Social Enterprise: Cleveland Clinic Considers Building a Health Insurance Company

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February 24, 2015; Becker’s Hospital Review

Cleveland Clinic Foundation, a $7.5 billion healthcare system headquartered in Ohio, has announced that it is investigating ways to enter the health insurance market. According to McKinsey research cited in the Becker’s article, more than 100 healthcare providers already offer insurance plans in 39 states, covering 18 million people.

Cleveland Clinic currently works under negotiated “bundling” agreements with insurance companies and major employers. Talk of starting its own health insurance company may be in recognition of the strategic direction of the healthcare market, or it may be a part of a negotiating approach to maximize its bargaining position with its current payers.

Healthcare payment under the Affordable Care Act (ACA) are designed to move from the traditional fee-for-service model to a “population health” model where providers are paid for maintaining or improving the health status of the people they serve. To do this, hospitals and other healthcare providers are under financial pressure to “capture” patients and provide comprehensive services that can be recorded and evaluated for health quality-based payments. Having health insurance products included in overall integrated healthcare delivery systems helps providers capture patients and direct them to system-provided care (e.g., by “in-network” services having lower patient out-of-pocket costs rather than seeking services from “out of network” providers not part of the integrated system).

Having an insurance company as a component of a health system not only helps capture patients for both profitable and unprofitable healthcare, it also presents the opportunity for systems to earn profits from the insurance products themselves. Profitability isn’t guaranteed, however, as there is significant specialized expertise and overhead required to operate an insurance company. Like much of the rest of the emerging healthcare market, a large customer base is required to provide the opportunity for revenue at sustainable levels.

The good news for Cleveland Clinic is that the Ohio health insurance market is relatively diverse, with no single insurer having more than about a third of the available market. A successful Cleveland Clinic health insurance organization could use the health system’s internationally respected name and reputation to compete without facing a single dominant competitor. Large national providers like Kaiser Permanente actually pulled out of Ohio in 2013 because they lost almost $60 million in 2012 serving 80,000 Ohio residents, or $750 per person in a single year. This indicates that it’s unlikely that there will be out-of-state competitors coming forward to challenge a potential Cleveland Clinic health insurance plan.—Michael Wyland