Health systems’ financial circumstances are in better shape than they were in 2022 and early 2023, but there are still thousands of hospitals across the nation that are losing money. To improve their financial standing, hospitals are working to add a variety of revenue streams, such as acquiring outpatient care facilities, making stock market investments and launching their own health plans.
Rolling out a health plan is a tricky thing for a health system, though, according to Parth Desai, a principal at Flare Capital Partners. Health systems have been doing this for about a decade now, but there are “very limited proof points that hospital-sponsored health plans have done well financially,” he said during a recent interview at the ViVE conference in Los Angeles.
“There’s a couple that we know do well — like Kaiser and UPMC for example — but by and large, there have been many, many efforts to do this, and most of them have either struggled financially or shut down because they haven’t been able to compete with regional and national payers on that scale,” Desai declared.
It’s difficult for a health system-sponsored plan to achieve the level of member density it needs to be profitable — most of these plans aren’t able to cover the large number of lives required to ensure a viable risk pool and maintain a healthy operating margin, Desai explained. He said this necessitates huge marketing and enrollment programs, and most hospitals can’t execute those programs at a large enough scale.
In his view, most hospitals that have tried to launch a health plan simply haven’t been able to figure out how to make it profitable.
“There’s a lot of reasons for this,” Desai said. “Hospitals are hyper-regional in a lot of ways, and when they decide to launch their own health plan, it typically sounds like a good idea — they’ll start with their employee populations. But provider-sponsored plans need to cross a certain threshold of lives to have an actual risk pool that allows them to create the economic structure needed to sustain good operating margins and medical loss margins.”
The number of patients needed for plan enrollment depends on the line of business, he noted. For example, he said a provider-sponsored Medicaid or Medicare plan should have a scale of 100,000 lives.
Desai added that he has seen hospitals across the country lose money on their health plans because they haven’t reached that level of scale.
“There are other factors that go into it too, like actuarial capabilities. When you start to launch a health plan, there’s a lot of things you need to figure out how to do well,” he remarked.
This includes forecasting what the member population’s risk complexity is going to look like, as well as determining how the member engagement department will reel patients in for their visits, Desai explained.
He noted that health systems must take care to structure the right provider network that prevents patients from leaking out of the plan’s captive structure and into other health systems. Hospitals also must figure out how to incentivize providers appropriately in order to set up the best possible network, he added.
“I think it comes down to looking at your local geography and figuring out the line of business you want to get into — is it commercial, Medicaid, Medicare Advantage? Then you have to look at how you build on that scale to be able to sustain profit over time. Those are the factors that we’ve seen challenge most health systems’ efforts,” Desai declared. “The vast majority of these have a negative operating margin, and they’ve had negative operating margins for some time.”
Photo: Jaiz Anuar, Getty Images
