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Adventist Health is pursuing a full-scale HMO license after initially seeking a partial license, determining it could better serve a portion of its rural patient base by offering a Medicare Advantage plan.

Earlier this year, the Roseville-based health system said a partial license could help it target so-called "dual-eligibles," or patients who qualify for both Medi-Cal and Medicare. But Adventist Health said it determined a full Knox-Keene license would be beneficial in three particular counties -- Mendocino, Tuolumne and Kings -- where there is little or no market penetration of Medicare Advantage HMOs.

"In some of our rural markets, there are not a lot of Medicare Advantage plans," said Jeff Conklin, vice president of payer and network strategies for Adventist Health. "Some of that is the nature of rural communities, and some of that is the HMOs have not gone to those areas."

In Mendocino County, where Adventist Health operates Ukiah Valley Medical Center and Frank R. Howard Memorial Hospital in Willits, along with a number of rural clinics, there are roughly 19,300 Medicare eligible residents. By contrast, there's only one Medicare Advantage HMO available, or about a 7 percent market penetration, according to the health system. The effort does not include Adventist Health operations in Napa and Lake counties.

The move to a full-scale HMO license is part of Adventist Health's efforts to address population health and managed care under the Affordable Care Act, which encourages greater integration and financial incentives for preventing readmission rates among Medicare patients.

"We believe we have to improve our skill set in managed care with our population, so moving into the HMO space helps us move into that journey," Mr. Conklin said. "If you think about what you have to do to run a good HMO, those are skills that are very compatible with the Affordable Care Act and providing care to patients."

The movement toward managed care may sound similar to the capitation days of the 1990's, but there are several key differences, Mr. Conklin said.

"In the'90s, it was primarily about revenue capture, and now I think it's more about successfully helping improve the health of populations. It's about new models of care to improve care under complex financial structures."

Under the Affordable Care Act, all hospitals will face a penalty in Medicare reimbursement rates if patient's readmission rates are too high, prompting hospitals to better coordinate with health plans and medical groups.

Adventist Health, which operates facilities in Vallejo, St. Helena, Clearlake and Mendocino, as well as an administrative center in Santa Rosa, filed its application with the state Department of Managed Health Care about a week ago.  Mr. Conklin said he expected approval for the three aforementioned counties within in the next six months. The health plan hopes to begin enrollment next October and to have plans take effect Jan. 1, 2015.

Across Mendocino, Toulumne and Kings counties, there's roughly 48,000 Medicare eligible residents. Adventist Health already operates hospitals and clinics in those counties, as well. Mr. Conklin said the strategy in Southern California would likely remain on the dual-eligibles with the restricted HMO license, which allows providers to contract with other HMOs in patient care, but not directly enroll or solicit patients into a health plan.

In the three counties where Adventist Health will operate the HMO, "we think Adventist can lead with a branded product,"Mr. Conklin said. "In the other markets, we think there's enough health plans and we want to work with them."

The Department of Managed Health Care requires approval in  each county for HMOs seeking expansion, in order to ensure proper network adequacy.

Sacramento-based Sutter Health, which operates numerous North Bay facilities, has similarly obtained a full HMO license and expects its health plan to be in effect by 2015.

Adventist Health's net income last year increased by 37 percent to $133.1 million, while total revenue reached $2.7 billion across its 19-hospital system that spans California, Oregon, Washington and Hawaii.  The health system attributed some of that profit to growth in rural health care, home care and hospice care.