How to Build a Health Plan from Scratch

Catholic Health Initiatives is ramping up to offer health insurance products in 18 states by 2016. The nonprofit is determined to avoid pitfalls that have bedeviled other providers hoping to gain entry into the health plans business.

As they seek to boost their bottom lines and population health management capabilities, some healthcare providers are launching their own health plans.

"Some health systems imagine they will be able to get the rates they've always wanted from the Blue plans but couldn't," Juan Serrano, senior VP of payer strategy and operations at Englewood, CO-based Catholic Health Initiatives, told me last week.

Building a health plan from scratch is not as easy or as profitable as it may appear.

1 in 5 Health Systems to Become Payers by 2018

Serrano says "getting the math right" is among a host of challenges providers face when they open an insurance business line: "That has been the downfall of many a health plan."

CHI is taking a "methodical approach" in its quest to establish health plans in all 18 states where it operates, he says. "It can take three, four, five years for a health plan to get large enough to break even on its capital development expense. We've given ourselves two or three years… to get to a scale where we are breaking even."

CHI officials believe they have the ability to "shorten that cycle" because the health system has acquired a pair of health plans over the past two years: Soundpath Health in Washington State and QualChoice in Arkansas. "We looked to acquire some of the infrastructure rather than to build it all ourselves," Serrano said.

The acquisitions have allowed CHI to establish toe-holds in two lines of health insurance: Soundpath has experience marketing Medicare Advantage policies and QualChoice has a track record offering commercial health insurance policies.

Acquisitions and consultants are helpful when a health system decides to go into the insurance business, but there is no substitute for having a capable health plan team internally, according to Serrano.

CHI has launched a wholly owned subsidiary, Prominence Health, to build out a portfolio of health insurance products. Fully staffing Prominence has been a top priority, beginning with a skeleton crew of a couple dozen workers in 2012 and employing about 300 people this year.

CHI Launches Prominence Health Subsidiary

"We didn't only hire people to start a health plan," Serrano says. Prominence employees include not only underwriters and actuaries, but also experts in population health management and data analytics.

"These types of skills are essential, and all too often people try to outsource these skills to consultants," he says. "Having people within the health plan who understand the risks deeply enough is essential. Ultimately, somebody within the organization has to make business decisions… The consultants are going to stop short of giving a recommendation. They will only give guidance."

In addition to establishing a health plan infrastructure, one of the initial strategic goals for CHI was deciding which health insurance products to offer. The Medicare Advantage program was determined to be an attractive starting point because value-based plans provide an opportunity "to establish deep alignment" between a health system and its new insurance business line, Serrano said.

CHI is choosing its Medicare Advantage markets carefully with a county-by-county analysis in the states where the health system operates. "The first scan is a financial scan of the market," he said. Another key step is conducting actuarial assessments to make sure competitive premiums can be established to cover claims in a way that is stable over time. "The second part of the discernment process is determining the readiness of our hospital or health system from a network perspective. In all cases, we have to round out the network to provide all the services required."

The final steps in assessing a Medicare Advantage market involve answering some tricky questions, Serrano says. "How saturated is the market with competitors? What percentage of the market is Medicare Advantage versus fee-for-service Medicare? How attractive is the market? It starts to get a little more complicated," he says.

"It circles back to having the right team in place. We're careful to counsel folks; some markets are tougher than others, and it's important to understand that."

Based on CHI's experience, building a health plan business from the ground up is not for the financially faint of heart. "It takes a fair amount of capital expense and a long-range view of when that investment will realize a return," Serrano says. "There's a fairly large economic hurdle to doing this and doing it right."

Health plan startup expenses include assembling an infrastructure through acquisitions or internal investments, hiring staff to operate the plan, legal service fees for licensure, and obtaining reinsurance coverage to protect against large unexpected expenses.

Assuming those startup costs are handled properly, Serrano says another set of expenses is needed to operationalize a new health plan. One of them is carrying enough reserves for unexpected claims as well as "run-out costs" in case a health plan is forced to close and claims keep coming in.

"Parking that cash in reserve has to be clearly understood," says. There are also high marketing costs associated with launching a health plan. "Winning the business from employers requires a sizeable outlay of dollars in marketing."

CHI has set an ambitious trajectory for its health plan expansion. With help from its partners at Soundpath and QualChoice, CHI is offering health plans this year in the Pacific Northwest and Arkansas. Next year it plans to offer Medicare Advantage plans in four more states as well as offering more commercial plans. In 2016, the expectation is to have "Medicare Advantage or commercial or exchange plans in virtually all of our markets."

CHI officials have a high degree of confidence in their methodical approach to building health plans, Serrano says. "We think our strategy is a strategy that strengthens the probability of success for our health plans. There are different ways of being in this space," he says. "We think this is a strong model for us."