Should IU Health pursue a strategy of mediocrity?

Corrections: IU Health Plans offers access primarily to doctors that are part of the IU Health system and not to doctors that are part of competing hospital systems. However, IU Health Plans does include independent doctors, especially in primary care. Also, the risk adjustment mechanism Obamacare created for the individual and small employer markets is a permanent feature of the law. This post originally stated that risk adjustment in the Obamacare exchanges would end after 2016. I'm sorry for those errors. I have corrected them below. — J.K. Wall

Last month, when U.S. News & World Report released its annual Best Hospitals rankings, Indiana University Health had fallen off the magazine’s honor roll of the nation’s top 1 percent of hospitals.

I’m sure the folks at IU Health weren’t thrilled about it, after being on the prominent list the previous two years.

But, in a way, perhaps they should be celebrating.

Let me explain why:

Obamacare and other factors are pushing hospitals away from their usual ways of making money—seeing lots of patients and performing lots of tests and procedures. That trend is great for health insurers like WellPoint Inc., which make money whenever they charge more in premiums than the cost of care their customers use.

So IU Health and other hospitals are ramping up their own health insurance plans to capture more of those profits that have been going to WellPoint. These plans include primarily IU Health doctors, so whoever signs up for IU Health insurance is likely to be an IU Health patient.

IU Health's top-notch reputation will continue to attract lots of healthy people into its orb, and that should hold true for its insurance plans. The problem is, IU Health's stellar reputation also could bring its insurance plans an overabundance of really sick patients. And that could cause IU Health's insurance plans to spend more money caring for those patients than they can offset by selling insurance to those who don't use it much.

Put another way, if IU Health persuades all the folks with cancer, clogged arteries and really sick children to join its insurance plans, it might end up losing its shirt.

And that would be a problem, because IU Health is, to some extent, counting on insurance profits to offset the loss in patient volume it has suffered recently. It expects those lower volumes to continue as pressures from Obamacare, employers and patients themselves push it to do fewer high-dollar surgeries and hospitalizations.

“We know that the most affordable care a member can receive is the care that was made unnecessary through effective approaches that improve health,” Jim Parker, the CEO of IU Health’s insurance plans, wrote to me in May.

IU Health Plans sells individual Medicare Advantage policies to seniors. Those privately run plans now account for three out of every 10 Medicare beneficiaries. And that percentage is  and growing.

In 2015, IU Health Plans will offer individual insurance policies to Hoosiers of all ages, both on and off the Obamacare exchanges.

In addition, IU is the half-owner of MDwise Inc., which signed up nearly 28,000 insurance customers on the Obamacare exchanges this year.

And IU Health Plans also will try to sell on the private exchanges that many employers are looking to offer in place of their typical group plans.

Why are these markets—which all hinge on individual choices—so dangerous for hospital-run insurance plans?

Well, when hospitals offer health benefits to employer groups—even ones with, say, just 10 employees—they can be fairly certain that not all 10 of those people have cancer, or have a child needing services at IU Health’s Riley Hospital for Children, or folks who are on a waiting list for an organ transplant.

But when consumers are choosing plans one by one, IU Health can have no such confidence. It has a great brand, so it might attract lots of customers. But if it attracts all the customers who are already receiving lots of medical care—while the healthy folks opt instead for the broader choice of hospitals and doctors offered by Anthem or UnitedHealthcare—its cost of care could outstrip the premiums it charged.

Or, if IU Health tries to head off this problem by offering health plans with high premiums, it won’t get many customers at all.

Under Obamacare, the risks of this kind of “adverse selection” will be mitigated in the individual and small employer markets by risk-adjustment formulas that will shift premiums from health plans that sign up a preponderance of healthy customers to those that sign up mostly sick customers. But some risk will remain.

In all the individual markets, Parker is trying to attract customers who want long-term relationships with IU Health doctors to manage their health.

“Although the markets operate differently in many respects, they share one thing in common: Those that partner with individuals to manage their health effectively will succeed,” Parker wrote.

He’s right, but in the meantime, IU Health’s marketing department might lend Parker a hand by not mentioning that U.S. News ranked its downtown hospitals among the best nationally in four adult specialties and nine pediatric specialties. Or that the IU Health medical center downtown ranked tops in Indiana in 13 out of 15 specialties.

(Other hospitals, even those not offering health insurance plans, might want to stop touting themselves as having the best heart care in the nation—since, under Obamacare, cutting down on the number of expensive surgeries will be important for their future financial success.)

IU Health could instead run advertisements touting the medical specialties in which it "Doesn't Have The Strength It Takes."

Or IU Health could send checks to Community Health Network to keep promoting its cancer partnership with MD Anderson and to St. Vincent Health to promote its Peyton Manning Children’s Hospital and organ transplant center. That would be a way to direct more of those patients to other hospital systems and, therefore, to sign up for other health insurance plans.

Or, more seriously, IU Health might encourage employers that adopt private exchanges to also hire a firm to do risk-adjusting, so that its plans don’t become uncompetitive—even if they’re doing a better job taking care of sick patients.

It’s another example of how the incentives in health care have turned upside down under Obamacare and other health reform efforts. How IU Health and other hospitals respond is still very much up in the air.