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Cutting out the middleman: Hospital goes into insurance biz

Like most small-business owners, Mike Perivolaris is always looking to control costs at his Long Island, N.Y., kitchen remodeling company. With fewer than 50 employees, he's not required to offer health benefits under the Affordable Care Act, but he thinks it gives him an advantage in hiring.

"We target people that are stable, family people who expect at this point, you know, that the insurance is going to be taken care of by their employer," said the president of Marcos Kitchen & Bath Installations.

Facing a 20 percent increase from his old insurance carrier this year, Perivolaris' broker suggested he try a new plan, from a brand-new insurer tied to one of the area's biggest hospitals, North Shore-Long Island Jewish Health System. He decided to gamble on the upstart, because its rate was $10,000 cheaper, and its network would allow his staff to keep the doctors who were on their old plan.

(Read more: Obamacare 'not a bad thing' says hospital chief)

"The people that accept this insurance seem to be the doctors that they already had. So, it seemed natural," Perivolaris said.

"That's the secret sauce behind who we are," said Alan Murray, CEO of North Shore-LIJ's new CareConnect health insurance unit.

Alan Murray, North Shore-LIJ CareConnect CEO at the company's headquarters in East Hills, N.Y.
Bertha Coombs | CNBC
Alan Murray, North Shore-LIJ CareConnect CEO at the company's headquarters in East Hills, N.Y.

While this is North Shore-LIJ's first foray into the insurance business, its health system is well-known not only on Long Island, but in parts of New York City, which it also serves. That name recognition has helped the upstart insurer compete against larger well-established carriers on New York state's health insurance exchange, despite its limited network.

"We are not a United Healthcare. We are not an Empire Blue Cross Blue Shield. We have a very narrow network," said Murray. "But it's a highly intense, interactive network. So, what you trade in choice, we hope you make up for in simplicity."

(Read more: CVS kicks the habit, dropping tobacco products)

CareConnect is a separate division of North Shore-LIJ, but its relationship allows it to structure its payment model with the health provider in a more integrated way than outside insurers. The hope is that both sides can profit, by cutting out the middleman, and the patient will get better care.

"I agree ahead of time and will spend X number of dollars on health care, and it's up to them to work with us to figure out the most efficient and best place for that health care to take place. So that they're not trying to fight for every penny," Murray explained, "We're trying to fight for the best outcome for the member."

If they get it right, they'll join the ranks of Kaiser Permanente in California and Geisinger Health System in Pennsylvania. They are among the nation's most highly regarded hospital systems known for holding down costs through integrated insurance coverage and health care. But it's not easy.

A number of hospital systems got into the business of insurance back in the '90s when HMOs were popular. Most found it hard to manage the financial risks involved in managing an insurance plan. But analysts say this time hospitals may have better tools to help them make it work.

"Since we've moved through the 2000s and into the current day, the data capabilities are much greater, and many hospitals are much more closely aligned with their physicians than they had been in the past, " said Lisa Martin, senior vice president at Moody's. "But there certainly are still those risks that were present back in the '90s."

One risk for North Shore-LIJ's CareConnect is that it may have priced its premiums too low. As a new insurer, it doesn't have historical data on how much medical care its members typically use. And under the ACA, insurers can no longer charge higher premiums for those with pre-existing conditions who may need more medical care.

(Read more: WellPoint says exchange enrollment ahead of plan)

While an insurance plan can help boost revenue at a time when insurers are pushing back at hospitals on reimbursement rates, it can also backfire because it puts the hospital in direct competition with other insurers.

"That really changes the dynamics of that relationship. So if it's not managed well," explained Martin, "in an extreme case that can result in a termination of that relationship, and the hospital can lose patients."

At this point CareConnect's CEO is optimistic about managing the insurance side of the business, after having exceeded early enrollment expectations.

"We thought that we would probably have 3,000 to 4,000 individual members—of which, 50 to 60 percent of them would actually pay the bill," said Murray. "We've had almost double that—on and off the exchange."

Mike Perivolaris has written the check for his company's premium, and he's hopeful his gamble on the new insurer will pay off.

"We try new things every day," he said. "We're business owners. So, we have to be a little bit daring sometimes to make good decisions."

—By CNBC's Bertha Coombs. Follow her on Twitter @berthacoombs.

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