Hospitals Mull Medicare Advantage Opportunities

Almost all the growth in Medicare in recent years has been accrued to Medicare Advantage. Now health systems and hospitals are considering collaborating with an insurer or developing their own Medicare Advantage plans.

"If [insurers] want to get on the dance floor, now is the time to do it," stated Paul Mango, a director at McKinsey & Co.

Speaking at a packed session at the annual conference of America's Health Insurance Plans, in Las Vegas earlier this month, Mango outlined how competing market dynamics are transforming the healthcare industry and how those influences may affect health plans.

His acknowledgement that hospitals and health systems, are looking at becoming insurers—most likely in the Medicare Advantage market—resonated well with the AHIP crowd.

Mango pointed to several factors, including simple economics, that are sparking provider interest in taking on an insurer role in the Medicare Advantage market.

With an emphasis now on care coordination and the continuum of care, the healthcare delivery system is shifting from hospitals to physician offices and outpatient facilities. Hospital executives understand that the return on investment on future bed towers will not be positive.

As Mango explained, the commercial book of business, which historically has generated about 150% of margin, is shrinking. That means hospitals must raise their prices each year just to stay even. Meanwhile, the Medicaid and Medicare books of business are growing, even as reimbursements are falling.

Mango noted that almost all the growth in Medicare in recent years has been accrued to Medicare Advantage. "In our minds, it's here to stay. We think it will be a refuge for any senior over the long term."

Medicare Advantage will become more important as reduced reimbursements push doctors out of fee-for-service Medicare. In addition, Medicare FFS could also be challenged by decisions from the Independent Payment Advisory Board or IPAB. The Affordable Care Act gives IPAB the power to step in and manage Medicare expenditures when costs, such as physician reimbursements, get out of line.

Under these circumstances providers have several options. They may:

• Lower their per-case operating expenses and continue to play on the fee-for-service field,
• Participate in the risk arrangements developed by the Centers for Medicare & Medicaid Services,
• Partner with an insurer on a Medicare Advantage plan, or
• Develop their own provider-led Medicare Advantage plans

In terms of maximizing market share and margin, Mango said hospitals are most interested in collaborating with an insurer or developing their own Medicare Advantage plans. Collaborating with an insurer has a bit of an edge because although the margins are lower, organizationally, the process is a lot less complex. Mango offered several strategies:

A different kind of competition
Be prepared to "co-pete," a hybrid of collaborating and competing with providers simultaneously. Mango noted that "in their heart of hearts, providers know they don't know how to manage risk and they are really concerned about that. They need help. Offer them a viable alternative."

Consider partnering on a private label basis
Mango said Aetna Accountable Care Solutions, which is offered to hospitals and integrated delivery systems, is almost a private label health plan. The Aetna product is based on aligning incentives such as shared savings so all parties are looking for opportunities to add value to the relationship and provide better patient care.

Take another look
Providers who are unhappy with the contracts they have with other insurers may be willing to partner to improve their margins and market share.

Insurers do need to act quickly, though. Mango noted that hospital and health systems are looking now for partners they can have for several years who can help them achieve sufficient scale to take risk, as well as help to meet the new demands of healthcare service delivery, including the continuum of care.