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Nonprofit hospital systems are expected to become more prevalent in the commercial health insurance industry in the next several years, according to Moody's Investors Service Inc.
Several large and medium-size nonprofit hospital groups have launched or acquired commercial health insurance plans in recent years in response to changing market conditions, including the industry's heightened focus on care coordination and population health management under the federal health care reform law. Hospitals also have a growing need to diversify their revenue as inpatient volumes and other traditional top-line revenue drivers continue to dwindle, Moody's said in the Thursday analysis.
Recent entrants into the commercial insurance market include Ascension Health, Catholic Health Initiatives and Memorial Hermann Healthcare System.
Additionally, ongoing consolidation in the commercial health insurance industry has put hospital systems under increasing pressure to grow to maintain adequate price-negotiating leverage with insurers.
“The trend of not-for-profit hospital systems launching or acquiring health insurance plans will likely be limited to larger systems that have the resources to absorb the costs and risks associated with taking on an entirely new business,” Moody's analysts wrote in the report.
Even for large hospital systems, the commercial health insurance industry can be financially and operationally risky. Nonprofit hospitals that offer individual and group health plans typically experience a substantial drop in operating cash flow, Moody's noted, due primarily to considerable startup costs and ongoing reserve requirements.
“Even when critical mass is achieved, adverse selection can derail otherwise favorable financial performance,” Moody's said. “Hospital boards and management teams must carefully consider their appetite for lower margins in the near term while pursuing long-term benefits.”
Moody's said the biggest operational challenge hospital systems often face is a lack of the specific expertise and skills needed to effectively run an insurance plan, including actuarial and underwriting practices, marketing, customer service, information technology and state-by-state compliance.
“These skills can be profoundly different than the delivery of acute care services,” Moody's analysts wrote. “Until the majority of a hospital's reimbursement revenue is based on treatment outcomes, financial performance will hinge on treatment volume. The insurance business operates in the reverse, where lower utilization by enrollees improves profitability.”
Kevin Lofton, CEO of Catholic Health Initiatives, says his health system's entry into the insurance market has complicated its negotiations with insurers.