Two years ago, leaders at Sacramento-based Sutter Health took a hard look at their strategic plan for the next 10 years. Two primary goals emerged from these discussions: transformation and growth.

To achieve these objectives, the 29-hospital system embarked on a multifaceted strategy, which included creating and operating a new health plan. Called Sutter Health Plus, the health plan launched in January as an HMO commercial product now serving 5,000 members in the Sacramento area and San Joaquin Valley.

Steve Notle, CEO of Sutter Health Plus, says the benefits of owning a health plan outweighed the risks.  

"If you own your own health plan, you can have access to that black box of data held by insurers and put it into the hands of providers and begin to manage care in a different way," says Nolte, who was previously an executive at OptumInsight (formerly Ingenix).

A Pivot to Value

In an era where providers will increasingly be rewarded for total care management rather than individual patient encounters, hospitals and health systems like Sutter Health are seeing the value of owning their own health plans.

Out of the nearly 5,000 community hospitals nationwide in 2012, 627 had HMO insurance products, up from 597 in 2008, according to the American Hospital Association. Another 576 had preferred provider organizations in 2012, according to association data.

Acquisitions and new licenses for health plans by hospitals and health systems are making headlines. In April, Denver-based Catholic Health Initiatives purchased QualChoice Holdings, the parent company of QCA Health Plan, an HMO in Little Rock, Ark.  In Oct. 2013, North Shore Long Island Jewish Health System launched CareConnect, a new insurance company, with products for the small and large group and individual market in New York. 

The Affordable Care Act is driving the trend of provider-owned plans, said Allan Baumgarten, independent research consultant in Minneapolis who tracks provider-owned plans.

"It's also an acknowledgement that we are moving away from volume toward value," Baumgarten says. "It's a cliché but it is important to understand. It's about trying to get to the top of the health care food chain and having more control over the premium dollar."

Increasingly, insurers are offering employers and individual consumers health plans with narrow provider networks to keep costs down. Getting cut out of a provider network can be a financial blow for hospitals — and health plan ownership can help soften the impact. The trend of narrow networks was a factor in Sutter Health's decision to start a health plan, says Nolte. "The potential for the market to change is manifested with payers," he says.

Why They'll Work

Provider-owned health plans were a trend in the 1980s and 1990s, but by the mid-2000, many had been sold to larger players or shuttered. "It's déjà vu all over again," Baumgarten says.

Back then, many of the products sold were geared toward government payers like Medicare and Medicaid. Some providers dabbled in capitation and HMO-type products, but typically they were responding to niche opportunities in local marketplaces, he says.

"Many of them got out of the business quickly, concluding they weren't comfortable managing risk and with the investment required," Baumgarten says. "Whether or not this current wave of entry or reentry of providers into the insurance base will be an impactful development remains to be seen."

Nolte of Sutter Health Plus, who has been in the insurance business for 32 years, says there are significant differences this time around. First, data on membership and patients is much better, faster and more reliable than 20 to 30 years ago with the development of sophisticated health care information technology systems and analytics. "We didn't have enough time to see what did or did not work," he says. "Today we have not just data but the ability to accelerate data in real time that doesn't just look back but allows us to look forward. We aren't very good at it yet, but we are getting there."

Secondly, physicians coming up the ranks are much more comfortable with managed care than their predecessors, Nolte says. "Physician leaders in 10 years will be the business people leading the charge of transformation," he says. "They will have access to data that I can't even imagine today."

Michael Rowen, president of health system delivery and chief operating officer at CHI, agrees.

"The first time around, most people did not know what they were getting into," he says of provider-owned health plan ventures of past. "We are much more sophisticated and professional the way we are going about it."

This includes building an enterprise data warehouse and hiring insurance executives to manage that side of the business, he adds. "The strategy in the '80s was get a population, create a gatekeeper model and withhold care and don't let enrollees spend money," Rowen says. "That was the extent of the thought process. Today, as we look at this, if you look at the same process, our strategy is we are going to work really hard to use low-cost resources related to chronic care management to keep people well enough so they don't have to use expensive services."

Still, hospital leaders need to consider their situation thoroughly before jumping in, experts say. These include administrative structure, customer service, required assets, claims management, the necessary reserves required by state laws and how health plan ownership might affect relationships with current payers.

Health systems also need to decide how comfortable they are in taking on risk. "What is your appetite for risk?" Nolte asks. "Our desire is to take on more risk so it helped us to look at risk-bearing organizations within Sutter Health and work with those." These included the five Sutter Health regions in California and related foundations.

Top leadership needs to be on board as well. Nolte, for one, reports directly to the CEO of Sutter Health. He is part of the systems management team but steps out of the room when talk turns to health plan contracts and matters concerning other carriers. "We are very, very strict about that," he says of the firewall.

Many more providers are experimenting with risk today via accountable care organizations, and that can be a window into the risk model of health plan ownership, Baumgarten says. Some might be encouraged to move further down the road, while others might pull back. "It might not be in line with their business proposition," he says. "We might see history repeat itself."

For more on the challenges of narrow networks and other insurance trends, read our June cover story, "Reimbursement Roadblocks."

Rebecca Vesely is a freelance writer in San Francisco.