A decade ago, when the newborn UPMC Health Plan was just beginning to crawl out of the red, it was fielding acquisition proposals in the half-billion-dollar range from national insurers that wanted unfettered access to UPMC's hospitals.
The insurance company now is an even more attractive, more valuable asset. So would the health system consider an offer to sell, spin off or merge its commercial health plan with another company's, as it did back then -- before ultimately deciding to go it alone?
UPMC says no, it doesn't plan big changes to how its for-profit subsidiary is operated, although it wants to continue expanding its insurance services division. That means picking up more Medicaid and Medicare policyholders, more vision and dental customers, more workplace and behavioral clients -- and more market share for its commercial products.
But even as the health system's spokesman blames talk that it might sell on rival insurer Highmark Inc., some insurance industry pros say the timing could be right for a course change for UPMC -- either going for broke and trying to topple Highmark from its perch or shedding the commercial, under-65 health plan by selling it to a national operator.
"UPMC has made tremendous strides, but [it is] still more of a regional carrier," said Tom Tomczyk of Buck Consultants' Pittsburgh office. For that reason, he said, "[UPMC officials have] had problems trying to go after large national employers."
And if they want to change that, they'll have to change the way they do business.
One thing seems certain:
It is not in UPMC's nature to stand pat.
UPMC entered the commercial insurance market around the time Highmark created the popular Community Blue, a low-cost, narrow-network health plan that did not include the higher-cost UPMC facilities in its provider menu. UPMC Health Plan was created in 1997 and started selling commercial policies in early 1998, in part to offset Highmark's market dominance, give UPMC some negotiating leverage and allow it eventually to insure its own employees, as well as those at the University of Pittsburgh.
In that sense, "they have accomplished what they wanted to accomplish," Mr. Tomczyk said.
UPMC spokesman Paul Wood agreed: "It was our goal to create a more competitive health insurance market that's long been dominated by Highmark's monopoly. And we succeeded."
In the years since the creation of its commercial plan -- which grew out of the acquisition of Best Health Care of Western Pennsylvania, a health carrier that originally served only the Medicaid market -- UPMC Health Plan and its sister insurance companies have grown to a total enrollment of 1.6 million people. By comparison, Highmark has 4.8 million policyholders.
The UPMC insurance division now represents the third-largest health and accident insurer in the state in direct premiums written, according to state records, and is fifth-largest in terms of assets.
UPMC Health Plan and UPMC Insurance Services Division now offer not only the health plans, but also workers' compensation policies, behavioral health policies, Medicare, Medicaid (known as UPMC For Life and UPMC For You) and employee assistance programs. The division operates five licensed insurance companies.
Despite that growth, UPMC -- the hospital, not the health plan -- invited other national health insurance carriers into the Pittsburgh market this year to augment the list of commercial alternatives, should Highmark and UPMC officially split, as UPMC is now threatening. UPMC President Jeffrey Romoff told state legislators Thursday that his institution would never negotiate a new contract with Highmark. His remarks were made at a public hearing Downtown, called by the House Insurance Committee.
If a split happens -- a move that could eventually prevent many Highmark customers from having in-network access to UPMC doctors and facilities -- Aetna, Cigna and UnitedHealth will all be there with their new deals allowing them new, or broader, access to the vast UPMC hospital network.
So, has UPMC Health Plan served its purpose? Should UPMC look to sell the commercial line, while retaining the rest of its insurance division products? Merge UPMC Health Plan with another commercial insurer? Capitalize and expand it? None of the above?
"From 50,000 feet, it would appear that something else would make sense," said Elliot Dinkin, president and CEO of Cowden Associates, a Pittsburgh benefits consulting firm.
What that "something else" might be is hard to say. UPMC says it has no plans to jettison its health plan, and previous attempts to sell or merge didn't work out. In 2001, merger talks with United Healthcare proved fruitless. Previously, UPMC's hospital network had discussed a formal relationship with Kaiser Permanente.
UPMC also had chats with Highmark about creating a closer alignment. That relationship never fully materialized -- one reason the hospital system created its own plan.
"They're in a position to go any direction with the plan that they choose to," said David Straight, founder and CEO of the Benefits Network, a Pittsburgh benefits broker. "As a stand-alone product in this insurance market, they have a critical mass that really makes them formidable."
The insurance services division in 2010 reported $3.3 billion in revenues and an $86 million operating margin. That's a big climb from its start-up years. UPMC's insurance arm lost $16.3 million in 1998 and $13.3 million in 1997.
But even though enrollment and profits have grown in the 14 years since UPMC Health Plan's creation, some industry observers have questioned to what degree the plan (apart from the rest of the insurance division products) is a self-reliant entity and to what degree the commercial policies are being subsidized by the UPMC hospital network.
"It's my understanding that the health plan is performing well on its own," Mr. Straight said. UPMC has always said no such "friendly" arrangement existed between the Health Plan and the hospital network.
