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Anthem, LA providers creating HMO to compete with Kaiser

Posted On: Sep. 22, 2014 12:00 AM CST

An unusual joint venture between Anthem Blue Cross and seven competing Los Angeles-area hospital systems to offer employers a low-priced HMO plan underscores the eagerness of insurers and providers to try novel and risky strategies to survive in the rapidly changing healthcare marketplace.

The new company — Anthem Blue Cross Vivity — will seek to replicate Kaiser Permanente's success in controlling costs and ensuring quality — but without the singular ownership Kaiser has over its insurance and provider arms. To do so, participants in the joint venture agreed to share equally in profits and losses.

Starting next month, the venture will market a new health plan to employers with no deductible and premiums 10% below competitors, according to Anthem Blue Cross, a division of publicly traded insurer WellPoint. Patients who select the plan will be limited to a select network of providers, which includes 6,000 doctors and 14 hospitals. The California Public Employees' Retirement System has agreed to include the Vivity network in its HMO plan.

Regional markets are seeing a wave of mergers, partnerships and creative arrangements like Vivity. These alliances are producing networks that compete head to head with each other and could transform markets along the lines envisioned by healthcare reform architects. The deals linking local competitors — such as the Vivity joint venture and a merger earlier this month in Chicago — are uniting historically separate sectors including hospitals, insurers, physician groups and post-acute care providers.

Last week, St. Louis-based Ascension Health announced it would launch a post-acute care joint venture with a publicly traded partner. This month, Advocate Health Care and NorthShore University Health System said the two would merge to create a mega-system in Chicago.

Deals have exploded under growing public and private pressure to control health spending growth, with resulting downward pressure on government and private insurance payment rates. Dealmakers say new combinations will reduce waste and lower cost while better coordinating care. But with the flurry of deals comes heightened antitrust concerns about reduced competition and resulting higher prices.

On the other hand, the new combinations are designed to boost competition and lower prices in markets such as Los Angeles which traditionally featured relatively robust competition among major insurers but not providers. Vivity seeks to compete head-to-head with Kaiser — the Oakland-based integrated delivery system that holds the largest share of the California employer market — as well as Health Net and Blue Shield of California, which also offer HMO and other narrow-network products.

“When it comes to healthcare cost control, if the market is going to solve our problems, it has to be through competing systems,” said Jonathan Gruber, a health economist with the Massachusetts Institute of Technology and an architect of the healthcare reform law. The Vivity initiative indicates that healthcare prices have “reached the breaking point,” Gruber said.

But hospital systems risk dangerously eroding margins in models that seek to reduce inpatient care, especially in a period where the fee-for-service payment model, which rewards greater volume, still holds powerful sway.

Some dealmakers are betting that investment in care coordination and health IT can yield enough savings to make money under the new value-based payment models. But the evidence so far is mixed. The CMS said last week that three-quarters of roughly 200 Medicare accountable care organizations have failed to meet cost targets and earn bonuses through the first two years of the ACO demonstration.

The new Vivity joint venture raises the stakes by betting that seven competing hospital systems — some of which are among the higher-cost systems in the market — can work jointly to reduce costs and improve quality. It will market an HMO to large, fully insured employers in Los Angeles and Orange counties, with an anticipated first-year enrollment of 15,000. It has said it will hold premiums 10% below current rates. Employers will pay a capitated payment for each enrollee. There will be no deductibles or coinsurance, and copayments for medical services will be modest.

Vivity’s partners will pool premiums into one budget. Partners share equally in profits and losses. Partners that fail to meet quality targets won’t earn profits.

Together with Anthem, Vivity’s provider partners — Cedars-Sinai Health System, Good Samaritan Hospital and UCLA Health, all in Los Angeles; Huntington Memorial Hospital, Pasadena; MemorialCare Health System, Fountain Valley; PIH Health, Whittier; and Torrance (Calif.) Memorial Medical Center — will move to meld their health IT systems, at first relying on Anthem’s claims data system. Anthem indicated it would expand the model to other markets and other states if it succeeds.

Executives involved with the deal acknowledge the venture’s ambition and uncertainty. “The delivery systems themselves now have made a commitment and they’re trying to project where this will take them over time,” said Joseph Swedish, CEO of Anthem’s parent company, WellPoint. “But there are still, admittedly, many unknowns.”

Vivity is among a wave of mergers and creative arrangements producing networks of historically independent players. These alliances could transform markets along the competitive lines envisioned by healthcare reform architects.

“We’ve all done this before, we just haven’t done this together,” said Craig Leach, president and CEO of Torrance Memorial Health System.

Vivity will offer CalPERS’ 210,000 members in Los Angeles and Orange counties access to health systems “that frankly, from a price perspective, would not have been available” without adding $100 per month to premiums otherwise, said Ann Boynton, deputy executive officer for benefit programs, policy and planning at CalPERS.

Nonetheless, Vivity’s success likely will depend on targeting the high-cost care delivered in hospitals, something which can threaten hospital margins. Providers said existing capitation in California’s market has spurred many cost-saving transformations that prepare them to benefit under the Vivity HMO.

“That is a pretty bold play,” said Leemore Dafny, former deputy director for healthcare and antitrust with the Federal Trade Commission and professor at Northwestern University’s Kellogg School of Management. “It’s not obvious how they’re going to reduce hospital occupancy and come out on top.”

Vivity executives said reduced spending will come through special negotiated rates for hospital care and efforts to more closely manage where patients get care. “Prices are irrelevant in this conversation,” said Stephen Ralph, CEO of Huntington Memorial Hospital.

Thomas Priselac, CEO for the Cedars-Sinai Health System, and Dr. David Feinberg, president of UCLA Health, were unavailable for comment.

Pam Kehaly, president of Anthem Blue Cross’ West Region, said Vivity partners will have many consolidation opportunities for reducing costs, such as operating a single nurse-call center for members. It also will be critical to direct patients to the most cost-effective setting across Vivity’s network of ambulatory-care centers, community hospitals and academic medical centers.

That ability to manage across lower- and high-cost settings will be critical to academic centers’ success in this and other accountable care initiatives. “The idea is to provide the right care in the least restrictive setting,” said Dr. Scott Berkowitz, medical director of accountable care for Johns Hopkins Medicine and executive director of its ACO.

But to manage that care, the partners will have to overcome many organizational and cultural differences. “There are seven different ways of doing things” among the systems involved, said Steve Valentine, president of the Camden Group, a Los Angeles consulting firm.

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