The Vanishing Difference Between Hospitals and Insurance Companies

By John Tozzi
September 18, 2014 - Businessweek

Anthem Blue Cross, California’s second-largest insurance company, is entering an unusual arrangement with seven hospital groups in Southern California: Together they’ll create a joint health plan where rival hospitals and the insurance company will share in profits and losses.

Hospitals and insurers usually sit on opposite sides of the table, but the new plan, called Vivity, is the latest example of the blurring line between the companies that provide medical care and the ones that manage risk—and costs—for patients. Most hospitals currently make more money performing a surgery than providing preventive care to avoid one, but under the Affordable Care Act they’re being encouraged to change that: Instead of compensating doctors and hospitals for each service provided, the law encourages arrangements that reward hospitals for better outcomes.

Some health-care providers have responded by consolidating. The behemoth Partners HealthCare, which includes Boston’s Massachusetts General and Brigham and Women’s hospitals—is locked in a battle with competitors over whether its latest attempt to expand is about better managing patient care or accumulating more market power. In Chicago, the proposed merger between two big hospital groups, Advocate Health Care and North Shore University Health System, is raising the same question.

Anthem’s deal with Southern California hospitals, including Cedars-Sinai, UCLA Health, and MemorialCare Health System, is a different proposition. The hospitals won’t be merging. But together they’ll have a shared incentive to bring down medical costs for patients on the Vivity plan.

It’s an attempt to compete with Kaiser Permanente, the giant California health system that insures more than 7 million people in the state and operates its own network of doctors and hospitals. Kaiser has about 40 percent of the California health insurance market, compared with 23 percent for Anthem, a division of WellPoint (WLP), according to a report in the Los Angeles Times last year.

Anthem is also facing backlash from consumers over health plans that hold down premiums by offering only narrow networks and exclude premier hospitals such as Cedars-Sinai or UCLA, which typically have higher costs. With Vivity, Anthem will offer employers a network that includes big academic hospitals and will still be cheaper than its standard HMO plan, according to the L.A. Times.

Medical providers and insurance companies in California may have another reason to collaborate to hold down costs: The state insurance commissioner may get the power to reject premium increases if voters approve a ballot measure called Prop 45 in November. A state-imposed ceiling on insurance premiums could limit how much hospitals can charge. For hospitals and insurance companies, sitting down and figuring out how to cut some costs voluntarily—and share in the savings—is a much more palatable option. The big unanswered question: whether Vivity can actually deliver the savings it promises.