Are Provider-Led Health Care Networks Too Big To Fail?

by Joel Zinberg
Health Affairs Blog
Are provider-led health care networks equipped to function like insurance companies? Do they have the expertise and experience to assess population health risks and costs and to accurately price health insurance products? The answer is no, and the current effort to consolidate providers and make them into ersatz insurers is a prescription for disaster.

The Affordable Care Act (ACA) is driving health care providers to combine into large health systems and to take on risk — i.e., to provide care for a specific problem or comprehensive care for a period of time, with the proviso that if costs exceed predetermined payment amounts, providers will bear the losses, and if costs are less, providers will keep the profits. Three ACA architects wrote in a 2010 Annals of Internal Medicine article that the legislation was intended to “lead to vertical integration of providers and accelerate physician employment by hospitals and aggregation into large physician groups” on the theory that consolidation, coupled with assumption of financial risk, will incentivize providers to decrease unnecessary services, cut costs, and improve outcomes.

Affordable Care Act cuts to hospital payments and new regulatory burdens make it difficult for smaller, weaker institutions to go it alone. And solo physicians and small groups cannot afford to purchase and maintain electronic records and comply with government reporting requirements. As a result, hospital mergers are booming, and large hospitals are buying up beleaguered physician practices and outpatient service providers to form health care networks—only about a third of physicians remain independent—with many offering insurance plans directly to patients.

In essence, providers are being encouraged to function as insurance companies. As Peter Orszag, President Obama’s former director of the Office of Management and Budget and an ACA advisor, acknowledged last year, “If you’re a provider and you are taking on capitated payments you are effectively becoming an insurance company without all the protections surrounding insurance companies.”

This didn’t work in the 1990’s failed, managed care experiment, when providers consolidated to gain negotiating leverage with health maintenance organizations (HMOs). Many groups took on risk by participating in capitation arrangements to treat patients over a period of time for a predetermined sum. Nearly all the capitation arrangements lost money and folded.

Affordable Care Act initiatives aren’t working either. The ACA’s Medicare Shared Savings program establishes provider-led Accountable Care Organizations (ACOs) to coordinate care for Medicare patients. These ACOs share savings over projected costs and will eventually share losses. Over 400 ACOs care for over seven million elderly Americans. But only 26 percent of ACOs generated enough savings to qualify for shared savings payments. Nearly half spent above benchmarks. The ACA’s Pioneer ACOs, for providers with previous experience coordinating patient care, share both savings and losses. Sixteen of 32 Pioneer ACOs have dropped out. Overall, ACO savings have been modest, approximating 0.1 percent of Medicare spending.

The ACA also created Consumer Operated and Oriented Plans (CO-OPs)—private, state licensed, non-profit health insurance companies—to provide low-cost, consumer friendly coverage to individuals and small businesses. Twenty-three plans were funded with $2.4 billion in government loans. Thirteen have failed, leaving more than 800,000 people in 14 states scrambling for coverage and $1.3 billion in delinquent loans. Only one had a positive margin. Remaining CO-OPs may close, leaving thousands more patients without insurance. This result is hardly surprising. The people running the CO-OPs had no experience running an insurance company — CO-OPs were forbidden to have anyone affiliated with insurers on their boards.

Even experienced health insurers have trouble providing ACA-compliant insurance. United Healthcare, the country’s largest health insurer, recently announced it is losing money on ACA plans and may exit the exchanges in 2017.

Earlier hospital consolidation led to higher inpatient prices. New studies show that vertically integrated networks raise outpatient care prices, too. But decreased competition and higher prices may be the least of the problems.

Government promoted consolidation creates large entities that, like their financial counterparts in the 2007-2008 meltdown, will be “too big to fail” and will need government rescue. Health care markets are becoming so concentrated that some areas will have only one or two provider networks. Inevitably, large, risk-bearing networks will fail — most hospitals barely break even and are ill-equipped to take on insurance-like functions. Local, state, and federal governments cannot and will not allow important providers to go belly up. Too many people will be left without medical care, and too many health care workers will lose their jobs.

The moral hazard will be immense. Networks, knowing that they will not bear the costs of taking risks, will over-expand, underprice their products, and overspend in the pursuit of market dominance. In 2014, the American Hospital Association urged, “CMS not to require that Pioneer ACOs establish significant financial reserves.” Unlike the financial institutions bailed out in 2008, undercapitalized provider networks will be unable to repay the government. Taxpayers will be left holding the bag. As Peter Orszag admitted:

There are going to be a bunch of hospitals that blow up…because they take on too much risk that they don’t have the analytical tools to handle…too big to fail, which is a phenomenon that is associated with the financial sector, is also a kind of clear and present danger for the hospital sector over the next decade….

Perhaps, the ACA’s architects intended this too big to fail scenario to extract concessions from health care providers or prompt a government takeover of health care. But the clear and present danger of multiple major health care network failures could trigger an economic crisis. Government policies that encourage provider consolidation and risk-bearing have not delivered their promised benefits and should end before the inevitable network failures occur.

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