Two health systems show no signs of easing up their competitive relationship after Highmark Health’s recent earnings report.
Last week’s earnings report from integrated provider and payer network Highmark Health will likely have an impact on the balance of power with University of Pittsburgh Medical Center (UPMC) as the two Pennsylvania health systems fight for control of regional markets.
For years, Highmark and UPMC have been locked in a competitive dynamic to win customers, crucial geographic markets, and even courtroom decisions.
The 2017 earnings report was seen as a positive for Highmark as it continues to challenge the UPMC system for footing in the Keystone State, bolstered by an excess of revenue over expenses of $1.1 billion and a year-over-year operating gain increase of $554 million.
UPMC’s 2017 earnings report indicated the system achieved a net income of $1.3 billion and gained $245 million from investing and financing activities.
Additionally, Highmark recorded its first profits from insurance exchanges established by the Affordable Care Act while its Allegheny Health Network (AHN) recorded a $31 million gain in operating revenue in 2017 after posting a $33 million loss in 2016.
Evan Camden, an associate analyst for Decision Resources Group, told HealthLeaders Media the recent earnings indicate Highmark is hitting its stride, showing profitability, and offering counterpunches to UPMC’s recent strategic moves. Camden also said the activity is part of a growing trend by both systems to establish regional, and eventually, statewide dominance.
“A lot of times people hone in on one area like Harrisburg, Scranton, or Pittsburgh,” Camden said. “I see in each market what they’re doing, and I see that they have their hand in the cookie jar statewide. You have to think of this not as a Harrisburg dynamic or a Pittsburgh dynamic; it’s a Pennsylvania dynamic that is going on between [Highmark and UPMC].”
Earnings are turning tide, putting Highmark in the mix
A number of strategic initiatives have paid off for Highmark after a two-year financial slump culminating in a concerted effort to turn the Pittsburgh market into a two-player contest, according to Camden.
This includes the turnaround of AHN, which has established its revenue strength in northwest Pennsylvania, as well as a profitable marketplace.
Camden said one of the factors in Highmark’s success last year was the effectiveness of its algorithms, which were the result of changes to rates and plan options over several cycles. Highmark has also benefited from narrow-network plans, especially in places such as Pittsburgh, where both systems compete for a swath of customers willing to pay lower premiums for access to specific doctors.
Improvements to Highmark’s brick-and-mortar building strategy in northwest Pennsylvania were another key to a profitable 2017 and served as a necessary response to UPMC.
In September, UPMC’s purchase of Pinnacle Health System, a seven-hospital system based in Harrisburg, became official but was quickly met by Highmark’s announced partnership with Penn State Health Milton S. Hershey Medical Center in December.
Different origins, same end goal
Despite a banner year of positive earnings complemented by the Penn State deal, Camden said Highmark is still positioned as an insurer trying to catch up with UPMC, an established payer-provider with a stronghold of facilities.
Highmark’s recent strategic activity has helped close the gap, though UPMC has been building toward a larger statewide strategy for years, as exemplified by its acquisition of Pinnacle.
The positive earnings report will likely help Highmark continue to partner with other regional players in the northwestern part of the state, but Camden does not think it places any additional pressure on UPMC.
“Both are independently so big, I’m not sure at this point they can do much, regionally, to wreck each other,” Camden said. “You have two giants swinging at each other and can’t really hurt [each other]. You can take marginal market share here and there in certain areas, but it’s kind of a chess game that they’re playing behind the scenes."
Going to Philadelphia?
While both systems keep tabs on the other’s respective activity, UPMC has already turned its focus toward eastern Pennsylvania, specifically Philadelphia. UPMC currently offers Medicare Advantage plans in a few counties outside of Philadelphia and has a cobranded plan with Tower Health, formerly Reading Health.
The ultimate goal is for Highmark and UPMC to define themselves as “Pennsylvania players,” though Camden says he doesn’t think the companies will look to expand in the Philadelphia healthcare market just yet. He argues this is due to the presence of established health systems such as Jefferson Health and University of Pennsylvania Health System in the area. However, he doesn’t rule out that UPMC might opt to lay the groundwork for a years-long campaign to enter the market.
A more likely scenario is that UPMC and Highmark look to making inroads in the Scranton and Lehigh Valley markets. Geisinger Health System is a provider in both markets, which Camden suggests could develop into a partnership with Highmark.
Currently, Geisinger and Highmark have a coalition operating in five counties outside of Scranton. Camden thinks that if Geisinger views UPMC as an encroaching threat, it would choose a partnership with Highmark in order to survive.
Instead of acquiring facilities and systems under one brand name, Highmark might choose to arrange a partnership with Geisinger that is similar to the deal it struck with Penn State. This would ensure Geisinger remains an active, autonomous player in the market while backed by a larger system.
Camden says that UPMC could coordinate its own counterpunch by establishing narrow-networks with Commonwealth Health System, another established player in both the Scranton and Lehigh Valley markets.
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.