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Competition among providers, increasing pressure to lower costs and renewed ability to impact how care is delivered are driving health systems toward value-based care. For many systems, provider-sponsored health plans designed for their specific patient populations present significant advantages, including better alignment of incentives, first dollar capture and increased clinical coordination.

As a market penetration strategy, provider-sponsored plans can enable health systems to take full responsibility for their patients — widening the scope of care from patients who come into the hospital to an entire community, with the goal of better health. These plans shift away from designing a specific care plan to working with physicians and patients to implement it.

The idea of stepping into payer shoes can be overwhelming, but taking a closer look at the process can help boards and executives to determine if this is the right strategy for their organization.

Preparing to Take the Plunge

The first step in taking on risk via a provider-sponsored plan is evaluating the organization's ability to successfully manage that risk over a long period. Providers that already have built a clinically integrated network of physicians, especially those who have begun incentivizing their network around quality improvements, are often positioned best for risk. However, there are a wide variety of tools and approaches available to providers that are looking to limit the financial risk of the arrangements they enter. Some of these include stop-loss provisions, the exclusion of selected high-cost cases and risk-adjusted capitation.

At the same time, advances in technology and predictive modeling can enable providers to apply proven actuarial analysis without needing armies of actuaries to do it. These advancements have made visibility into financial risk — and thus the ability to account for it — more available to providers than ever before.

Nevertheless, creating and running a health plan or managing certain risk arrangements means providers will need to take on all sorts of new responsibilities: claims payment, customer service, insurance reporting and other administrative operations. As integrated systems and their medical staff develop new capabilities in managing the health of their population, they will benefit directly, and so will their patients.

The Competitive Landscape

Competing in the market alongside commercial and government-run payer organizations can be intimidating for providers who will be going up against these incumbent payers for the first time. But the entrance of health insurance exchanges could change the game.

The availability of insurance via exchanges means that employers can move away from offering employees a selection of national health plans and instead offer the option to receive a lump sum that enables them to select and buy insurance themselves. As several recent reports indicate, a growing number of employees are opting for higher-deductible, lower-priced plans, showing that consumers are open to taking more control of their plans and health care costs.

As the exchanges are refined and gain a successful track record, it will be easier for local and regional health plans to enter the market. With localized benefits that are cheaper and provide more options than the plans offered by big payers, provider-sponsored plans will bring a new level of competition to the national plans.

All in the Family

Suppose a health system has a risk contract with a private payer, and a bill comes in for a patient with a $40,000 admission, which the insurer pays. It would still cost a provider-sponsored plan $40,000, but they write that check to the hospital, and the hospital may have only had incremental costs of $5,000 to deliver that care. That bed didn't cost any more for the hospital to provide, and the nursing staff were already in place. So, when the hospital and plan are under the same organization, money moves from one revenue line into another, but rolls up to the system's ultimate bottom line. The money stays in the system, and a much smaller fraction walks out the door.

Patients most often end up outside of a health system because either a primary care physician referred them outside or didn't convince them to stay. Provider-sponsored plans enable hospitals to create incentives so that ambulatory-based providers help to keep patients in the system, which encourages collaboration around how care should be delivered. For example, a double bypass patient who leaves the hospital likely will require follow-up ambulatory care. When a health system and its medical staff are integrated with a common data platform and incentives to care for a given population, they will work together for the betterment of the patients.

George Lynn ( is a member of the board of directors of Valence Health, Chicago, and former chairman of the American Hospital Association board of trustees. Philip H. Kamp ( is CEO of Valence Health.

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