What happens when your hospital is also your insurance company? We’re starting to see the effects

Is your hospital under the same corporate roof as your health insurance company? Michael Siluk/UCG/Universal Images Group via Getty Images

Historically, hospitals have provided care for people, while separate insurers have paid for that care.

During the past two decades, however, this arrangement has changed. Today, nearly 1 in 3 hospitals also own insurance plans – putting them on both sides of the transaction.

Sometimes referred to as "payviders," these hospitals decide when and how to provide treatment, but they also decide when and how much to pay for that treatment for people enrolled in their insurance plans. This arrangement raises an important question for patients, providers, policymakers and researchers like us: What happens when your hospital and insurer are owned by the same company?

As health services scholars who study policy, practice and economics, we are working to uncover what is good, bad and unknown about bringing hospitals under the same corporate roof as insurance companies. Our research focuses on Medicare Advantage, the private version of the traditional Medicare program administered by the federal government.

Where we are looking

Health plans that are owned by hospitals have sprung up in many insurance markets, including commercial insurance, Medicaid – which is largely managed by states – and Medicare Advantage.

Medicare Advantage is the private alternative to the traditional Medicare program administered by the federal government. Medicare insures people 65 or older and some who are younger and disabled. The commercial Medicare Advantage option now accounts for the majority of Medicare enrollment, or just over 35 million people.

We and a colleague spent six months compiling a database of people who are insured through a Medicare Advantage company that is affiliated with a hospital.

We started with data from the Agency for Healthcare Research and Quality, where hospitals can report whether they offer a Medicare Advantage plan. We then searched hospital websites, press releases and news articles to find the identity of each plan. We also checked through the list of all Medicare Advantage plans to make sure we didn't miss plans that hospitals forgot to report.

Our database lists 2,190 hospitals that are owned by companies that also own a Medicare Advantage plan. Nearly one-sixth of people enrolled in Medicare Advantage, the private version of Medicare, are insured by a Medicare Advantage plan owned by a hospital.

The good

Having your insurer and hospital under the same corporation can allow better communication between your insurer and doctors, reducing red tape.

Insurers and hospitals that are operated by different companies can often be at odds: Hospitals say that insurers may try to override their doctors' care decisions. Insurers say that some doctors may recommend too much unnecessary care if left to their own devices.

By contrast, hospitals that own insurance plans argue that because they are trying to take care of patients, as well as provide an affordable insurance plan, their doctors are more motivated to provide high-quality care with less waste.

Research from several teams has shown that when people with Medicare Advantage plans administered by insurers that own hospitals get most of their care at those hospitals, they require fewer prior authorizations and have better experiences, care quality and coordination than standard Medicare Advantage plans.

There is also some evidence that these patients have fewer readmissions, mortality and surgical complications than those in standard Medicare Advantage plans.

Open to gaming

However, we have some concerns with hospitals that own insurance plans.

First, they may be able to game regulations to get extra taxpayer money. The government pays Medicare Advantage plans a given amount for each person enrolled in the plan, and the plan uses that money to pay for that person's healthcare. Through a process called risk adjustment, the government pays more for people who have more health diagnoses, such as diabetes or heart failure, since they usually have higher medical costs.

The higher payment for people who have more health problems is meant to offset any incentive to only enroll healthy patients. Past work shows that enrolling in a hospital-owned plan tends to increase a person's number of diagnoses. This suggests that some hospitals that own plans may be able to encourage their doctors to record more diagnoses for people enrolled in the affiliated plans in order to get higher government payments, which drives up taxpayer costs.

The government pays private insurers more for patients who have more diagnoses, which means hospitals that own insurance plans are incentivized to code more intensely.

Companies that manage both insurance and care could also extract extra taxpayer money through the prices those plans pay their affiliated hospitals. By law, insurers in certain markets like Medicare Advantage must spend 85% of their revenues on enrollee healthcare. This is known as a medical loss ratio.

However, if a hospital-owned plan is providing less than 85% of its premiums on healthcare, it could pay its affiliated hospital higher prices for the care that people enrolled in the plan do receive. This would allow the company to superficially inflate its plan costs and skirt medical loss ratio rules to increase its profits. Hospital-owned Medicare Advantage plans tend to have higher medical loss ratios, which can mean they spend a higher percentage of their revenues on care or that what they spend on care is superficially inflated.

When we compared the plans we had collected in our database, we found that at a given hospital, affiliated Medicare Advantage plan prices are on average about 5% higher than unaffiliated plan prices.

These patterns could be consistent with gaming. However, there are also more innocuous explanations, such as these plans having sicker patients who require more resources for a given procedure, or hospitals even forming these plans when they are dissatisfied with the prices paid by competing plans. Further research will be needed to distinguish this.

Competition concern

Our second concern is that insurers that own hospitals could harm competition.

Usually, hospitals and insurers negotiate whether the hospital will provide care to people enrolled in a given insurance plan and what prices the insurer will pay the hospital. A hospital that has its own plan could use this negotiation to make it more desirable than competing plans.

For instance, the hospital could charge competing insurance companies higher prices, which could raise the premiums they charge to people enrolled in the plans. Or the hospital could even refuse to provide any care to people enrolled in competing plans. We can't yet tell whether or how often these issues occur.

We found that 10% to 20% of the hospitals that own insurance plans charge higher prices to competitor Medicare Advantage plans, 66% to 73% charge their affiliated plans similar prices to competitors, and 7% to 24% charge lower prices.

The unknown

Much is still unknown about how companies that own hospitals and insurance companies will ultimately affect people who need care. We have found that Medicare Advantage plans owned by hospitals charge higher premiums than other Medicare Advantage plans.

However, we haven't yet examined how much of this premium difference is due to the higher quality that many of these plans seem to provide versus potential anti-competitive behavior that may make competing plans less desirable. For a given person on Medicare Advantage, these higher premiums may or may not be worth any added benefits.

In our work so far, we are seeing modest evidence that insurance companies affiliated with hospitals may be able to game regulations to extract more taxpayer money. But further work is needed to understand how widespread this is, and how it affects government expenditures.

Like most things in life, hospital-insurance integration comes with trade-offs and unknowns. But as more of the unknowns become known, people who use insurance and policymakers can make better decisions on the trade-offs.

This article is part of an occasional series examining the U.S. Medicare system.

Geronimo Bejarano Cardenas received funding from Arnold Ventures, National Institute of Aging, and Paul and Daisy Soros Fellowship for New Americans.

Grace Mackleby receives funding from Arnold Ventures and the Commonwealth Fund.