Three decades ago, Boston’s community health centers banded together to launch Neighborhood Health Plan, a new insurer for the city’s poor and working-class residents. It grew to become the largest plan in the state for low-income adults and children covered by Medicaid.
Now, after ringing up more than $300 million in operating losses in the past three years, Neighborhood Health is making a major shift. The Somerville-based company is shrinking its Medicaid membership and pushing aggressively into the more lucrative business of selling health insurance to employers.
Of Neighborhood’s more than 435,000 members last year, 65 percent were on Medicaid. For the first time, the company, owned by the large health network Partners HealthCare, is saying it wants to cut that ratio to less than half, and expand so that commercial business accounts for the bulk of its revenue. Executives say changes are necessary to restore financial stability as the company tries to navigate the tumultuous health care market.
“If we don’t make this transformation, we feel our 30-year mission of providing equitable care to diverse populations is at risk,” Neighborhood Health’s chief executive, David Segal, said in an interview.
The new strategy underscores the financial challenges many organizations face in serving the poor, and is a precursor of bigger changes to come next year when the state restructures the Medicaid program — known here as MassHealth — into new networks that will be charged with managing the care of their patients. MassHealth is a joint state-federal funded program, covering about 1.9 million Massachusetts residents.
Segal said that the insurer remains committed to the low-income population.
“We may be smaller in MassHealth,” he said, “but we’re still going to be there with lots of energy and enthusiasm.”
Neighborhood Health’s losses have dragged down earnings at the usually profitable Partners, the state’s biggest network of hospitals and doctors. Last fall, Neighborhood stopped taking new MassHealth members, an unusual step that the insurer now says will stay in place through the end of 2017.
Meanwhile, it has ramped up advertising and hired new executives to sell its coverage to small and large employers, competing directly with the state’s three biggest commercial insurers: Blue Cross Blue Shield of Massachusetts, Harvard Pilgrim Health Care, and Tufts Health Plan.
Neighborhood has grown briskly since it was acquired in 2012 by Partners, whose hospitals include Massachusetts General and Brigham and Women’s in Boston. As other MassHealth insurers took steps to cut high-priced hospitals out of their networks — including those owned by Partners — Neighborhood Health became even more attractive to many patients. The sharp rise in membership, coupled with the launch of expensive new medicines and higher spending on hospital care, caused financial losses, according to Neighborhood executives.
That led the company to freeze enrollment for MassHealth patients as part of a “corrective action plan” developed with state health officials. The insurer also was asked to rework several of its contracts with hospitals, which officials said were “significantly higher” than the benchmark rate. So far, Neighborhood Health said it has renegotiated seven contracts, but still has five to go.
“NHP has made progress controlling total medical expenses while focusing on high-quality care, however, it has continued to experience material losses,” MassHealth spokeswoman Sharon Torgerson said in an e-mail. “This temporary enrollment freeze is part of an affirmative corrective action plan that is intended to assist NHP as it develops a sustainable strategy to control costs and to comply with all provisions of their MassHealth contract.”
The changes at Neighborhood come as Governor Charlie Baker’s administration works to restructure MassHealth into a program that includes several different networks called accountable care organizations, or ACOs. These groups of physicians and hospitals, set to launch next year, will seek to keep patients in their networks and coordinate care with a goal of avoiding unnecessary hospital stays and other expensive services. The organizations will be rewarded when they stay under budget and penalized when they go over.
As these networks take shape, Neighborhood Health expects to lose MassHealth members. For example, patients who currently see doctors at several community health centers are set to become part of a new accountable care organization that includes those health centers, and Neighborhood said it will end its MassHealth business with those facilities.
‘It really does push the question of what is Partners’ strategy here?’
Some insurance companies are teaming up with health care providers to run several of these ACOs. Neighborhood Health applied to participate in just one network, affiliated with Greater Lawrence Family Health Center and Lawrence General Hospital.
John E. McDonough, professor at the Harvard T. H. Chan School of Public Health, who was a state representative at the time of Neighborhood’s founding, said he was surprised to see the company retrenching on MassHealth.
“This is a pretty big departure [from the company’s earlier strategy],” McDonough said. “It’s an interesting evolution, and it really does push the question of what is Partners’ strategy here?”
Neighborhood Health’s restructuring plan also included cutting about 5 percent of the company’s workforce of 625, including nurses and other clinical workers. It was the first layoff in at least nine years, when Segal joined the company.
Meanwhile, Neighborhood has hired several new executives to help increase its base of premium-paying commercial customers. They include a chief medical officer who came from Blue Cross, and a chief financial officer and senior vice president of sales with experience at Harvard Pilgrim.
Neighborhood is targeting price-sensitive employers looking for affordable coverage for their workers. State data show the company added more members than any other Massachusetts insurer between September 2015 and September 2016. Its commercial business represents about 3.6 percent of the market.
“If you looked at the financial strain, . . . some of this was necessitated by that instability financially,” said James W. Hunt Jr., president of the Massachusetts League of Community Health Centers and a longtime member of Neighborhood’s board. “Hopefully, they’ll become a stronger player in the days going forward.”Priyanka Dayal McCluskey can be reached at priyanka.mccluskey
@globe.com. Follow her on Twitter @priyanka_dayal.