurance companies?
For today, though, let's join the health system CEOs and drink the Kool Aid and put aside those minor issues of implementation and ask what conditions are necessary to make the overall business proposition work? Size and scope. You need to be large enough to amass a sufficient balance sheet to meet insurance reserve requirements, and you also need a patient base that is broad enough to create an effective risk pool to cover actuarial probabilities.
These conditions feed into an environment that has author Steven Pearlstein nervous, in another Washington Post article. He notes:
Because there are often hospitals in each region that insurers must have in their networks to attract subscribers, dominant hospital chains are able to demand monopoly-like prices for their services. Insurers have responded by merging with other insurers in the hope of gaining negotiating leverage by becoming as indispensable to the hospitals as the hospitals are to them. To maintain their leverage, hospitals in turn have consolidated into bigger and bigger chains.
This arms race has produced repeated waves of consolidation that, rather than having led to lower prices, have led to higher prices, declining quality and less competition.
There is [a] reason to be skeptical about these mergers, not so much because they will reduce competition in today’s insurance market, but because they foreclose potential competition in an evolving health-care market in which one organization will provide both health care and insurance.
Neither Republicans nor Democrats have chosen to address these market power issues. The Federal Trade Commissioner has said that his agency does not have the resources or political power to do so. I know of no industry in which unregulated market dominance has led to lower costs or greater customer choice. Monopolies, after all, behave like monopolies.
Ah, but let's not worry. These organizations will be too big to fail.
This is not a bad concept. An oft-cited example, Geisinger Health System in Pennsylvania, has been successful with it. But it is not easy, as noted in the Post article:
“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 New York University. “It winds up being incredibly complicated.”
For example, the Post notes:
As insurer, the health system may also have to make tough decisions that rub physicians the wrong way or reduce their income, [Michael] Dowling [CEO of North Shore-LIJ Health System] said. “You can blame the insurance company now, 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.”
In fact, Vince Kuraitis at the e-Care Management blog, says that this is something best avoided. He suggests that health care executives should lie down until the urge goes away! Why? A summary:
This is the dumbest idea I’ve heard since “I’m going to invest all my money in Facebook’s IPO and get rich!” Here are six reasons why:
1) You’re too late.
2) You have bigger fish to fry.
3) Health insurance is a far more complicated business than you realize.
4) Becoming a health insurers will drain you of capital and management resources.
5) It’s beyond your core competencies and not in your DNA. Trust me.
6) Do you really want to risk waking the sleeping giants in your neighborhood, i.e., the existing health insurance companies?
For today, though, let's join the health system CEOs and drink the Kool Aid and put aside those minor issues of implementation and ask what conditions are necessary to make the overall business proposition work? Size and scope. You need to be large enough to amass a sufficient balance sheet to meet insurance reserve requirements, and you also need a patient base that is broad enough to create an effective risk pool to cover actuarial probabilities.
These conditions feed into an environment that has author Steven Pearlstein nervous, in another Washington Post article. He notes:
Because there are often hospitals in each region that insurers must have in their networks to attract subscribers, dominant hospital chains are able to demand monopoly-like prices for their services. Insurers have responded by merging with other insurers in the hope of gaining negotiating leverage by becoming as indispensable to the hospitals as the hospitals are to them. To maintain their leverage, hospitals in turn have consolidated into bigger and bigger chains.
This arms race has produced repeated waves of consolidation that, rather than having led to lower prices, have led to higher prices, declining quality and less competition.
There is [a] reason to be skeptical about these mergers, not so much because they will reduce competition in today’s insurance market, but because they foreclose potential competition in an evolving health-care market in which one organization will provide both health care and insurance.
Neither Republicans nor Democrats have chosen to address these market power issues. The Federal Trade Commissioner has said that his agency does not have the resources or political power to do so. I know of no industry in which unregulated market dominance has led to lower costs or greater customer choice. Monopolies, after all, behave like monopolies.
Ah, but let's not worry. These organizations will be too big to fail.