An emerging trend among not-for-profit hospitals positions them well for population health management but also carries significant credit risks, say Moody’s Investors Service analysts in a recent report. The trend is to enter the commercial health insurance business to both improve care management and gain market share, the analysts wrote.
The effect on credit primarily depends on the pace and the magnitude of the strategy. A hospital/system can either start a plan from scratch or acquire an existing health plan business. But both carry significant credit risks. Three key challenges must be overcome:
- Developing or obtaining a skill set focused on operating/managing a business where lower utilization by enrollees improves profitability. Until the majority of a hospital’s reimbursement revenue is based on treatment outcomes, financial performance today depends on volume; i.e., higher utilization
- Competing effectively with large established insurers
- Financial resources to absorb start-up costs
The report notes that:
More providers will enter the commercial health insurance market despite risk of margin dilution.
Owning a health insurance plan gives health systems a way to control costs, diversify revenues and efficiently track and measure patient outcomes (i.e., population health management). However, an insurance strategy can negatively affect cash flow before the system can achieve sufficient revenues and critical mass. “The median operating cash flow margin for hospitals with insurance plans is 9.7 percent and they have a median rating of Aa3, well below the Aa median operating cash flow of 11.0 percent.”
Embarking on a health insurance strategy is very complex and requires new management skills.
These include actuarial skills for pricing models, specific marketing and service acumen, significantly different information technology demands, additional regulatory burdens and effectively managing competition from other health plans and other hospitals.
Healthcare systems with successful health plans share characteristics helping offset risks.
Common success factors include:
- Experienced health plan leadership that operates the insurance business as a separate enterprise from hospital operations
- Expansive and well-established physician networks
- Critical mass of enrollment
- Strong balance sheets and ample reserves to fund growth strategies and subsidize years when the plan operates at a financial loss
- Fully-deployed electronic medical record
- Strong and leading market position for acute care operations, which help management develop population health strategies
- Track record of strong operating margins from acute care operations
(Source: Hospitals Entering Insurance Business Gamble on Long-Term Payoff, Moody’s Investors Service “Sector in Depth,” September 24, 2015.)
Read the full report in iProtean’s upcoming Finance course Integrating Population Health Management into Your Strategic and Financial Plans, Part Two.
(iProtean again thanks Moody’s Investors Service for allowing us to share this and other reports with our subscribers.)
iProtean subscribers, the advanced Finance course, Integrating Population Health Management into Your Strategic and Financial Plans, Part One, is now in your library. Marian Jennings, Mark Grube and Nathan Kaufman discuss physicians and population health management, the infrastructure required, return on investment for population health initiatives, risks for smaller organizations and evaluating capital allocation priorities.
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