More than 100 doctors in New York's Hudson Valley have launched a new health insurance company, one of the most striking examples of the tolerance for high risk that has flourished in healthcare as the industry looks to capitalize on upheaval under the health care reform law.

Middletown, New York-based Crystal Run Healthcare this week opened its small- and large-group health plans for enrollment. State approval to operate managed-care and Medicaid plans is expected by August. The doctor-owned plan will compete with major insurers for local business. It'll have a more limited network of doctors, but its owners hope to offer a competitive price and a more personal touch.

The new insurer's early bids for business have lowered employers' health benefit expenses by 8% to 12%, said broker Bruce Weil, senior vice president of sales and marketing at Capacity Benefits. “It's like a breath of fresh air to see something new,” he said. Crystal Run also entered the market with offers to attract employers. It will offer employees credits for deductible spending they've incurred if their employers break an existing contract to join Crystal Run. Deductibles in Crystal Run plans do not apply to some routine medical care or expenses, such as for some pharmaceuticals, unlike some existing plans, he said.

Few health insurance companies are owned by doctors — and only doctors — among the roughly 150 health insurers that have providers as owners, according to rating agency A.M. Best Co. Hospital operators more commonly own health plans. Hospitals typically have access to capital and the scale needed to enroll enough members to lessen the financial risk from costly claims.

Crystal Run invested $13 million for required capital, financed by the physician-owners, said Glenn Polansky, executive director of Crystal Run Health Plan. About 130 doctors hold a stake in Crystal Run Healthcare, a multispecialty physician group with 300 doctors that operates in three New York counties.

For most medical groups, those hurdles are too great, experts said. But those that prevail may have an advantage in managing the quality and cost of care without an expensive hospital to finance. “One way to succeed as a health plan is to keep patients out of the hospital,” said David Gans, a senior fellow for industry affairs with the Medical Group Management Association.

The doctor-owned health plan benefits when fewer patients seek care in hospitals, the most costly place to deliver care. Health plan medical costs will decline if doctors can shift patients to less costly outpatient clinics.

Crystal Run executives said experience in Medicare accountable care prepared the practice to manage medical costs to reduce spending. Now, they hope to expand that business model to keep more of the savings from lower medical costs and reduce the overall cost of care, they said. “We think it's right for the patient,” said Dr. Jonathan Nasser, the health plan's chief medical officer and the medical group's chief transformation officer. “We think it's right for the economy.”

Risk for investors

Nonetheless, even those that can take on the risk should stop to consider whether they should, experts said. That's true despite new public policy that encourages doctors to put more of their profits on the line based on the quality and efficiency of their care.

“I don't know if the goal is to be the insurance company,” said Marsha Gold, senior fellow emeritus at Mathematica Policy Research, a research and policy evaluation organization. “The goal is to get them to manage care and better assess the trade-offs and to be less on a fee-for-service basis,” Ms. Gold said. Fee-for-service, which pays doctors strictly for the number of tests, procedures and visits they conduct, is widely criticized for encouraging doctors to do more simply to earn more. “You don't have to become an insurance company” to manage care and shift payment away from fee-for-service, Ms. Gold said.

Indeed, commercial insurers and Medicare have begun offering hospitals and doctors new incentives to lower patients' medical costs and meet quality performance targets. HHS officials in January said they would rapidly expand offering those incentives under accountable care and bundled payment contracts to account for half of nonmanaged care spending by 2018. Those incentives and others were introduced under Medicare by the Affordable Care Act to reduce waste and reward quality.

Under such agreements, doctors who save money may keep some — but not all — of the premium or payment that would have otherwise been used to pay medical bills. Insurers also keep some of the savings.

Starting a health plan, however, allows Crystal Run to keep all of the money its doctors save. “Why should you share the savings if you can have it all?” Mr. Gans said. Of course, that also means doctors must absorb all the losses when medical costs exceed revenue from premiums, he said. “The downside is you have all the penalties too.”

For a startup health plan operated by a medical group, that risk is very real.

Experience, marketing challenges

First, doctors need the expertise to run a health plan and develop the marketing and other necessary business services. Most medical groups lack both.

Meanwhile, existing insurance companies won't be receptive and have established relationships that they can leverage, said Dr. Jim Bonnette, executive vice president of consulting and management at the Advisory Board Co. “An insurance company is not going to look favorably on new competition on the block,” he said.

Crystal Run Healthcare doctors will continue to contract with other insurers, Mr. Polansky said. He described the medical group's rates as competitive. The large medical group is “sort of unavoidable,” he said. “They need us in the marketplace. We need them in the marketplace as well. It's a big enough market for all.” He declined to offer projected margins for the health plan business.

Enrollment growth is critical for new health plans, which can be more vulnerable to sharp operating swings with a small membership. That's because small plans have less premium revenue to offset catastrophic claims, expensive treatments or highly priced blockbuster drugs. “If you don't have the right number of insured lives you can get upside down quickly,” Dr. Bonnette said.

Pricy medication eroded health plan margins last year, as happened in Boston with Partners HealthCare's Neighborhood Health Plan, which lost $110 million last year in part because of hepatitis C drug costs. Pharmaceutical costs will continue to be a major challenge in coming years for health plans and providers that agree to take financial incentives to manage costs. For those without the leverage to negotiate discounts, “Right now there is virtually nothing you can do,” he said. “You just wind up eating it.”

Dr. Bonnette said medical groups are more likely to mitigate financial risks by entering an agreement with existing health insurers, rather than starting their own plan.

Viability will also depend on Crystal Run's leverage in rate negotiations with network hospitals. “The smaller startup plans don't have the expertise or leverage in the market,” said Rebecca Owen, health research actuary for the Society of Actuaries.

Crystal Run Health Plan's owners acknowledge they are starting from scratch and likely won't ever dominate the market.

“We're starting at zero, which is a small as it gets,” said Doug Sansted, chief legal officer for Crystal Run Healthcare. The company projects membership of 25,000 to 30,000 within three years. Mr. Sansted said the company's focus on customer service will be its selling point. “There is an opportunity to wow the customer,” he said. “The smaller, nimble startups have the advantage.”

But perhaps the plan can offer local employers a competitive alternative, Nasser said. Health plans, too, have increased competition nationally with some medical group acquisitions, he said. “We're not the ones that were the first to branch out and change our business plan.”

Melanie Evans writes for Modern Healthcare, a sister publication of Business Insurance.