Highmark buy continues national insurer trend

June 1, 2013

Payer and provider affiliation deals vary and bring up new questions

After almost two years of rigorous regulatory review, the Pennsylvania Insurance Department (“PID”) approved the affiliation of Highmark Inc. (“Highmark”), a Pennsylvania Blue Cross plan, and West Penn Allegheny Health System (“WPAHS”), a five-hospital health system.  This affiliation represents a growing national trend of insurer and provider integration where the line between insurers and providers has become blurred.

 

The Federal Patient Protection and Affordable Care Act (“ACA”) is, at least in part, to be credited for propelling this trend through changes that are incentivizing payors and providers to foray into the others’ market.  One of these game changers is the medical loss ratio (“MLR”) requirement, which mandates that insurers spend 80% to 85% of the premium that they receive on medical benefits or quality improvement expenditures.  If insurers fail to meet this requirement, they must rebate excess premiums to policyholders. 

 

With the cap of premiums insurers may retain, insurers must be efficient so it can keep its administrative costs down, and also look for ways to transform their business.  As stated by Highmark preceding PID’s approval of the affiliation, Highmark desires, though the affiliation, to “evolve from a traditional health insurer to a health and wellness company with a significant role in the delivery of medical care.”  Highmark is not alone in this trend.  Many other insurers have begun venturing into providing or managing primary care practices and even formed joint ventures or affiliation with providers, including institutional providers.

 

The Highmark-WPAHS Affiliation

 

Unlike more straightforward acquisitions where an insurer acquires ownership of a health care provider or vice versa, the Highmark-WPAHS affiliation sought to achieve two goals: (1) to preserve Highmark’s control over its insurance operations and (2) to protect WPAHS’s Section 501(c)(3) tax-exempt status.  A new nonprofit parent company, UPE, was established as the sole corporate member.  UPE holds a new class of corporate membership in Highmark in addition to the existing class of members of Highmark, which consisted of the Highmark’s members of its board of directors.  While the Highmark directors-members will retain significant control over Highmark’s operations, UPE was given certain reserved powers.

 

A new nonprofit subsidiary of UPE was also formed to become the sole member of WPAHS as well as two other hosptals: Jefferson Regional Medical Center and Saint Vincent Health System.  UPE and the UPE subsidiary were each given certain reserved powers in the hospitals and a majority of the board will be appointed by the UPE subsidiary.  UPE’s initial board of directors was determined based on the requirements of Section 501(c)(3) and the initial senior officers were the same as the senior officers of Highmark.

 

The structure of the affiliation was altered continuously throughout the affiliation process and is not easily summarized within a brief article such as this one.  However, nothing demonstrates the changing deal terms more than the price of the affiliation for Highmark.  While the initial cost of the affiliation to Highmark was set at $475 million, it appears that the cost to Highmark will actually exceed well over $1 billion.

 

Continuing the Trend

 

Highmark’s affiliation with WPAHS is just the latest in a growing trend across the country of payor-provider affiliations.  These affiliations have varied greatly in form, ranging from acquisitions, joint ventures, private label products, reinsurance/coinsurance arrangements, performance-based compensation and accountable care organization (“ACO”) affiliations.

 

For example, due to California’s prohibition on insurers owning medical practices, United Healthcare acquired the management arm of Monarch HealthCare to complement its previous acquisitions of the management arms of two other practices, AppleCare Medical Group and Memorial HealthCare Independent Practice Association.  These management companies provide Monarch with access to 2,300 independent physicians, 20 hospitals and 30 urgent care centers.

 

At the same time, Humana has been acquiring a variety of providers, such as Concentra, CAC Medical Centers and SeniorBridge (a home health company).  These acquisitions allow Humana to have control, either through ownership or management contracts, of several hundred clinics nationwide which deliver primary care, occupational medicine, urgent care, physical therapy, wellness and home health services.

 

In terms of joint ventures between payors and providers, Aetna and Inova Health System entered into a joint venture that owns health plans operating in Virginia, Maryland and the District of Columbia.  Aetna and many other payors have also taken the lead on organizing ACOs or ACO-like arrangements, such as Aetna and Banner Health, Cigna and Weill Cornell Physician Organization, and Wellmark and Iowa Health.

 

Convergence Is Not Always Easy

 

Despite the convergence of payors and providers through a variety of methods, each deal has resulted in unique features and raised innovative questions.  As discussed below, some of the more significant legal issues include possible antitrust scrutiny, increased transparency and regulatory oversight.

 

Antitrust Scrutiny - A typical inquiry from the regulators is the impact that a payor-provider affiliation may have on competition.  The Department of Justice (“DOJ”) generally views vertical integration, which combines participants that operate at two different levels of the health care industry, as increasing competition in the insurance and health care markets and, as a result, lowering prices for consumers.  However, federal and state regulators, by no means, give payors and providers a free pass.  For example, in Highmark transaction, PID imposed a number of conditions for the approval of the deal, including that the parties must not enter into an exclusive contract; no contract between the parties may include a most favored nation provision; and the parties must implement a firewall policy that prevents Highmark and WPAHS from sharing competitors’ pricing or product information.

 

Network and Operational Transparency – While insurance regulators generally refrain from reviewing how insurers sign up providers, insurers may have to be more transparent about their network strategy and comply with certain requirements that may not be required in normal circumstances to secure the approval of an affiliation transaction.  For example, in Highmark’s case, PID required, as a policyholder protection measure, that tiered network products be based upon transparent, objective criteria that include quality and cost.  PID also stated that it will continue monitoring the impact of the affiliation on community hospitals as well as the parties’ continuing community health reinvestment.

 

Provider Oversight from Insurance Regulators – One common surprise for health care providers affiliating with payors is the level of oversight from insurance regulators.  In addition to having direct jurisdiction over insurers, insurance regulators are increasingly interested in assessing the “enterprise risk” of insurers’ non-insurance affiliates and their business to determine how the affiliates’ operations may impact the insurer’s operations.  The National Association of Insurance Commissioners has adopted revisions to its insurance holding company system model act to require holding company systems to report annually on the enterprise risk created by its non-regulated affiliates.

 

There are other business risks as well.  Providers that enter into joint venture with insurers often alienate other insurers.  Insurers may likewise alienate providers or, at least, add a layer of complication to their managed care contract negotiations.  Additionally, insurers taking on hospitals with failing financial conditions could put stress on its own capital as well.

 

No End in Sight

 

Despite the potential obstacles, the trend of payor-provider affiliations appears to still be in its beginning stages with more to come.  Insurers are not alone in this convergence.  Providers have been acquiring or forming provider-sponsored plans that compete with insurers for the premium revenue.  With insurers facing increased competition from not only other insurers but also providers, the trend of future payor-provider integration will not be ending anytime soon. How affiliations, such as the Highmark-WPAHS transaction, will impact insurers’ future business ventures as well as provider rates of the acquired providers going forward remains to be seen.