A new trend in the provision and financing of health care is the forming of health carriers by health systems and provider groups. This trend follows the emphasis on managing health care with better quality and decreased costs under the Affordable Care Act, and provider reimbursement increasingly linked to cost-effectiveness and quality rather than simply the volume of services delivered. Methods such as accountable care organizations and bundled payments are also creating incentives for provider systems to manage the entire process of care, including insurance.
In 2014 for example, North Shore-LIJ CareConnect became the first provider-owned health plan in New York to offer health insurance on the state's health insurance exchange. Similarly, Premier Health recently acquired a state insurance license in Ohio and has expanded from offering coverage to its own employees and their dependents to providing coverage both on and off the federal insurance exchange in Ohio. These provider-sponsored plans tend to focus on a particular region, with a more narrow network than larger carriers, but also with a more interactive network. Typically the goal is to cover lives in the provider group's service area with the providers' health initiatives, rather than to be a large national player in the insurance market. Forming an insurance carrier for this purpose can help the provider group's business at a time when insurers are pushing back at hospitals on reimbursement rates, but it also puts the provider groups in direct competition with insurers who are contracting with the providers for their insureds. It also creates new and regulatory issues that may not be familiar to providers and health systems.
In embarking on these new ventures, providers and health systems need to consider carefully the implications of acting as a health carrier. First and foremost, the health system must appreciate that the insurance business is very highly regulated and regulated quite differently from health care providers. For example, insurers are subject to financial regulation intended to prohibit improvident practices that could limit the availability of the insurer’s resources for fulfillment of obligations under its insurance contracts, such as investment limitations that permit investment in instruments specifically authorized by statute, strict reserving requirements and risk based capital requirements. Insurers are also subject to regular reporting requirements, as well as periodic financial examinations and market conduct examinations that investigate the insurer's compliance with the myriad operational requirements (e.g., adherence to underwriting and rating standards, marketing standards and claims handling standards, within a state). Relationships with affiliates are also heavily regulated.
The regulatory, operational, and strategic considerations between health care providers on the one hand and insurers on the other vary greatly, so, although the health insurance and health care provider markets intersect, success with one type of business is not necessarily an indication that the other will succeed. Indeed, we would argue that geography and market dynamics will be the most accurate predictors of eventual success for provider sponsored carriers.
Second, traditional carrier/provider concepts of rate negotiation must be reimagined. When the carrier and the provider are affiliates, it is no longer necessarily in the best interests of the health system to negotiate the highest possible reimbursement rates from the carrier. Rather, affiliated carriers and providers may be negotiating a different set of contract terms. For example, terms that focus more on member experience and branding initiatives (giving the member the feeling of a cohesive experience— where the carrier and provider work together to simplify the member experience and provide a sort of "one stop shop" for health and wellness needs—and focusing on differentiation from competitors).
We should note that insurance regulators continue to monitor rate negotiations among affiliates, and relationships between a carrier and its affiliates are traditionally subject to the jurisdiction of the insurance regulator, both in terms of the substance of the agreements and disclosure of information. In short, when the insurer is under common control with the providers, the insurance regulator becomes involved in that relationship to ensure that the agreement is an "arms-length" agreement. While traditional anti-trust principles may not necessarily apply to negotiations between carriers and providers, the affiliates must also take care to avoid the appearance of collusion and price fixing. Particularly to the extent that the carrier and the provider share personnel, individuals may be privy to information they would not have in the case of non-affiliate negotiations. The high profile case of West Penn Allegheny Health System, Inc. v. UPMC; Highmark, Inc., 627 F.3d 85 (3d Cir. 2010), which has since been dismissed, illustrates the dangers of the appearance of collusion, as West Penn (a provider) accused Highmark (the carrier) and UPMC (a competitor provider) of a mutual protection conspiracy to eliminate competition in their respective markets. Then Highmark announced its intent to acquire West Penn, and UPMC filed an anti-trust based counterclaim. While the case was eventually dismissed based on agreement of the parties, it subjected all parties to years of expensive litigation and settlement negotiations involving US Department of Justice investigations and the highest levels of state government.
In light of the foregoing, affiliated carriers and providers must give careful consideration to how to structure the companies and personnel to avoid conflicts of interest. Issues may arise, for example, with respect to shared board members with divergent fiduciary duties, legal (and other) departments with confidentiality obligations, and with respect to the roles of board members versus the roles of operating executives for both companies.
As a final example, we note that business initiatives will need to be vetted. There are a number of initiatives that may make good business sense and be a natural fit for an affiliated provider and carrier. For instance, it may be tempting for a health system to offer the members of its affiliated carriers special perks at health system hospitals, however, based on the particular facts and circumstances, such perks may be prohibited by state insurance laws and regulations (for example, unlawful rebate and inducement or unfair trade practices provisions).
Vertical integration of carriers and health systems offers the potential rewards of lower costs and better outcomes based on the promises of clinical integration and financial alignment. It is unclear, however, whether these benefits will outweigh the risks—and whether the benefits will outweigh the costs—for providers entering a new and highly regulated market which requires careful consideration of legal and regulatory issues.
Noteworthy links from the past two weeks
- Numerous outlets assessed the 5-year anniversary of the Dodd-Frank Act [Law360, The Wall Street Journal (subscription required), Investment News]
- NYDFS continued its investigation of potential conflicts of interest at Promontory Financial Group [The New York Times (subscription required)]
- Peter Hartt was named Acting Commissioner at the NJ Department of Banking and Insurance [New Jersey Department of Banking and Insurance]
- A group of experts urged FSOC to be more transparent [A.M. Best (subscription required)]
Life & Health
- The California Governor signed a bill prohibiting surrender fees on fixed deferred life annuities [A.M. Best (subscription required)]
- A Government Accountability Office investigation determined that the federal health exchange had issued coverage for fake applicants [The Wall Street Journal (subscription required)]
- AHIP announced that it has hired the former head of CMS [Business Insurance]
- PA passed a law to allow email delivery of life insurance policies [A.M. Best (subscription required)]
Property & Casualty