Managing Director & Senior Partner
In recent years, a growing number of health care systems have looked for new growth by entering the health insurance business. That is especially true in the fast-expanding Medicare Advantage (MA) market, where health systems have been entering at unprecedented rates, seeking diversified revenue streams, higher profit margins, and opportunities to capture more of the value from care initiatives that improve patient health and reduce costs. Overall, health systems now make up three out of five new market entrants, according to a 2016 report.
They are entering the MA market for three key reasons.
For health systems, launching an MA plan is a way to enter a market with higher growth and profit margins than their core health care services market can provide. Over the past five years, according to a US Department of Health and Human Services report, MA revenues have grown at 11% per year, driven by an aging population and higher rates of seniors choosing private plans—and that growth is expected to continue. (See the exhibit below.) In that same time period, hospital revenues have grown at just 3%. And profit margins for leading MA plans are about 5%, more than twice the average hospital sector margin.
Recent political trends have further improved the growth outlook for MA. Sixty-five US senators recently signed a letter expressing strong support for the MA program. Reflecting this support, leaders in Congress have laid out a Medicare agenda that would provide a significant boost to MA plans, including a proposal that would shift Medicare from a defined benefit model to a defined contribution model—in which beneficiaries receive a set dollar amount from the federal government that can be used to buy private insurance. This change, according to one former CMS official, would be “gasoline on the fire,” further accelerating growth in the MA market.
Finally, the market is appealing because it combines high growth with relatively low barriers to entry. In particular, as a direct-to-consumer market, it allows new entrants to reach customers more easily than they could in other health insurance markets, whether via external brokers or Medicare’s plan-finder website. This has helped the MA market attract a wave of new entrants—including venture-backed startups such as Clover, which has raised more than $400 million from investors like Google parent company Alphabet.
Part of the attractiveness of MA for health systems is the expanding market itself. But a second key reason that health systems are increasingly interested in starting an MA plan is that providers are well positioned to win in that market—if they can execute effectively. In particular, providers are poised to take advantage of a recent shift in how plans manage their medical costs, a key driver of value for health plans.
In the past, health plans managed these costs primarily through processes such as prior-authorization requirements, which were created to ensure that members receive only appropriate and necessary care. But in recent years, there has been a shift in focus toward partnering with health care providers to improve members’ health outcomes—for example, by using incentives and technology to drive better management of chronic conditions such as diabetes and hypertension. With the primary strategy for holding down medical costs shifting from managing providers to collaborating with providers, provider-sponsored health plans have a built-in advantage.
The additional leverage that health systems have with their providers can also have significant benefits in other areas that are critical for MA plans such as risk adjustment and star ratings. And the results bear that out. In 2016, for example, 10 of the 13 plans that earned five stars were provider led.
A third reason health systems are entering the MA market is that the move can serve as a strategic hedge against two recent trends that have put health systems on the defensive.
First, local MA markets have continued to consolidate. Acquisitions—such as Cigna’s purchase of HealthSpring and Aetna’s purchase of Coventry—have increased the market share held by national players. Today, two insurers (UHG and Humana) now control at least half of the MA markets in more than one-third of all counties in the US.
At the same time, MA plans are increasingly narrowing their networks as a way to gain negotiating leverage and keep costs down. Although network adequacy rules—guidelines that require access to a sufficient number of in-network providers—limit the degree to which plans can trim their networks, the overall trend is clear. About 1 in 6 MA plans has now removed more than two-thirds of local hospitals from its MA networks.
In this context, starting a health plan is a way for providers to remain relevant in their communities. It allows them to open a direct channel to their patients, bypassing payers in their community and blunting their market power. (See the exhibit below.)
For health systems, launching a health plan is no longer just a strategy for diversification. It’s a path to faster growth, a way to leverage assets that provide a unique competitive advantage, and a key strategy for protecting an organization’s future and relevance in a changing market.