In a market analysis circulated internally this spring, Highmark threw cold water on UPMC Health Plan's size. It noted "the majority of enrollment is in nonhealth products," such as workers' compensation coverage, behavioral health plans and employee assistance programs, which are counseling programs often offered by employers as a supplement to traditional insurance.
"Commercial health lines," the analysis said, "account for only 20 percent [of insurance division membership], with a third of that membership attributable to UPMC employees."
UPMC's data shows that of its Insurance Services Division's roughly 1.6 million customers, about two-thirds are covered by worker's comp, employee assistance programs and behavioral health policies. Of the rest, about 100,000 have Medicare policies and 150,000 are enrolled in Medicaid or state-funded Children's Health Insurance Program, according to 2009 data.
The balance -- about 350,000 -- have commercial HMOs or PPO policies through UPMC Health Plan.
Highmark, by comparison, says that of its 4.8 million policyholders, commercial health insurance products -- those provided by employers and those purchased individually at retail but not including Medicare or Medicaid products -- account for 3.4 million of the company's regional members.
That UPMC Health Plan's commercial enrollment number has been hovering above 300,000 or so for the last decade demonstrates both the division's weakness as a larger commercial player but also its strength in developing ancillary products and marketing them statewide.
"They've focused more on behavioral health" by design, one former UPMC official said. "That's the strength of their CEO."
Diane P. Holder, who has been in charge of the health plan and the insurance division since 2003, had previously been CEO of UPMC's Western Psychiatric Institute and Clinic and the founding CEO of the Community Care Behavioral Health Organization.
Ms. Holder said the growth in the division's ancillary products -- and the stability of the commercial health plan's enrollment, in an unstable time -- demonstrate the long-term effectiveness of the payer-provider strategy.
"We've consistently taken market share away from other players" in this region, Ms. Holder said. "There isn't a product that hasn't grown."
It's a strategy, not coincidentally, Highmark and West Penn Allegheny Health System now hope to employ, in one form or another, as Highmark announced earlier this year that it was buying the financially struggling WPAHS.
"Why does a provider company own an insurance company?" Ms. Holder asked. "Because [aligning] the finances and the clinical delivery is a powerful methodology for improving cost and quality."
UPMC is playing catch-up with Highmark on the payer side of the payer-provider equation, but as with other insurers, it has learned that its flagship commercial health products are just part of the puzzle.
The real growth potential lies in the complementary products.
Medicaid enrollment is expected to grow as Medicaid eligibility is expanded under the federal health overhaul. UPMC Health Plan launched a dental network product this year and will be unveiling its new vision network plan in January.
But can the 350,000-strong Health Plan -- the insurance product now being advertised on billboards across the city, the health insurer that UPMC wants your employer to switch to and away from Highmark -- handle a major influx of customers should Highmark lose market share rapidly?
"We have scaled dramatically" in the last several years, Ms. Holder said. "We would like that problem."
The fortified presence of other national health insurers in the Pittsburgh market isn't reason enough to cut UPMC Health Plan loose. There's no guarantee of how well those "new" insurers will perform here, nor is there any guarantee that the companies will stay put once the recently signed network contracts expire a few years down the road.
Mr. Tomczyk, of Buck Consultants, said the UPMC Health Plan would be an important asset to have when -- or if -- the health care exchanges and other regulations related to last year's federal health care overhaul take full effect in 2014.
"Who knows what pressures are going to be on the [hospital] system, with reforms to Medicare and Medicaid. ... If they need cash, they may look at this as an opportunity to generate some" by selling the commercial health plan.
Another option: If UPMC goes through with its divorce with Highmark, steering policyholders to its new allies (and patients to its own hospitals), it could theoretically break the Highmark hold on the Pittsburgh commercial market.
Then, after the deals with Aetna, Cigna and the like expire in a few years, UPMC hospital system could lock those insurers out of its network, too, leaving UPMC Health Plan as the only game in town with access to its own hospitals.
"Jeff has made no secret that he wants it all," the former UPMC official said, speaking of UPMC's Mr. Romoff.
Such a situation would seem ripe for antitrust intervention from federal officials. But such an intervention might be avoided if UPMC Health Plan partnered with one of those national, for-profit players -- not an outright sale, but a co-managed company branded with the UPMC name.
That could give UPMC Health Plan access to a broader base of potential customers and to a national provider network its commercial health products currently lack, making it more attractive to companies with a multistate presence.
Others, including Jim McTiernan of Triad USA, a local brokerage, doubted that UPMC Health Plan could realistically squeeze Highmark out of the commercial policy game. All the more reason, he said, UPMC might decide that commercial policies aren't in its future.
"You always wonder, strategically: Does the health system really want the health plan?" he said. "It's a buyer's market ... it's a tough business to make money on. And if every other insurer here is going to have access [to UPMC], is it really part of their core business?"
Bill Toland: email@example.com or 412-263-2625.