Will Hospitals Become Insurers?

by Wayne Myers

Steven Brill, in the January 19th issue of Time Magazine (What I learned from my $190,000 Open-Heart Surgery), revives an interesting idea. He proposes that large regional health care systems be encouraged to assume the function of medical insurance companies. He argues that having separate insurance companies between providers and the patients adds cost and complexity but not value.

The original medical insurance organizations were formed by hospitals and by doctors to distribute the risk of expensive care across many subscribers, and increase the chances of getting paid. From the provider's point of view, an insured patient is still better than one without insurance, but dealing with insurers costs lots of clinician and administrative staff time, and, hence, money.

From the patient's perspective, in years past, having health insurance let a person get their care from most any doctor or hospital with confidence that insurance would cover the bill. As insurers negotiate reduced rates with a select few providers, some patients' choices of clinicians have narrowed.

The insurer collects premiums, maintains required financial reserves and pays bills. For this, the company gets to keep 15 or 20 percent of the cash flow depending on the nature of the account.

Brill's proposal will get attention because it's a lead article in Time. It's a "back to the future" idea. The country tried an assortment of organizational models for health care and financing between 1980 and 1995. Brill's proposed arrangement was one of those. For example, Humana started as a chain of hospitals and clinics. They added health insurance to their business. In 1993 Humana disposed of its hospitals to specialize in insurance.

The current, dominant arrangement, i.e., for-profit insurance companies separate from hospitals and clinics, won out, perhaps because it made a lot of money for investors. Therefore the system is relatively stable politically and economically. The Affordable Care Act further stabilizes it by making the existing scheme accessible to more people and eliminating some flaws.

What appeals to me about Brill's proposal is the possibility of genuine regional systems of care. A person could enter at any point and move without pre-authorization and with minimal confusion. Each system would use a common information system and be stitched together with a range of telemedicine resources.

Would the scheme Brill proposes, writing as he does from a highly urban perspective, be good for rural America? I doubt it. The largest teaching hospitals with their unique system of Medicare supplemental payments are the ones with the financial reserves to become their own insurance companies and build the networks he describes. Investor-owned hospital systems will be able to raise the required insurance reserve capital if they choose to.

Medicare recently announced plans to shift its basis of payment from quantity of care provided to quality of care and results. Such schemes seem likely to favor organizations that can accept responsibility, and payment, for the full range of care from head colds to heart surgery. On the positive side, smaller, rural facilities joining regional systems would be better positioned to share in new Medicare reimbursement schemes. They should get help with professional recruitment, continuing education, and the torrent of regulatory and technical challenges pouring down upon them.

Patients would be assured that they could enter "the system" in their hometown and move to the level of care appropriate to their condition. It seems to work for the Geisinger Health System operating out of rural Danville, Penn. Geisinger insures 467,000 people and cares for over three million.

On the down side, though, what are the incentives for the large urban centers to enter into equitable long-term arrangements with smaller, more rural facilities? Why should central system managers offer membership in the network to rural hospitals and clinics when insured country people seem willing to drive past their local facilities for care in larger towns? Given the fact that there is a modest surplus of hospital beds nationally, does an urban-oriented network need a rural hospital with more empty beds?

Given the record of urban affiliates closing rural hospitals and relocating Critical Access Hospital designations, can contractual relationships be devised that safeguard local interests while meeting the network's needs? Would some "patchwork quilt" of facilities belonging to different networks give rural people some choice of providers?

Analogous developments in pharmacy have been hard on independent rural pharmacies. National retail pharmacy chains have developed their own prescription insurance plans. They favor their own stores. Rural independent drugstores have fared poorly dealing with such plans. As "out of network providers" they may be paid below wholesale costs for some prescriptions.

From the patient's perspective, Brill is describing a form of "health maintenance organization," (HMO). The network gets your money. The less the network spends on care the more it gets to keep. Supporters feel this gives HMOs incentives to practice evidence-based medicine and keep people healthy. Detractors say it motivates them to under test, underdiagnose and undertreat.

Through my working life, the large referral teaching hospitals have been largely responsible for the overspecialization of our physician workforce. If the entities managing these institutions were financially dependent on giving routine, evidence-based quality care to the general population, values and prestige relationships might shift. Over time we might see more generalists and fewer subspecialists coming out of the training stream.

My guess is that more provider systems will go into the insurance business. This will be mostly an urban and suburban model. Medicare payment changes will encourage the process. Insurers will lobby state government to prohibit such arrangements. It will be hard for small, freestanding rural hospitals and clinics to find appropriate places in such systems. To that extent, development of these insurer-provider networks will become an additional force pulling patient care out of rural communities. Rural facilities and their associations should begin planning to contend with this development.

Wayne Myers is a retired pediatrician and rural medical educator. He directed the federal Office of Rural Health Policy from 1998 through 2000, and was President of the National Rural Health Association in 2003. He and his wife, JoAnn, farm in rural Maine.

Opinions expressed in this column are those of the author and do not necessarily reflect the views of the Rural Health Information Hub.

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