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Should nonprofit hospitals jump into health insurance?

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Nonprofit hospitals may be able to run successful health insurance operations, but only if they are tough, patient, lucky and prepared to handle disappointment.

Mark Pascaris and other health care credit rating analysts at Moody’s Investors Service give that cautious assessment in a commentary on the idea of nonprofit health insurers starting or acquiring health insurance businesses.

The Patient Protection and Affordable Care Act (PPACA) is pushing hospitals to enter the health insurance business by giving them an incentive to achieve economies of scale and add new sources of revenue, the analysts say.

PPACA drafters, and opponents of big health insurance company mergers and acquisitions, have pulled hospitals toward the health insurance business, by giving the impression that the level of competition in the U.S. commercial health insurance market is low.

See also: AMA quantifies Cigna and Humana deal effects on market competition

The Moody’s analysts say hospitals need to understand that the health insurance business is more complicated, and more crowded, than it looks.

“Competition from national and regional insurers is intense,” the analysts say.

See also: Regulators order New York CO-OP to shut down

A new health plan will guzzle cash while it is starting up, and, “even when critical mass is achieved, adverse selection can derail otherwise favorable financial performance,” the analysts say.

Starting a new plan slowly may be the safest strategy, partly because management “can adjust if the rollout falls short of expectations,” the analysts say.

The analysts note that, when they are evaluating a hospital company with an insurance business, one thing they like to see is the hospital putting experienced health plan leadership in charge of an insurance business that operates separately from the hospital business.


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