How can provider-sponsored health plans succeed?

May 25, 2017
By Kristine Daynes, MBA, PAHM, Payer Market Director, 3M Health Information Systems

As healthcare shifts toward risk-based payment, an increasing number of health systems intend to become insurers. Over the past two years, the number of provider-sponsored health plans has more than doubled, surpassing 270 health plans.1 In fact, 50% of U.S. health systems have applied, or intend to apply, for an insurance license.2
Top financially performing provider-sponsored health plans (PSPs), on average, improved their underwriting margin from 2.4% in 2012 to 2.6% in 2014. Other health plans lost money, on average, with an underwriting margin of -0.8% in 2014.3

That’s an astonishing number, since managing health insurance is vastly different from delivering healthcare. Sponsoring a health plan requires a completely different business model from the hospital-centric, fee-for-service-based delivery system that is still the norm in much of the United States Although many payment models adjust for quality or cost performance, most reimbursement for healthcare is still paid separately for each service like an office visit, test, or procedure. It isn’t easy to dismantle the traditional revenue model without interrupting the system of care delivery.

Yet, the trend toward provider-owned or provider-sponsored health plans does make sense. Providers know that payers intend to increase at-risk payment to upward of 60% to 70%. For health systems easing into risk-sharing agreements, a health plan makes it possible to set some of the terms. Owning a health plan means the health system can channel more patients to its own doctors and facilities, and it also offers the promise of combining data analytics, information technology, and other resources to better manage population health.

Provider organizations may choose to leverage their existing internal health plan, partner with an external plan, or even create a new health plan—all with the goal of reducing healthcare costs and improving outcomes. There are five challenges these new plans can’t afford to underestimate: payment design and incentives, provider network management, care management, risk management, and technology infrastructure and data sharing.

When provider-sponsored health plans embrace these five challenges and manage them effectively, they can increase patient volume, preserve market competition, and succeed financially in a value-based care environment. Here are key considerations for health plans as they address each of these challenges.

Payment design and incentives

Most of the newer health plans, certainly the smaller ones, are likely to pay their providers based on fee-for-service, possibly at similar rates or with the same quality incentives used by other payers. This approach, however, doesn’t help differentiate the health plan in the marketplace, nor does it offer the greatest profitability. For growth and sustainability, the health plan needs to consider including incentives for the following goals:

  • achieving clinical, cost and/or utilization targets;
  • enabling shared-savings;
  • participating in bundled payments; and
  • improving the patient/provider relationship.

Provider network management

Network management involves more than simply owning a medical group. Successful provider-sponsored health plans must enlarge their ecosystem beyond acute care and ambulatory services to include post-acute services, primary care, retail pharmacy, home health, and long-term care. These “owned” entities must offer high-quality services at a competitive price, which requires the following:

  • referral patterns that avoid revenue leakage and direct members to high-value providers,
  • member access to the right care in the right setting at the right time, and
  • sufficient plan members to justify changes in practice management.

Care management

Health systems have made huge improvements in reducing readmissions and hospital-acquired infections. With an affiliated health plan, a health system must translate hospital-based care coordination into population health management. It has taken provider organizations many years to develop programs for managing the quality of acute care. It will take a similar effort, but broader, to keep health plan members out of the hospital or emergency department, make sure they take medications properly, direct them to preventive care, encourage follow-up visits to manage chronic disease, and avoid unnecessary tests and procedures outside the hospital setting.

Risk management

Some health systems have tried to hedge risk by partnering with an insurer or third-party administrator to support claims processing, regulatory compliance, or financial risk management. Although it’s wise to have an experienced guide, it doesn’t insulate the health system from the risk of managing a new line of business in a competitive market space.

Even experienced insurers struggle to manage competitively priced health plans, especially when the risk pool is relatively small or when there is inadequate historical data to accurately assess member health risk. (Witness the exodus of health plans from state exchanges.) Health plans, even small provider-sponsored plans, need strong analytics capabilities to forecast market trends and population health risk. New technology and outsourced services can help PSPs augment their analytics capabilities, especially as they develop analytics leadership internally

Technology infrastructure and data sharing

One benefit of getting into the insurance business is access to complete member and claims data. Health systems already have near-real-time clinical data. With access to multiple data sources, provider-sponsored health plans have an advantage for clinical and financial analytics. To overcome the challenges of health plan administration, health systems need to share data with physicians and other service providers—not only data, but data within population health management tools and integrated in workflows. Everyone within the care delivery system needs to know how they are performing, which members are at risk, and how to promote cost-effective care.

It’s a brave new world for provider-sponsored health plans, but promising, too, given the rise of technology. Health care has been slow to adopt digitization and big data. Now is the time to catch up to be able to manage the challenges of risk-based and value-based care.


  1. PwC Health Research Institute Spotlight. “Vital signs: What to consider before launching a provider-sponsored health plan in the New Health Economy,” PricewaterhouseCoopers.
  2. PWC Strategy&, “Several hundred health networks will become payors,” PricewaterhouseCoopers.
  3. Deloitte Center for Health Solutions, “Provider-sponsored health plans positioned to win the health insurance market shift,” Deloitte.

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