June 21, 2016
Health Systems with Insurance Operations Stumble in 2015
Nobody has said playing the role of provider and health insurer would be easy.
Not-for-profit integrated health systems—or those that combine hospitals, doctors and health insurance operations—continued to churn out surpluses in 2015, but the margins were a lot tighter than the year before, according to new bondholder filings and a review of the Modern Healthcare hospital financial database. In some instances, the money that health systems made from daily operations was slashed by half or more.
“We have seen some of the hospital systems new to insurance have really stubbed their toe,” said Jim LeBuhn, a senior director at Fitch Ratings who tracks not-for-profit hospitals. “And that is partly because they are just new to it, and they don't have as diversified a book of business.”
It's a message that resonates with health insurers selling plans on the Affordable Care Act's individual exchanges—although some companies have found success, it's been a difficult undertaking for most insurers in the early years.
But systems that are newer to health insurance were not the only ones that recorded smaller margins. Several other factors have played into the declining finances, even for more established integrated health systems. The ACA's Medicaid expansion provided a large, positive jolt starting in 2014, but became less of a factor in 2015. The decline in fully insured commercial plans, typically the most profitable segment for insurers, has continued as well.
Some systems that are still in the beginning stages of their payer operations skated on thinner financial ice last year. UnityPoint Health, based in West Des Moines, Iowa, bought a health system in Wisconsin a couple years ago that included an insurance company, and there have been some negative ramifications. UnityPoint posted a 1.7% operating margin on $3.89 billion of revenue in 2015, compared with a 3% operating margin on $3.7 billion of revenue in 2014. Those slim changes in margins equate to tens of millions of dollars, and UnityPoint executives said in their financial filings that “high levels of insured medical claims expenses” contributed to the weaker numbers.
Northwell Health in Great Neck, N.Y., posted a 1% operating margin on $8.72 billion of revenue in 2015, down from the already tight 1.2% margin from 2014. Northwell launched its insurance arm a little more than two years ago and covers 72,000 people, but executives aren't worried about the results so far.
“Having an insurance base has great potential, but it's a long-term play,” Northwell Health CEO Michael Dowling told Modern Healthcare last year. “You have to grow it slowly. I look upon this as a five-year play before you're going to see any substantial results.”
Most analysts agree hospital-owned plans need to have several hundred thousand covered lives before the finances become sustainable. “There's a certain amount of critical mass you need to have to spread that insurance risk out,” LeBuhn said. “It's sort of easier said than done.”
But even the health systems that have operated insurance divisions for decades encountered troubles last year. Intermountain Healthcare in Salt Lake City posted a lower margin, thanks in large part to huge shortfalls in risk-corridor funding from the ACA's exchanges and the lack of Medicaid expansion in Utah, both of which have become major political challenges. The operating margin at HealthPartners, a $5.74 billion insurer and provider network in Bloomington, Minn., went from 3.6% in 2014 to 1.8% last year.
The Carle Foundation—a prominent insurer and network of hospitals and doctors based in Urbana, Ill.—had medical-loss ratios “running above 100%” in certain lines of business in 2015. MLRs indicate how much of the health insurance premiums are spent on medical care. Carle posted a 1.3% operating margin on $2.49 billion of revenue last year, a fairly large dip from the 4.6% margin recorded in 2014.
Presbyterian Healthcare Services in Albuquerque greatly benefited from the state's Medicaid expansion in 2014, which resulted in a somewhat high 6.5% operating margin that year, said Dale Maxwell, Presbyterian's chief administrative officer. In 2015, as more insured patients started using services, the bottom line began fading. Presbyterian closed last year with a 4.3% operating margin on $2.9 billion of revenue.
“That is pretty much were we can expect to perform,” Maxwell said. “When we see lower utilization, we actually do better.”
Presbyterian has seen an evolving payer mix, however, from both sides of the business. The number of patients who have commercial health insurance has either been flat or declining annually, Maxwell said. Presbyterian also covers almost 460,000 people, and only 18% have commercial insurance. In 2012, almost a quarter of Presbyterian's members had employer-based coverage.
“We're just not seeing employers either growing in New Mexico or new companies coming into New Mexico,” Maxwell said.
Sanford Health, headquartered in Sioux Falls, S.D., posted a 2.5% operating margin in the first nine months of its 2016 fiscal year, down heavily from the 5.3% margin in the same period of 2015. JoAnn Kunkel, chief financial officer at Sanford Health, said the health plan operations are “definitely” the main challenge. Sanford covers 180,000 people and struggled with high costs from its ACA population and especially a large commercial contract.
Lisa Goldstein, an associate managing director at Moody's Investors Service, said there is still a lot of interest among hospital systems to start up their own health plans. Medicare Advantage especially has grown in popularity. However, other providers have been adamant about staying out of insurance after so many similar projects flamed out in the 1990s. “It's really a tale of two different perspectives,” Goldstein said.
The experienced players are patient enough to endure the ebbs and flows of the new insurance markets. Sanford Health has been building the payer operations for two decades, and Kunkel believes it leads to the type of risk-based care that the industry has been promoting.
“We knew how the financing side of healthcare was going to work,” Kunkel said. “If you take the first dollar and kind of take out that middleman…we do feel that's the way to manage the financial side of healthcare in the future.”