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Irreconcilable Differences?

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In a reformed health care environment, should hospitals own health plans?

One key question posed by the new health reform act is whether hospitals should continue to own health plans. In the past, there were clear business benefits for such arrangements. But in a reformed environment, the potential problems and conflicts might outweigh those benefits. Here’s the debate:

	Point	Counterpoint
Hospitals should continue to own health plans. Integrated delivery systems promote quality and efficiency.	Health reform will make it harder for hospitals to earn a buck. You need insurance referrals more than ever.	Health reform is all about lowering costs. Forget about growing income—hospitals should sell their health plans now and focus on slashing costs.
	If hospitals and health plans work together, they can do a better job of reducing costs and improving patient care.	That’s a big “if.” Besides, to lower costs government payers may push patients toward non-hospital settings whenever possible. It may be a no-win situation—ditch the health plan.
	Expanded health coverage will grow the whole pie—hospitals, health plans, physician networks and ancillary services—even home health and hospice care. Common ownership will drive efficiency and service quality.	Providing care and selling insurance are two different businesses with conflicting incentives. Asking the same organization to do both is confusing and creates financial and operational challenges.

	Point	Counterpoint
Hospitals should get out of the health plan business. This is a classic case of conflict.	Hospitals need to increase reimbursement for a procedure to cover their costs; health plans want to pay as little as possible. Both face unique competitive pressures. To work under common ownership one party must subsidize the other.	Health reform provides incentives to lower health care costs and provide better patient care. The best way to achieve those goals is for hospitals and health plans to have common ownership.
	The new incentives encourage insurers to steer patients to preventive and outpatient care. Hospitals entered the insurance business to influence patients to seek care at their hospitals.	What can we do to fight back? Today’s consumers are very price conscious, but aggressive price promotions undermine the perceived value of our brand.
	When hospitals have health plans, they create a breeding ground for collusion, which could drive health care costs up, not down. It also could produce incremental regulatory action.	Every business situation presents opportunities for wrongdoing. That’s what government regulators are for.

My Take

Simon Gisby Simon Gisby, Managing Director, Deloitte Corporate Finance LLC

The Patient Protection and Affordable Care Act (the Act) will expand health care coverage to include millions of additional Americans, creating a tremendous growth opportunity for hospitals and health plans alike. Will hospitals continue to benefit from owning health plans in this new environment? No one really knows. Even my colleagues at Deloitte are vigorously debating the subject.

What we do know is that hospitals will likely face lower Medicare and Medicaid reimbursements and increased pressure to reduce costs. Providers can expect to be paid for delivering quality care, not for the number of patients they treat. Likewise, a strong push for preventative care in non-hospital settings can be expected and hospital-based treatment of acute patients should decline, as a result. Now that the Act is a reality, I expect regulators to demand more transparency and disclosure of conflicts of interest.

Meanwhile, health plans will be dealing with challenges of their own – including new taxes and fees, increased government regulations, more scrutiny on premium increases and elimination of lifetime limits and denial of coverage for preexisting conditions. They could also face increased competition and price pressure as states enter the market and health insurance exchanges make it easier for consumers to shop around.

Hospital ownership of health plans has the potential to compound these challenges. If a hospital owns the company that pays for its services, there may be conflicts over contract rates, quality of care issues and increased transparency requirements. New definitions of fraud and waste compounded the potential issues hospitals may face. Plus conflict-based challenges may arise over whether patients should be treated at the hospital or somewhere less costly.

This is a classic example of two parties in fundamental conflict. Hospitals have a vested interest in maximizing payment for their services, while health plans have a vested interest in doing just the opposite. An organization that combines hospital care and health coverage will need skilled leadership to successfully navigate the changes, opportunities and challenges presented by health reform. Is success possible? Yes. Is it likely? Maybe not. Stay tuned.

A view from the Health Provider sector

Philip Pfrang, Partner, M&A Transaction Services, Deloitte & Touche LLP

As patient volume has declined in recent years, hospitals have been struggling to increase referrals and admissions—first by forming their own health plans and more recently by buying physician practices. Under health reform, the business of health care will become more complex and the declining profitability of the traditional fee-for-service model will only increase hospitals’ drive for more business.

Health reform favors providers that can reduce costs through economies of scale and one way to do this is through a truly integrated health care system. An organization that offers insurance plans combined with hospital and physician care has a head start in the race for efficiency, especially if it provides coverage over a broad geographic area. But an early lead does not guarantee success.

For hospitals, a more robust strategy for revenue growth might include expanding offerings beyond their corridors into ancillary services such as imaging centers and CATH labs, or even hospice and home health services. By providing a continuum of care, an integrated health care system has the potential to deliver higher quality care for their patients at the lowest cost. Ultimately, that’s what will separate the winners from the losers.

A view from the Health Plans sector

Brian E. Flanigan, Principal, M&A Consultative Services, Deloitte Consulting LLP

During the reform debate, some advocates pointed to integrated delivery systems (IDS) such as Kaiser, Intermountain and Geisinger as examples of how health care should work in this country. Under the IDS model, the health plan is the revenue center that directs premium dollars into the system; hospitals and physician practices are cost centers. This arrangement creates a tangible economic incentive to deliver high quality at lower costs.

Unfortunately, smaller health plans may find it difficult to comply with the new regulations. Larger plans with greater scale generally have more resources to deal with the reform requirements, including new industry fees, administrative simplification, exchanges, compliance investments and policy changes.

I expect that some smaller health plans will struggle to keep up with reform’s operational, financial and compliance requirements and will seek larger partners. Like everything else in health reform, the outlook is evolving as we go, but there’s a strong potential for irony here: if smaller health plans disappear, competition in the market diminishes – which is contrary to the objective of the legislation.

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