The 2 Main Reasons Why PSHPs Fail
Last blog we talked about the potential of the provider-sponsored health plan (PSHP). Creating the next Kaiser or UPMC is a legacy that most health system CEOs would dream of building. Think about the reduced administrative complexity, opportunity to blend claims and medical information to better predict health outcomes, and streamlined member enrollment to reduce uninsured patients (also known as “charity care” or “uncompensated care”).
So, what gives? If this is the holy grail of “value-based care” or “population health risk,” why hasn’t every health system started one already? Well in my opinion, there’s two main reasons…
Cannibalism is bad
If you’re a hospital CFO, your two most important metrics are occupancy rate and payer mix. Occupancy rate is the % of filled beds over total staffed beds, while payer mix reflects the type of insurance your patient population receives. There used to be a saying in hospital administrator land, “heads in beds.” Now obviously this doesn’t apply to all health systems, just most.
In the fee-for-service (FFS) world, hospitals and physicians got used to being paid for each visit and procedure. The way you made more money was by doing more services. But that wasn’t everything. You also needed to watch out for what type of health insurance. Treating a Commercial patient versus a Medicaid patient resulted in huge financial swings.
In general, the baseline rate is always set by the good folks at the Centers for Medicare Services (CMS). There is no negotiation. Next, the Commercial and Medicaid rates are negotiated, oftentimes as a % of Medicare. Commercial rates can pay a whopping 141% to 259% of Medicare FFS. Medicaid pays significantly less, maybe 60-70% of Medicare FFS. The point being, hospitals make more money from having a full hospital of commercial patients and less with majority Medicare and Medicaid.
If you’re starting a Commercial PSHP, your health plan leadership will be aiming to do exactly what your legacy health system leadership has always feared. Get patient’s heads out of beds. Without true change management, it is a tough pill to swallow for any CFO to knowingly reduce Commercial utilization.
Starting up is slow, hard, and expensive
Now if you’re going to start a PSHP, you must choose your own adventure between Commercial, MA, or Medicaid.
Think Commercial is your best bet because you’ve heard it’s the most profitable line of business? True, but you’re also having to compete head-to-head against every other major health plan in your state (including your state’s dominant BCBS plan) who aren’t going to be very happy about your entrance. They might even think about kicking you out of their preferred Commercial network tier as a retaliation.
Is MA more your speed? Welcome to the most brutally competitive line of business which every large for-profit health plan (UnitedHealthcare, Aetna, Humana) plus every VC-backed health plan (Devoted, Bright, Alignment, Oscar) is focused on in 2020. Plus, although it’s growing, MA is still only 1/3 of the Medicare population across the country. The pie is growing slowly, but so is everyone’s appetite.
And what about Medicaid managed care? Your system loses so much treating Medicaid patients, might as well try to make something on the back end in terms of PSHP profit. Welcome to Thunderdome. Good luck with the high-stakes lobbying battle with all other health plans who need to win this multi-billion state contract. These contracts can be the biggest single budget decision of a Governor’s administration, so prepare for a long, expensive process.
In addition, you’re going to need a lot of something that health systems are notoriously bad at having. Extra cash. Have you ever wondered how all these startup health plan companies are raising hundreds of millions of VC funding? Oscar Health has raised $1.3 billion in funding. Bright Health has raised $1.1 billion. Devoted Health raised a $300 million Series B round alone. It seems CRAZY to think the relatively low-margin business like health insurance would attract so much capital?
Well the reason they’ve raised so much money is because health plans, including PSHPs, require significant capital to cover reserves or risk-based capital (RBC). There’s a pretty complicated formula to calculate the real RBC, but for directional sake, think about a minimum of 8-10% of premium revenue must be earmarked towards any potential future PSHP losses. To give you some math, that means a PSHP with 50,000 MA lives generates $600 million in annualized premium revenue (assuming $1,000 PMPM). In order to be in good standing with the State Insurance Commissioner, this PSHP would need $48-60 million sitting on the balance sheet to cover minimum RBC. Now most BCBS plans have multiples of that 8-10% threshold just in case, but you’re going to have a hard-enough time with the minimums.
In summary, PSHPs have a lot of promise. But they also come with a whole slew of issues, the two discussed above, plus many others including the challenge of scaling a low-margin business and using an absurd number of vendors to comply with state and federal regulations.
Lastly, I am going to take a month long hiatus from these long-form blog posts. Frankly, I am way too busy to keep writing these right now. For those of you watching ESPN’s, “The Last Dance” documentary series, this is like an abbreviated 1993 Michael Jordan retirement. Except I’m not a defending 3-time champion and I’m only leaving for a month or so… I will definitely keep up my daily posts on LinkedIn and Twitter, so please follow me there.
Andy Mychkovsky is the creator of Healthcare Pizza, who also provides strategic consulting to startups and healthcare companies. Follow him on Twitter (@AMychkovsky) and LinkedIn for future thoughts and updates.