Governance Nightmare: Integrating Hospitals and HMOs

Sentara: the epitome of Big Medicine

by James C. Sherlock

Del. Sally Hudson, D-Charlottesville, has introduced a terrific piece of legislation, HB 1731. The bill tackles for the first time an increasing threat to competition, cost, availability, consumer choice and quality of health care in Virginia — the vertically integrated carrier.

The combination of hospitals and insurance carriers has captured the attention of neither the media nor the political class, but it is a fundamental driver of runaway healthcare costs in Virginia.

To illustrate the impact of vertically integrated carriers in the marketplace, consider Sentara Health’s offering of its Optima HMO plans in Charlottesville and surrounding counties in 2018 — Hudson’s legislative district. Optima was the only carrier that year to offer plans on the Affordable Care Act (Obamacare) marketplace in multiple locations where Sentara had hospitals. The people depending upon the federally administered program found that their only option, Optima, charged the highest plan prices in the United States.

A 40-year-old couple with two kids had to pay $40,000 in premiums for a Silver Plan. Plus they were liable for up to $11.700 in co-pays and deductibles. Sentara Martha Jefferson Hospital was included in the network. The University of Virginia Medical Center was not. All in the family. Similar scenes played out in other areas of Virginia where Sentara had hospitals and Optima was the only ACA seller.

According to Virginia Health Information, Optima had an amazing year in 2018.  Enrollees increased 10 percent, premiums earned jumped 60%, average monthly premiums rose 30%. Profits increased 890% to $139 million. Sentara Martha Jefferson reported operating income of $28.8 million in 2018, a profit margin of 11.6%.

The vast majority of Optima’s ACA members in 2018 had premiums subsidized by the federal government. You’d think the federal government might get cranky. But so far it’s done little.

In enacted, Hudson’s bill would address the market power of vertically integrated carriers, which she defines as carriers that own, are owned by, or are under common ownership with an entity that also owns or operates acute-care hospital facilities in the Commonwealth. The bill would bar such carriers from discriminating against competing healthcare providers either in terms of reimbursement for professional services or membership in provider networks.

Hospital systems in Virginia’s five largest metro areas either own their own health plans and insurers or have joined exclusive partnerships with one.

The vertically integrated healthcare systems with captive carriers are the aforementioned Sentara Health/Optima Health, Centra Health/Piedmont Community Health Plan and VCU Health/Virginia Premier. (Yes, the state controls a commercial health plan, at least temporarily). To complicate the issue, the state has awarded $5 billion in annual Medicaid managed-care contracts to Optima and Virginia Premier — yes, DMAS gave federal money to another state agency – who together manage the care of nearly half of Virginia’s Medicaid patients. Now, Optima has a proposal before the State Corporation Commission to buy 80% of Virginia Premier. Perhaps readers can see a pattern.

Legal issues

The two partnerships are Inova and Aetna in Northern Virginia (Innovation Health) and Carilion and Aetna in Roanoke (Aetna Whole Health). Unavoidable legal issues arise from enterprises that control both providers and carriers:

  • Risks from failure to act in the best interests of HMO enrollees;
  • Antitrust risks from anticompetitive actions against other providers and insurers;
  • Fiduciary risks for corporate directors.

When the vertical integration includes a combination of non-profit and for-profit organizations, as with Sentara Health, the conflicts are even more intense. Virginia provides zero oversight to ensure that “non-profit public charity” healthcare systems pay balanced attention to their charitable missions, their business missions and their licensed missions.

The missions, fiduciary obligations, licensure obligations and business imperatives of healthcare providers and insurers/HMOs are distinct and often in direct conflict.

Single-point control of both providers and insurers threatens the obligations of captive insurers. Carriers are required to represent only the interests of themselves and their members when negotiating with providers on prices and access to their care networks. Vertically integrated health systems make those decisions internally, making state oversight very hard to exercise.

Another issue is patient referrals.  The Virginia Attorney General concluded almost 30 years ago that Virginia statutes and court decisions “allow a hospital to employ a physician as long as the employment agreement authorizes the physician to exercise control over the diagnosis and treatment of the patient, the physician’s professional judgment is not improperly influenced by commercial or lay concerns, and the physician-patient relationship is not altered[1].

Both federal anti-kickback statutes and the Stark Law attempt to control misuse of referrals. Yet multiple studies since show that the creation of a vertically integrated provider causes referrals to competing practices to plunge. An investigation by the current AG would reveal whether pressure is put on physicians employed by these systems to refer within the system.

Finally, tension exists between overlapping boards and duties of each board and member. Sentara Hospitals and Optima Health have conflicts in business goals  and their fiduciary and licensing obligations. IRS 990 forms show that the CEO of Sentara Health, the parent company, was a member of the Sentara Health board and chaired both the Sentara Hospitals and Optima Health boards.


General Assembly and Governor:

  • Assign the State Corporation Commission to oversee the business activities of large and complex healthcare nonprofits. They can read the Forms 990 collected from Virginia’s multi-billion dollar non-profit health systems that are collecting dust somewhere.
  • Review the Virginia’s Nonstock Corporation Act to determine whether it needs to be updated to deal with these issues.
  • Amend HB 1731 to bar actions discriminating against competing insurers or health plans.
  • Ban vertically integrated carriers.

Attorney General:

  • Enforce the Virginia Antitrust Act.

Everyone else:

HB 1731 is an excellent bill.  Call your General Assembly members to support it.

