This is the dumbest idea I’ve heard since “I’m going to invest all my money in Facebook’s IPO and get rich!”
Here are six reasons why:
1) You’re too late. Health insurance was an attractive and profitable business in the 00s, but after passage of the Accountable Care Act it’s been commoditized.
First, the health plan business model of the past decade is dead. That model was — “Avoid and shed risk” — or more simply, avoid insuring people who are already sick (preexisting conditions) and get rid of people who become sick (rescissions). Under the ACA, health insurers must take all comers and they can rescind policies only for fraud or intentional misrepresentation.
Second, the ACA institutes medical loss ratio restrictions on health insurers. Depending the the type of plan, insurers now must spend at least 80-85% of premium dollars on paying medical claims; if they spend less, they must return these “excess profits” as rebates to customers. As a result, health insurance has become a highly regulated quasi public utility.
This is why you see health plan CEOs like Mark Bertolini of Aetna declaring “Health insurers face extinction”. The old health insurance model is on a burning platform, and health plans are reformulating themselves as companies involved in health IT, analytics, data mining, etc.
2) You have bigger fish to fry. Focus on developing accountable care capabilities. The AHA estimated that hospitals will need to spend $11-25 million to develop an ACO. Get going.
3) Health insurance is a far more complicated business than you realize. As Gregg points out, hospitals tried to become insurers in the 90s and almost all failed. Since then, the business has only become far more specialized and automated. You need scale and deep expertise to run a health plan, and hospitals don’t have it.
4) Becoming a health insurers will drain you of capital and management resources.
5) It’s beyond your core competencies and not in your DNA. Trust me.
6) Do you really want to risk waking the sleeping giants in your neighborhood, i.e., the existing health insurance companies? Remember that hospitals are a high fixed-cost, low margin business. When health plans realize YOU are the competition and start steering patients elsewhere, on average 95% of every dollar of revenue lost will come straight off your bottom line.
The far better strategy for hospitals: work cooperatively with health insurers, and count your blessings that you don’t have their business challenges.