Getting Paid: Insurance Guy, MD?

The late comedian George Carlin used to crack, “If you can’t beat ’em, arrange to have them beaten.”

Funny. And no doubt the thought has crossed your mind when it comes to insurance company bean-counters. Almost everyone agrees, after all, that there’s something just wrong with the whole industry. Year after year, patients watch helplessly as premiums increase, copays and prescriptions soar, and on and on.

You know that you aren’t getting any of that extra money: Physician reimbursement is holding steady or declining. Indeed, says New York pediatrician Herschel R. Lessin, “The current climate is putting primary-care doctors out of business.”

But unless you happen to be buddies with Tony Soprano, you can fuhgeddabout having anyone beaten. Yet perhaps the more conventional platitude is the way to go: Maybe you should join ’em. Is it possible for you, a doctor, to own an insurance company?

Is this just the starry-eyed fantasy of anguished docs? Or could it really be …

Let’s face it: The only people who are happy with health insurance are the insurance companies themselves - and their stockholders.

“Physicians often feel like they’re working for the insurance companies,” says Suzanne Madden, president and CEO of The Verden Group, a consultant who keeps a careful eye on managed-care companies. “They’re working for themselves, really, but they feel like they are at the mercy of these companies.”

But while the insurance landscape is bleak, it isn’t completely hopeless. A handful of organizations across the country are trying to change the way insurance works. They want to see health plans make lives better for both patients and physicians. To say it’s not easy is an understatement, but for these dedicated individuals it’s worth the risk.

The impossible dream?

If the concept of physician-owned health insurance sounds familiar, it’s because you’ve probably heard it before. In the late 1980s and mid-1990s, when everyone was looking for innovations in healthcare insurance and HMOs were coming into their own, a number of state medical associations and other groups started their own insurance plans. The idea was simple: control costs and pay physicians better than they were currently being reimbursed through major carriers - sometimes much, much better.

But by the end of the 1990s, most doctor-owned insurance plans - including Pennsylvania Physicians Care, a managed-care organization with nearly 4,000 physician-owners, and California Advantage, a plan started by the California Medical Association - were bankrupt and out of business. It seemed like a fatal blow to physician involvement with health insurance, even though a handful of nonprofit HMOs (such as DakotaCare, started by a group of South Dakota doctors) are still in operation. Today DakotaCare is the state’s largest HMO, but with only about 110,000 members it serves a very limited population.

Patients vs. profits

Can a small organization like that really be the solution to physicians’ insurance woes?

The Physicians Assurance Corporation, a Columbus, Ohio-based health insurance company started by seven local physicians, thinks it might be. “We believe that healthcare is local,” says cofounder Alice Epitropoulos, an ophthalmologist and vice chair of the company’s board of directors. “TPAC is locally owned and operated with the intent of improving healthcare for central Ohio customers.”

As Epitropoulos describes it, TPAC was born out of local physicians’ frustration with the insurance market and conditions in central Ohio. “I think [physicians] as small business owners are getting very frustrated with double-digit increases in our [employees’] premiums and then declining reimbursements,” she says. “We have to stay in business to continue to provide for our patients.”

It’s the same story from many physicians across the country struggling to keep their practices afloat. Epitropoulos and her fellow founders were also tired of medical decisions being made by the wrong people. “If I want to order a test, the larger insurance companies review it. If they don’t feel it is medically necessary [they don’t approve it],” explains Epitropoulos. “They’re not physicians making that decision. They’re basically practicing medicine, and that is not in our patients’ best interests.”

Epitropoulos and six other physicians took inspiration from a group of Columbus OB/GYNs who had successfully started their own malpractice captive. If one type of insurance could work, why not another? After an initial feasibility study, they set to work raising capital - about $5.6 million in a six-month period. More than 200 investors purchased stock in the private company; about 95 percent are physicians.

“I think that we felt the need as a medical community,” says Epitropoulos.

Now fully licensed by the state of Ohio, the company began offering coverage in July 2008. But TPAC always keeps its company’s informal motto in mind: Patients before profits.

“Our philosophy - and I know our physician board agrees with us - is we have to run this like a business,” says Brett Bäby, CEO of TPAC. “But it is merging a business philosophy with a physician philosophy, being more patient-centered, and being a lot more provider-friendly as well.”

Advantage: TPAC

TPAC has thought long and hard about the advantages a physician-owned company can offer over traditional insurance companies.

