Jefferson looks to turbocharge its health insurance arm with proposed Lehigh Valley Health Network deal

Thomas Jefferson University planned to double the size of its health insurance business in five years. Then last month’s agreement to acquire Lehigh Valley Health Network dramatically shortened that timeline.

Now the Philadelphia-based nonprofit health system is projecting that it can reach its goal in two years, Jefferson CEO Joseph G. Cacchione told investors last week in San Francisco, according to a Fierce Healthcare report.

Jefferson Health Plans has about 350,000 people in its Medicaid and Medicare plans, mostly in Philadelphia. Last year, it offered individual plans on Pennsylvania’s Affordable Care Act marketplace, and picked up a small number of customers for 2024 coverage. Jefferson currently has no plans to sell insurance to private employers.

Acquiring Lehigh Valley and its 13 hospitals located as far north as Scranton gives Jefferson 30 hospitals in total and significantly expands the marketing opportunity for Jefferson Health Plans, which it has wholly owned since the fall of 2021.

Jefferson’s plan to grow its insurance business is part of a national trend toward consolidating doctors, hospitals, and insurance all in one giant health-care company.

The strategy is designed to boost profitability by cutting out the insurance company as a middleman. Executives say it will also aid the transition to new payment methods that could make hospitals responsible for providing cost-efficient and high-quality care. Health systems traditionally made money off the volume of care.

When health-care providers know they are being prepaid a fixed amount of money no matter how much taking care of a patient costs, they have to adopt a different approach, experts say.

“I think they are more proactive on promoting health,” Cacchione said in a December interview on Jefferson’s preliminary agreement with Lehigh Valley. “That’s really what we think we ought to be doing.”

Jefferson has already experienced a financial payoff from owning Jefferson Health Plans, formerly called Health Partners Plans. That business reported a $48 million operating profit for the year that ended June 30, while the health system’s clinical operations had a $216 million operating loss.

Four decades ago in the 1980s, a group of Philadelphia-area hospitals owned an HMO, as then-common “health maintenance organization” insurance plans were called, and in the early 1990s Main Line Health hospitals and doctors had their own managed-care plan.

That shows how health-care systems have long eyed expansion into the insurance market as an opportunity to help boost their typically narrow profit margins, said Dan Grauman, CEO of Veralon, a Philadelphia-based health-care consulting firm with clients around the nation.

“If this middleman wasn’t there and we can work directly with Medicare, Medicaid, employers, then there’s some extra money there,” said Grauman, offering the perspective of the hospital executives he advises. “That has been the lure for decades.”

Post-pandemic, higher labor costs have shrunk hospitals’ margins, making it harder to claim profits from the health-care financial pie.

Jefferson’s former CEO, Stephen K. Klasko, acknowledged the pressure two years ago at a Philadelphia business conference and pointed specifically to insurance: “There’s just not enough money for somebody to be getting 17 cents on the dollar as an insurer to be the middle person.”

Jefferson joins a national trend by aiming to expand its insurance business as it acquires another hospital network.

Two prominent examples that could be models for Jefferson are in Michigan and farther west.

Intermountain Health, a nonprofit based in Salt Lake City, saw its insurance business, Select Health, as the biggest growth opportunity when it acquired Colorado-based SCL Health in 2022, Intermountain’s chief financial officer told Becker’s Hospital CFO Report.

Intermountain’s insurance arm, Select Health, has since announced plans to start selling Medicare Advantage plans in Colorado, where SCL had hospitals.

In Michigan, Beaumont Health and Spectrum Health merged to form Corewell Health in 2022. Spectrum’s statewide health insurance business, Priority Health, is a core strength of the combined enterprise, according to Standard & Poor’s. Crain’s Detroit Business described the merger as a stepping stone for the expansion of Priority in Southeast Michigan.

The merger talks between Jefferson and Lehigh Valley Health Network started as a conversation about expanding Jefferson Health Plans into the Lehigh Valley region through a partnership, Cacchione said last month.

Jefferson had already started offering Medicare Advantage plans in the Lehigh Valley during the fall 2022 enrollment season.

Underscoring the challenge of breaking into a new market, Jefferson picked up just 90 members in Carbon, Lehigh, and Northampton Counties as of this month. Jefferson had a similarly slow start closer to home, in Burlington, Camden, and Gloucester Counties.

Jefferson’s announcement of the Lehigh acquisition comes as Kaiser Permanente, the biggest and most highly regarded model of combining hospitals, doctors, and insurance, descends on Pennsylvania with its acquisition of Geisinger Health.

Geisinger, headquartered in Danville, Pa., will be the first health system in a new nonprofit called Risant Health, which is expected to acquire additional systems around the country.

There’s a big difference between Kaiser and other health systems with insurance arms, according to experts.

Kaiser, the nation’s largest nonprofit health system, thinks of itself as a health plan that happens to have some hospitals, said Kevin Holloran, a senior director at Fitch Ratings. Almost all of its patients have Kaiser insurance.

“In that model, anybody who comes in the door, you’ve already made all the money you’re going to make off of them through the health plan. You are managing the cost from there on out,” Holloran said.

At places like Jefferson, UPMC in Pittsburgh, and Geisinger, by contrast, many or most patients have insurance from other companies. Doctors still work mostly under the traditional reimbursement model, which pays them more for seeing more patients and providing more services.

Jefferson said in an email that it is working “to align incentives for providers toward care and wellness.”

Long term, Jefferson will use what it learns from its own insurance operations in its work with other insurers, Cacchione said. That could lead to fully prepaid — or capitated — contracts with other insurers.

Under such contracts, Jefferson would be fully responsible for managing the cost of caring for a group of patients. It would be paid a fixed amount each month, not matter how much it cost.

That’s the future of health care, said Rick Gundling, senior vice president for health-care financial practices at the Healthcare Financial Management Association, a trade group in Washington.

“It’s a different mindset, a different management style,” he said.