Legacy, PacificSource Teaming up to Create New Regional Venture

The leaders of the two organizations met recently with Oregon Insurance Commissioner Laura Cali to discuss their plans.

Legacy Health and PacificSource Health Plans are engaged in active discussions to create a new venture known as PacificSource Affiliates, according to documents leaked to The Lund Report. The two organizations intend to create a strong community-based not-for-profit regional health plan.

Leaders from the two organizations -- Dr. George Brown, president and CEO of Legacy Health -- and Ken Provencher, CEO and president of PacificSource – met recently with Laura Cali, Oregon’s Insurance Commissioner, to discuss their new venture.

Legacy is not being acquired by PacificSource, and is not expected to lose its charity and tax-exempt status.

Legacy and PacificSource will be equal partners under the agreement discussed with Cali. 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].

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