The first and arguably most important advantage is on overall cost. “We feel we can have an impact on the cost of health insurance premiums by providing lower margins,” says Epitropoulos.

Most traditional insurance companies are publicly traded corporations that are expected to return profits to their shareholders. It’s not unusual to see major insurance carriers with profit margins of 20 percent or more.

“Basically, they are skimming 15 to 20 cents off of every healthcare dollar to pay their investors,” says Lessin. The pediatrician is a board member of MVP Healthcare, a New York state insurer, and vice president and director of clinical research at The Children’s Medical Group. “There’s a difference between healthcare costs and the cost of healthcare. The cost of insurance premiums goes up and up and up, but provider payments don’t go up. Insurance company profits go up.”

TPAC wants to change that dynamic. “I think we’re going to have lower margin requirements that will allow TPAC to price more aggressively and to stabilize prices for the small business owner,” says Epitropoulos.

Lower profit margins and lower administrative costs are the backbone of TPAC’s strategy, allowing the company to pass the savings along to consumers.

The counterpart to lower consumer prices is a competitive reimbursement schedule for participating physicians. TPAC is determined to pay providers well, but not so well that it can’t afford to stay in business. “This is not a short-term game,” says Bäby. “It’s a long-term enterprise that hopefully will pay off for our clients, for the physicians who are participating with us, as well as our shareholders.”

Money is only one contributor to success, however, and TPAC knows it has to offer something else if it wants to attract participating providers. One of the key differences between TPAC and other insurance companies is physician involvement.

“We’re looking at more of an inclusive model, where the local physicians have input,” explains Bäby. “We’re going to create 32 different specialty committees that will review everything from benefits and coverage to different procedures that are developed over time. We want to include the physician in this decision-making process instead of excluding them.”

A former CEO of UnitedHealthcare of Ohio, Bäby knows from experience how physicians get locked out of decision making at big insurance companies. “I worked for United for 15 years, and there is not a lot of consideration given to local practice patterns and local physician input with regard to making both medical and coverage decisions,” he says. He doesn’t want TPAC to make those same mistakes. To that end, TPAC plans to be as transparent about its decision making as possible.

“TPAC will publicly disclose our rating methodology,” says Epitropoulos. “There is really no other company that currently discloses its information.”

Another difference in TPAC will be the emphasis on prevention. “Prevention is the key to helping to control healthcare costs and maintaining quality of life,” says Epitropoulos, who wants to see TPAC establish health and wellness programs within the first year, including programs for smoking cessation, diabetes, and asthma. “We hear a lot about ‘pay-for-performance.’ We want to do almost a ‘pay-for-quality,’ establishing measurable quality factors based on quality care, not economic factors. That’s unique.”

Succeeding where others fail

It’s all well and good to talk about quality care and competitive reimbursement, but haven’t we heard this story already? A lot of bankrupt companies espoused this same philosophy 20 years ago.

TPAC is well aware of the pitfalls. In fact, one of its first calls was to the organizers of the defunct Pennsylvania Physicians Care plan. TPAC learned two major lessons from its predecessors’ mistakes:

Don’t overpay yourself. Pennsylvania Physicians Care did it, the now-defunct California Medical Association plan did it, and so did … well, pretty much any physician-owned insurance plan that ever failed.

There is always a temptation, especially among physician-owners, to reimburse participating physicians at a higher rate than competing plans, confirms Madden. “Physician-owned plans have a tendency to pay higher. They want to be fair, whereas a traditional carrier is looking to minimize costs and increase profits,” says Madden. “Doctors tend to want to pay other doctors a better rate.”

But companies that pay providers too well risk putting themselves out of business. It’s exactly what happened to Pennsylvania Physicians Care.

“They wanted to pay themselves significantly higher than market value,” says Epitropoulos. “Higher than Medicare - 130 percent over Medicare.”

Lessin once consulted with a company that was even more ambitious. “They wanted to pay 200 percent of Medicare. I said you can’t stay in business doing that. You can’t. They said, ‘Oh, yes, we can,’” remembers Lessin. “They were wrong.”

Good underwriting is key. The only way an insurance company can remain solvent long-term is by spreading its risk across a large enough patient population. In other words, there have to be enough healthy patients to pay for the sick ones. TPAC knows that and is working hard to get the right mix of patients. It’s targeting a nine-county area in central Ohio and working primarily with private employer groups and the fully-insured market, avoiding self-insured and government employers entirely. They’re also avoiding the Medicare and Medicaid markets. That means full premiums from a patient population that doesn’t necessarily have a high claims rate.

