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Catholic Health Initiatives to divest health plan operations

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Hospital system Catholic Health Initiatives' experiment with health insurance has hit the end of the road after a couple years of heavy losses. CHI is “exploring options to sell” its health plan subsidiary, executives said in new financial documents.

The documents, released this week to bondholders, explain that top CHI executives “decided to exit the health insurance business” in May after undergoing a strategic review in March. CHI's consolidated insurance division, QualChoice Health, formerly known as Prominence Health, has hemorrhaged money since its inception. QualChoice sells Medicare Advantage plans and commercial plans to employers in six states.

In the first nine months of CHI's fiscal 2016, which ended March 31, QualChoice lost $97 million from operations compared with $19 million in the same nine-month period last year. QualChoice collected $377 million in premiums during the first nine months of this fiscal year, a 41% increase from $268 million last year, according to the financial statements.

CHI, based in Englewood, Colorado, did not immediately respond to an interview request. A spokesman sent a statement saying that “CHI continues to explore all strategic options including partnership as well as the sale of all or part of the health insurance business.” As of March 31, the company had about 33,000 Medicare Advantage members and about 150,000 commercial covered lives.

It's unclear what kind of price tag CHI could fetch for its insurance division. But based on the subsidiary's revenue and industry valuation metrics, CHI could receive several hundred million dollars from potential buyers, which would help offset the system's growing net losses.

CHI, one of the largest not-for-profit health systems in the country with 102 hospitals, started aggressively acquiring health plans in 2013 as a way to compete with other insurers and conform to the goals of the Affordable Care Act. CHI was attracted to Medicare Advantage because of the large growth of baby boomers into private Medicare plans.

Other health systems like CHI have jumped into health insurance as a way to take on the full financial risk of patient care. Health care executives have hoped the strategy of integrating hospitals, doctors and other care settings with insurance under one roof will lower spending and improve care coordination — a strategy hospitals tested a couple decades ago, but it ultimately failed for many.

Many caveats still exist with launching provider-based health plans, and several systems have already stumbled financially with the process. CHI isn't the first health system to backtrack on its health insurance gamble, either. Mercy Health, a Catholic system based in Cincinnati, sold off its HealthSpan division (formerly part of Kaiser Permanente) earlier this year and still faces steep financial challenges.

CHI struggled with high medical claims expenses from its Medicare and commercial populations “as a result of increased covered lives and unfavorable shifts in the medical loss ratio,” executives said in documents, referring to the metric that shows how much of an insurer's premiums are spent on medical care. Higher medical loss ratios mean more patients are seeking more care, which dwindles the bottom line.

Kevin Lofton, CEO of CHI, knew that growing the insurance business too quickly was not in the system's best interest.

“The biggest learning that you're going to face initially is just the fact that (we need to) take it a little slow,” Lofton told Modern Healthcare last year. “We have to make sure that we know what we're doing before we start going out and gathering a whole lot more, in terms of covered lives.”

Moody's Investors Service and Standard & Poor's Ratings Services have each downgraded CHI's bond ratings this year. CHI ended its first nine months with an operating loss of $265.6 million and a net loss of $568.1 million, after factoring in losses from investments and interest rate swaps. Investments in electronic health records and other technology also contributed to CHI's losses.

Bob Herman writes for Modern Healthcare, a sister publication of Business Insurance.