Hospital systems and health insurers have very different financing structures. Hospital boards and executive management will want to consider the fundamental differences when considering whether to combine both organizations within the same larger health system.
Briefly, the health system has these fundamental financial structure characteristics:
- Significant physical plant investment
- Fewer growth opportunities
- Higher margins, lower return on capital and lower revenue and margin per employee
Health insurers financial structure characteristics include:
- Required to maintain a level of liquid capital linked to their total premium
- Limitations on investment
- Can more easily expand into new geographies
- Higher revenues and total margins per employee
The financing differences between health insurers and hospital systems follow the function of each organization. In general, insurers can provide their services without the need for a significant capital investment. Insurers maintain less physical capital than hospital systems but are required to maintain sufficient liquid capital to protect policyholders when an insurer experiences financial weakness. (“Health Insurance and Hospital System Financing at a Glance,” Healthcare Matters, hfm Early Edition, October 5, 2017)
Hospitals operate highly complex facilities with substantial physical plant investment and a significant number of employees. Although this complexity and investment contributes to higher margins, it also lowers the return on capital and reduces revenue and margin per employee.
Health insurers and hospital systems also have substantially different risk profiles. For example, insurers face short-term financial risk when:
- Premiums don’t cover higher-than-expected use of healthcare services
- There is additional uncertainty associated with important provider contracts
But hospital systems’ risk includes:
- Changes in provider payment from key payers
- Malpractice risk
- Lower-than-expected utilization of provider assets
To hedge against this risk hospital systems and insurers may consider combining the two organizations. “With such a combination, the collective impact of the factors that contribute to risk—higher or lower utilization and changes in payments—are mitigated across the broader organization.” (“Health Insurance and Hospital System Financing at a Glance,” Healthcare Matters, hfm Early Edition, October 5, 2017)
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