David Rubadue, TPAC’s chief financial officer, is fully aware of the importance of underwriting to the company’s success. “We have to look at the variables that can influence price. What we don’t want to do is bring in a lot of business with very poor claims at a price that is very cheap,” he says. “We will go out of business really fast.”

That might seem obvious, but it is surprising how many plans fail because of bad underwriting. “You have to spread the risk. You have to have enough people,” agrees Madden. “One person who requires heart surgery could bankrupt you.”

Madden adds that healthcare costs can sometimes be cyclical. “If a bad flu comes along one year, it can raise costs. You need to make sure you have enough reserves,” says Madden. “The big companies have reserves. If they’re having a bad year with healthcare insurance, they can depend on the profitability of their life insurance division, for example. Physician-owned companies can’t do that.”

Lessin also emphasizes the need for reinsurance: “If [the company doesn’t] have a reinsurance contract, and they are at risk for everything, they’re almost guaranteed to go broke.” He gives the example of a 100,000-member plan that might need to cover a liver transplant for a single patient. At a cost of over $3 million over such a patient’s lifetime, that could put the entire plan out of business. Small plans like TPAC and MVP need to contract with a third-party insurer to cover unexpected financial risks.

Business is business

Lessin’s MVP Healthcare is one of the success stories. Started in the late ‘80s by a local medical society in New York, MVP weathered the storms that tore other physician-owned companies apart. Now it’s a $2.5 billion not-for-profit managed-care organization serving close to 700,000 patients in the capital district of New York state, as well as Vermont and New Hampshire.

Strictly speaking, it is no longer physician-owned, though physicians are well represented on its board of directors. “New York state law does not allow physician control of managed-care organizations,” explains Lessin.

For 25 years, MVP has offered many of the advantages that TPAC is only planning to implement, including lower profit margins, physician involvement in decision making, and competitive reimbursement schedules. “We’ve been rated in the top ten or twenty [managed-care organizations] for our entire existence. We’re a good company, and we’re actually ‘profitable,’ to the extent that we have surplus, not profit, of course. Our profit margin is 3 percent, as opposed to 22 percent like that of for-profit companies,” says Lessin.

Yet with 700,000 patients, MVP is small for a health insurance company and much more vulnerable to risk than a major corporation. “Even at $2.5 billion in premiums, we’re a minnow in that particular pool,” acknowledges Lessin.

Lessin is quick to point out how difficult the insurance business can be. With more than two decades’ experience, he is constantly amazed at companies that balance estimated and unclaimed expenses against actual revenues yet still may not know how they are performing financially until halfway through the year. A wrong guess about the number of unsubmitted reimbursement claims can mean the difference between a very good year and bankruptcy for some insurance organizations.

“It is not a business for dilettantes,” confirms Lessin. “You had better be prepared.”

MVP wasn’t always prepared, and it nearly paid the price for that mistake. In the early 1990s, with healthcare costs on the rise and most managed-care plans facing a financial crunch, MVP’s financial ratings were down in the D range. (Its rating is back up to a solid A.) The company had a number of problems that could have put the company out of business, including a falling out with one of its contracted IPAs that caused it to stop operating in five counties in northern New York. (Even today, MVP doesn’t offer coverage in that area.)

“It’s a very risky investment,” says Lessin. “That doesn’t mean it can’t work, but it might have worked easier 25 years ago when there wasn’t a lot of managed care around and there weren’t all these behemoths to compete with. … You should go in with your eyes open.”

That’s sage advice for anyone inspired by TPAC or MVP’s examples. A lot depends on your own market situation, the regulations in your state, and the goals you and your partners have for starting an insurance company. If you’re only in it for the money, you might want to think again.

“A lot of physicians would like to start something like this,” says Rubadue. “It’s going to look very attractive, but it’s also a very regulated industry.”

It’s fine to put patients before profits, but any successful insurance venture, like any successful medical practice, has to be run like a business.

“If it’s just a bunch of doctors saying, ‘Hey, we can do this,’ I would have my doubts,” says Lessin. “Being in a business you don’t understand is a ticket to disaster.”

Robert Anthony, a former associate editor for Physicians Practice, has written for the healthcare and practice management industries for six years. His work has appeared in Physicians Practice, edge, Humana’s Your Practice, and Publisher’s Weekly. He is based in Baltimore, Md. He can be reached via editor@physicianspractice.com.

This article originally appeared in the September 2008 issue of Physicians Practice.