Long before Legacy Health announced its partnership with PacificSource Health Plans, the hospital system took a hard look at other affiliations. CareOregon along with Corvallis-based Samaritan Health Services were among the leading contenders, according to documents leaked to The Lund Report. It’s unknown whether Legacy executives actually met with their representatives before signing an agreement with PacificSource.
A strategic collaboration committee organized by Legacy considered several criteria for choosing a partner:
- Alignment – whether the health plan fits its vision, mission and commitment to value-based care,
- Cultural Fit – executive team fit, productive working relationship and similar organizational style,
- Speed to Partnership – decisive leadership able to move swiftly to capture unique infrastructure,
- Experience and Performance – high performing team supported by quality infrastructure,
- Exclusivity – amenable to long-term deal (10+years) with Legacy as an equitable partner,
- Portland commitment – Knowledge of local market needs and commitment to serving the Portland community, and
- Potential – the likelihood of an equitable partnership.
Legacy ruled out Samaritan because it would have been challenging to work with its CEO, Larry Mullins, and large board of directors, while CareOregon showed little if no interest in developing a commercial enterprise and had a limited infrastructure, the documents show.
Regence BlueCross BlueShield made the running but lost out because of its unwillingness to have an exclusive relationship in the Portland area, while Moda Health’s close ties with Oregon Health & Science University made it an unlikely contender. Legacy officials also questioned Moda’s long-term viability.
And, national payers such as United Health, Aetna, Humanaq and Cigna were rejected because they lacked interest in a true equity partnership at a local/regional level.
PacificSource fit the bill because Legacy would have access to its scalable infrastructure, the opportunity to build a statewide health plan, and the health plan’s strong motivation to grow in Portland.
In 2014, PacificSource had $193 million in equity from Medicare and commercial plans and had already developed a regional plan in Idaho and Montana. Another key factor: the majority of PacificSource members in the Portland area relied on the Managed HealthCare Network owned by Legacy and Adventist Health, a network of close to 5,000 physicians and other professionals.
Once Legacy and PacificSource agreed to work together, they retained Alton Health Advisors, LLC, paying the firm $75,000 to prepare an evaluation about the proposed transaction and a financial forecast including future capital requirements.
Since then, Legacy and PacificSource have filed legal documents with the Oregon Insurance Division, and are awaiting approval.
Together, they intend to build a world-class brand, and become a stronger competitor to Kaiser and Providence, the leading health plans in the Portland area. The contracts with the public employees and teachers are also on their radar, better known as the Public Employees Benefit Board and Oregon Educators Benefit Board. For a deep look inside those negotiations, click here. Another article shows the forecasts and assumptions that are critical to the partnership.
Behind the Partnership
Legacy and PacificSource will be equal partners under the agreement. Legacy will acquire a 50 percent ownership in PacificSource after initially making a $100 million investment in 2016 and contribute another $150 million in $30 million installments over the next five years, while PacificSource is valued at $250 million and has another $50 million in appraised property. The capital contributions from Legacy will boost PacificSource’s financial health at a time when many insurance companies are seeing their capital get depleted.
According to the documents provided to The Lund Report by a confidential source, PacificSource put forth an optimistic financial forecast in which revenue would climb 6.5 percent in 2016 while expenses would only grow by 4.2 percent - even though most insurers in the state are actually seeing expenses go up faster than revenue. The company is also well capitalized and has five times the regulatory minimum in reserve.
By teaming up with Legacy, which operates five hospitals in the Portland metropolitan area, PacificSource, has a bold opportunity to control costs with a fixed provider network similar to Kaiser Permanente and Providence Health Plans and have an integrated system of care
PacificSource will also benefit from Legacy’s hospital in southwest Washington and the soon-to-be acquired Silverton Hospital. The system employs about 10,000 staff members, and is the second-largest system in the Portland metro area, after the Providence Health System.
The two partners also intend to create new insurance products next year, particularly in the Portland area and other markets where Legacy has a presence to broaden their impact and increase membership, the documents show.
Before the transaction is completed, PacificSource intends to reorganize itself as a membership organization to become tax-free or tax-deferred for federal income tax purposes.
A new nonprofit public benefit corporation will be created, comprised of 15 board members, with six selected from each organization and the remainder chosen by member designees. Physicians will have four seats on that board, along with Legacy employees and community members chosen by both Legacy and PacificSource. The new board will be responsible for strategic plans, acquisitions up to $50 million in value, capital and operating budgets and board members will be evaluated on an established performance process, according to the confidential documents..
Negotiations have been in discussion since last December after a deal between PacificSource and Providence Health Plans crumbled. Providence had attempted to purchase the Eugene-based health plan but its physicians balked, fearing they would lose too much autonomy, and PacificSource began looking elsewhere for a new partner.
The leadership teams from both organizations have been engaged in due diligence, business planning and development for several months, and the definitive agreement is expected to come before the Legacy board of directors on Nov. 18.
Currently, PacificSource participates in commercial, Medicare Advantage and Medicaid in Oregon and earlier announced plans to broaden its product offerings to Idaho and Montana. Together with Legacy, it’s more primed to take the plunge.
PacificSource had 157,012 members enrolled in its plans on June 30 – an 11.3 percent drop from a year earlier. And it seems as though the loss of 19,966 members likely contributed to the company’s $6.3 million first-half of 2015 net loss. With fewer members, premiums dropped at the insurance company, to $282.6 million in the first half of this year, down by 11.3 percent or $35.9 million.
PacificSource did what it could to restrain spending. Its hospital and medical costs were $246.2 million, $27.9 million less in the first half of this year than the first six months of 2014. Claims adjustment expenses were $11 million, down $1.05 million. General administrative expenses were $40.8 million, down $3.1 million.
The cuts weren’t enough to make up for lower revenue, yet PacificSource had $25.7 million in cash on hand and $153.7 million in capital, and expects to be solidly profitable by the end of the year.
Diane can be reached at [email protected].
