The stage is set for Legacy Health and PacificSource Health Plans to become equal partners and start building their empire.
Insurance Commissioner Laura Cali has called for a public hearing March 28 on the their request to create a joint venture and a regional health plan known as Pacific Health Associates.
But, even before the hearing takes place, concerns are being raised about what the implications for consumers. “I’m not enthusiastic about a trend toward consolidation,” Jesse Ellis O’Brien, consumer advocate for the OSPIRG Foundation, told The Lund Report. “My feeling is if you’re going to get bigger you also have to get better.”
Under the agreement Legacy and PacificSource will be equal partners, with Legacy acquiring a 50 percent ownership in the insurance company after making a $100 million investment this year and 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 confidential documents given to The Lund Report, PacificSource indicated an optimistic financial forecast this year and expects revenue to climb by 6.5 percent with expenses only growing by 4.2 percent. This – at the same time -- most Oregon insurers are actually seeing expenses go up faster than revenue. PacificSource is also very 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 product, particularly in the Portland area and other markets where Legacy and PacificSource have a presence to broaden their impact and increase membership, the documents show.
Negotiations have been in discussion since late 2014 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 so PacificSource began looking elsewhere for a new partner.
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 now more primed to take the plunge.
At year’s end, PacificSource had 168,480 members, up 0.6 percent from 2014, and a net loss of $10.2 million, compared to a $16.9 million profit in 2014. Also, its hospital and medical costs went down by 8.8 percent, reaching $509.6 million.
Joint Venture
The planned joint venture between Legacy Health and PacificSource, made public in a Lund Report exclusive story, has roots in internal discussions launched at Legacy well over a year ago, documents reveal. Across hundreds of pages of plans, presentations and internal reports leaked to The Lund Report, officials at both companies mapped out their concerns and considerations in a fast-changing healthcare marketplace.
Meanwhile, PacificSource is predicting unprecedented profits for itself in the coming years, while Legacy that sees population health management as key to its future. The two companies believe that by working together they can each accomplish more than working alone.
Financial forecasts obtained by The Lund Report show that PacificSource expects profits to climb significantly in the coming years. But from 1999 through 2014, PacificSource has never before seen profits or growth that would match what it predicts for the next three years. Its net income has never topped $30 million – which it now expects to do within a few short years.
The Leaders Perspective
After The Lund Report broke the story about the new venture last fall, its leaders sat down with us to discuss their intent.
In that story, Dr. George Brown, Legacy’s CEO and president, said, “There’s a distinct advantages in creating an innovative health system,” adding that it fulfills the mission of the Triple Aim – improved the patient experience, achieve better outcomes and reduce costs.
This joint venture has been compared to the systems run by Kaiser Permanente and Providence Health Plans – as well as the new venture among Oregon Health & Science University, Salem Health, Tuality Healthcare and Moda Health – which will have all services under one roof – the providers, the hospital and insurance company – better known as integrated care.
When asked how non-integrated health plans such as Regence BlueCross BlueShield might fare under this transformed model, Brown insisted there’s room for both systems in this dynamic new marketplace.
Brown also dismissed the idea that Legacy was on the search to purchase hospitals in central Oregon, Idaho and Montana where PacificSource has an active presence.
“There are always opportunities but this isn’t one of our strategic objectives.” He does expect the purchase of Silverton Hospital to be wrapped up early next year, bringing Legacy to seven hospitals under its belt. Legacy also has under 500 employed physicians.
“This is an exciting opportunity to bring the two of us together and do something special for our members,” was how Ken Provencher, CEO and president of PacificSource, described the venture.
Provencher made it quite clear that he doesn’t anticipate any layoffs once the transaction is completed. “Our brand, our structure and our management will all stay the same in one place.”
Provencher said his reason to collaborate had nothing to do with not being asked to participate in the OHSU/Moda Health/Salem Health venture.
“We didn’t do this as a reaction to OHSU but as a forward looking initiative.”
Once the venture has gone through all the regulatory hoops and ladders, PacificSource doesn’t expect to have a role in Health Share, the tri-county coordination care organization of which Brown is a founding member.
Diane can be reached at [email protected].
