Lies, Damn Lies and Statistics

The Business of Healthcare

by James C. Sherlock

Jim Bacon commented yesterday upon a study underwritten by the Virginia Hospital and Healthcare Association (VHHA) that said Virginia hospitals were getting shortchanged by health insurers, and that the insurers were charging too much to consumers.

We can’t stand still for that, can we?

It may have been published in support of HB 2021 Health insurance; provider contracts, report, Delegate Wendy W. Gooditis  (D) which itself has the earmarks of a VHHA product.

The Catch

Unmentioned is that some of health insurers in Virginia, including the second largest, are controlled by the same integrated healthcare systems that control the state’s most profitable hospitals.

Are they cheating themselves?

Perhaps it is worth pointing out that Optima Health, the second largest private health insurer in Virginia, was the most profitable of that group in 2018, the last year for which state data is available. Optima realized 6% revenue on almost $2.4 in premiums in 2018. Sentara hospitals in that same year realized 11% operating margins in Hampton Roads, the core Sentara hospital monopoly.

Optima Health and Sentara Hospitals are tightly controlled by parent Sentara Healthcare with interlocking managers.

It is also applicable to the discussion that Sentara is not the only hospital monopoly selling health insurance.  Inova, Carilion and Centra do as well. VCU Health still owns a slice of the large health insurer Virginia Premier it sold in 2020 to Optima.

VHHA forgot to mention that when damning health insurers.

That is also why the state lobby for health insurers, Virginia Association of Health Plans, is conflicted about responding to this attack. Many of their members are controlled by hospital systems.

That leaves Anthem as the most effective lobby for health insurers.  And indeed the target of this VHHA attack is Anthem, which is the largest health insurer in Virginia (but not by much over Optima).

Hospital profitability also varies greatly in Virginia. Some lose money. Some make a lot. So average profitability means nothing.

The relationships between providers and insurers controlled by the same management can be opaque to the outsider but very profitable to the biggest systems.

Sentara and Optima – the Business Model

So today I went back in my files to a 70-page report Report to the Virginia General Assembly on Reform of the Businesses of Health Care and Health Insurance that I prepared for the General Assembly dated September 5, 2018.  

I will share some of that with you that bears upon the issues raised by the VHHA report. Specifically, the issue of hospital ownership of health insurers was not addressed. My report addressed it directly.

Michael Dudley recently retired after serving as the President and Chief Executive Officer of Optima Health and a Senior Vice President of Sentara Healthcare from 1996 to 2018. Optima Health Plan (the health plan division of Sentara Healthcare) serves 525,000 members with a provider network of over 15,000 physicians and 114 hospitals.

Mr. Dudley wrote on June 15, 2018, on the subject of control of the healthcare dollar.

“Beyond financial results, most provider sponsored health plans tout other benefits that speak to both the mission of the organization and the financial performance of the enterprise in total. Such benefits include, but are not limited to:

  • Improved performance in quality, service and total cost of care
  • Enhanced understanding of the consumer/customer
  • Control of the premium dollar”

“Of these added benefits, perhaps the benefit derived from the control of the premium dollar is least intuitive and most important. Here is a simple way to think about this issue.”

“If XYZ Health Insurer brings in $100 of premium, they will pay a hospital about $40 for inpatient and outpatient services. If the hospital is well run, it will make 4% or $1.20 on the $40 of revenue.”

“However, if the hospital owns the health insurance plan, and the insurance plan is making a 2% margin on the premium of $100 [$2.00], then the enterprise will earn $3.20, 2% on the premium and 4% on the “inter-company” transfer between the owned health insurance company and the hospital. (NOTE: this is a simple example. The actual arrangements between the hospital, its owned health insurance plan, and the contract with the non-owned health insurance companies will determine the actual results, but the principle is demonstrated with the simple example.)”

“To be sure, the challenges in owning and operating a health insurance plan are both daunting and different from operating a hospital system. However, the rewards can be worth the effort .”

Indeed they can.

Mr. Dudley discussed the division of the premium dollar between the insurance and provider arms of an integrated delivery system such as Sentara/Optima.

He failed to mention the actual effects on Sentara hospital revenue and margins and the negative effects on Sentara competitors of other Optima actions, especially its control of the membership of its in-network provider system.

A couple of other missing points:

  • Customer out-of-pocket copays increase hospital revenue, so spending Optima revenue as payments to Sentara providers results in higher Sentara Healthcare corporate margins than retaining the same revenue as Optima profits.
  • Optima deductibles provide a formidable financial disincentive to discourage customers from using out-of-network facilities and physicians. With out-of-network coverage, an Optima customer’s out-of-pocket costs, including out-of- pocket maximums, are generally higher. Out-of-network physicians are often required to get pre-authorization. Finally, customer use of out of pocket deductibles for their medical bills rather than the premium dollars they paid Optima increase Optima’s cash flows.

Mr. Dudley used what he called a simple example. It was modest indeed. I offer a real-world example.

In 2016, Optima Health realized less than $10 million in profits on nearly $1.4 billion in revenue. In a vertically integrated system, that is a feature not a bug. As discussed above, Optima revenue that could have been insurer profits is directed instead to Sentara providers. That revenue is then increased by customer copays.

Sentara hospitals in south Hampton Roads and the city of Hampton achieved margins averaging 12.9% in the same year.

So using those data, his example would have read:

If XYZ Health Insurer brings in $100 of premium, they will pay a hospital about $40 for inpatient and outpatient services. If the hospital is part of a monopoly, it will make 13% or $5.20 on the $40 of revenue.

However, if the hospital owns the health insurance plan, and the insurance plan is making a 0.1% margin on the premium of $100 ($0.10), then the enterprise will earn $5.30, 0.1% on the premium and 13% on the “inter-company” transfer between the owned health insurance company and the hospital.

That real-world example would have made national headlines.

A look at data that Sentara/Optima provide to the Commonwealth shows how the business model actually works: high premiums, lots of premium payers, limited providers, minimizing administrative costs and forgoing profits with its insurer to maximize payments and the accompanying co-pays to its providers.

This is impressive work to maximize corporate profits.

It is especially impressive because Sentara Healthcare, the parent company, Optima, Sentara’s insurer, Sentara hospitals and most of Sentara’s doctors practices are designated non-profits.

That last example used 2016 data, in which year Optima Health realized less than $10 million in revenue on nearly $1.4 billion in premiums earned while Sentara’s Hampton Roads hospitals achieved margins averaging 12.9%.

In 2018, Optima Health realized more than $139 million in revenue on premiums earned of nearly $2.4 billion while those same hospitals realized margins of 11%.  Optima managers simply failed get revenue to Sentara providers fast enough.

Kind of like a game, though $139 million is a nice bag to be left holding.

Reader beware

To be fair to VHHA, that information would not have fit into either its press release or the narrative it pushed.

The fact that the biggest health systems control health insurers means that Del. Gooditis’ HB 2021 as a practical matter only applies to independent insurers.  I wonder if she even knows that.

So reader beware of short press releases with limited statistics on complicated subjects.