James C. Sherlock, a Virginia Beach resident, is a retired Navy Captain and a certified enterprise architect. As a private citizen, he has researched and written about the business of healthcare in Virginia. 

[1] 1992 Op. Atty. Gen. Va. 147

Share this article


(comments below)


(comments below)


11 responses to “Governance Nightmare: Integrating Hospitals and HMOs”

  1. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Excellent post. It is a complex issue and you explained it well. $40,000 annually for an insurance policy. That is outlandish. In addition to HB 1731, I think there is legislation proposed by the Governor to establish a state exchange. If enacted, that would provide competition for these vertically integrated systems.

    1. sherlockj Avatar

      Dick, I can’t see how shifting the exchange from a federal website to a state would change anything except adding additional expense. The bill requires taxing the insurers $55 million over 2 years to pay for the new exchange. Guess who will wind up paying that? Jim

      1. Dick Hall-Sizemore Avatar
        Dick Hall-Sizemore

        I am quickly getting in over my head. Wouldn’t a state exchange provide residents alternatives and avoid the situation in which there was only one choice of ACA insurance in a market area? Also, not that I doubt you, but why would the state need $55 million to establish a new exchange. I obviously don’t know how these things work. These questions are a little off the topic of your original post. Maybe you could educate me, and maybe others, with a post on the state exchange legislation.

  2. Steve Haner Avatar
    Steve Haner

    Wow. Nobody is covering this session better than Bacon’s Rebellion right now. The MSM is missing all the good stories (except guns, guns, guns). For those of us who worry about the financial health and future of our kids and grandkids, reining in healthcare cost (greed) should be Job One.

  3. Peter Galuszka Avatar
    Peter Galuszka

    Wow vertical integration really gives away the store.

    1. Steve Haner Avatar
      Steve Haner

      With utilities, too…..

    2. djrippert Avatar

      Hard to see the advantage for the average patient / consumer.

  4. Jane Twitmyer Avatar
    Jane Twitmyer

    And is the issue I have hooted about in Education … the GA determining on all the small pieces of local school spending … argued and decided by GA instead of the local school Boards.

    But there is good news for that … The Governor’s Ed budget includes $7.1 million for an initiative — formally the Virginia Learner Equitable Access Platform — that “would create a depository for teachers, allowing them access to curriculum and other resources from other school districts and organizations across the state.” The state will build a readily available depository of proven resources and programs that any school can choose to pick up and try out for themselves. Sounds like the right direction.

  5. LarrytheG Avatar

    Everyone is trying to evade costs and shift it to someone else.

    Just to keep things honest.

    Obamacare IS subsidized, yes, but it’s purchased with money that has been taxed.

    That’s not true of employer-provided health insurance which is purchased with tax-free money.

    so if you bought 20,000 worth of employer-provided family coverage.

    That coverage would have cost you $30,000 worth of income if it were to be taxed and you got the balance to purchase your insurance.

    That subsidy is by far the biggest tax expenditure in the Federal govt tax system.

    What’s causing the escalation for both employer-provided and ObamaCare is the rule that says pre-existing conditions cannot be excluded so insurance companies are recovering their costs through higher premiums and higher deductibles and co-pays.

    And our medical providers get paid by the “code”. The more diagnostic and treatment “codes” they can assign, the more money they make from reimbursements.

    Insurance companies have no intention of going broke over this. It’s going to get put on subscribers by hook or crook unless and until it’s taken out of their hands.

    I find it amusing that the Dems typical response is to put those costs on govt/taxpayers and the GOP wants to do away with the requirement that pre-existing conditions be covered.

    By the way, “vertically integrated” means “networks”.

    Are we advocating that Govt ban networks? In what states has this been done?

    Is the idea here that Govt is the one to reform health care – not the private sector “market”?

    Also – who is James C. Sherlock ?

    Background? Affiliations? How does he know about healthcare?

    1. That is a wonderful chart – assuming you buy in to the fallacy that money the government cannot legally take from you in taxes qualifies as “tax expenditures”. If you do buy in to that, then you are well on your way to being convinced that all of your money belongs to the government anyway, so you should be grateful they allow you to keep any of it.

      Some of us, however, are not comfortable having our government treat the money we earn, and legally retain, as “tax expenditures”.

      1. LarrytheG Avatar

        Of course not. It’s about equity. Why do some people get taxed at lower rates than others. Why, for instance, do folks who own their own homes get to write off their mortgage but renters do not get to write off their rent? Why do individuals not have the same ability to create their own IRAs but folks who work for some companies do?

        No one likes paying taxes that I know and it’s just a fact of life that no matter where you live the govt will “take” your money as you put it, unless of course you live in a 3rd world country where true libertarianism and free markets rein.

        Money classified as tax expenditures are selective subsidies to SOME taxpayers but not all and that’s the issue with health insurance.

        Why does the govt selectively NOT tax some folks but tax others?

        that’s not about the govt taking your money – thats about tax equity.
        Unequal treatment based on silly things like what you do for a living.

        Grossly unfair and actually it’s worse than that – because those who have employer-provided health insurance also pay the same premium no matter their age or health status – called community rating. The govt requires it – again – only for those who get employer-provided and not insurance others have to buy on the market. Even Obamacare premiums are priced according to age.

        If you took away that subsidy for employer-provided – the politics of health insurance would change overnight if insurance companies were allowed to use medical underwriting for all health insurance.

Leave a Reply