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The return of narrow networks has been blamed largely on the Affordable Care Act (ACA). But the trend, similar to health maintenance organizations, re-appeared before the creation of the ACA’s health insurance exchanges. Physicians must learn how to cope with this movement and decide when it makes financial sense to be included in narrow network plans.
Narrow networks occur, in part, because of the nation’s reliance on market forces to mold industries. In other areas, consumers welcome these forces.
“The attempt to limit suppliers that provide a product isn’t new or unique to healthcare,” says David Blumenthal, MD, president of The Commonwealth Fund. “The ultimate example of that is Wal-mart, which beats up its suppliers to get the best prices to sell cheaply to customers.”
In retail, a price-for-volume discount is readily accepted. Consumers want their money to stretch, but in healthcare “it gives us the jitters,” Blumenthal says.
Patients want lower premiums, but they also want experimental treatments if they are diagnosed with a rare condition. “We want the market in abstract, but not in fact, in healthcare,” he says.
The ACA didn’t create narrow networks, but it has increased their prevalence. Experts say these plans are here to stay, and physicians and regulators are working to ensure they don’t stymie contracts, access and physician reimbursements.
According to a report by McKinsey & Company, almost half of the plans offered in the 2014 state health care exchanges had narrow networks. These plans typically lower costs: almost 70% of the lowest-priced products on the exchanges are narrow network or tiered plans.
The ACA has ratcheted up the pressure to reduce costs, in part because it has left payers with few options for keeping the costs of their plans down. Insurers can no longer reduce benefits beyond a certain point or cherry-pick healthy patients to keep premiums low.
In addition, consumers can compare plans in a true apples-to-apples fashion for the first time. McKinsey found that price is an important consideration for consumers. In simulations of the exchange purchasing experience, McKinsey found that 65% of consumers chose less-expensive plans with narrow or tiered providers in bronze and silver-tier plans. Even in the gold and platinum tiers, almost one-quarter of consumers picked lower-cost, narrow networks.
The private market and exchanges, where narrow networks are more prevalent, include a relatively small portion of most providers’ patients. Currently about 16 million get health insurance coverage there, though McKinsey estimates that could increase to as many as 36 million by 2019.
Expansive provider networks have been a hallmark of employer-sponsored plans, and that hasn’t changed dramatically, says Alexander Domaszewicz, MBA, a principal and senior consultant with Mercer Healthcare Consultants. But that could be changing.
For many years, employers focused on reducing costs, under the theory that if employees are healthy they will need less care.
Recently, however, some employers have begun to look at the provider side of the equation and experiment with reducing costs through on-site clinics and telemedicine, and by steering employees toward less-expensive providers.
“They are taking a much harder line on where they send folks,” Domaszewicz says. “Narrow and tiered networks play into that.”
He estimates that between 15% and 20% of employers are using narrower networks. The trend is more prevalent among larger employers, and where demographics allow it to occur.
“I think that having access to basically any doctor or hospital … the price tag for that is going to ultimately be too high for most employers to offer and we are going to see more narrowing of PPO [preferred provider organization] networks,” says Gerald Kominski, PhD, director of the UCLA Center for Health Policy Research.
When providers are excluded from insurance networks, it raises concerns that patients will have to change doctors or travel long distances to obtain care. But Kominski says narrow networks may not affect all of a given market.
Patients who need basic, high-volume medical care-physician visits and hospitalization for routine events like gallbladder surgery-ultimately will adapt to narrower networks. It will be the patients with rare conditions or those that may benefit from experimental treatment that will have difficulty accessing these services when providers are cut from their plans.
Some providers have begun taking steps against narrowing networks. Seattle Children’s Hospital filed suit against Washington state’s insurance regulator for approving too many plans that did not include it in their networks. Hospitals in Kentucky filed complaints with the state’s insurance commissioner over provider exclusions from that state’s exchange plans in 2013.
The Centers for Medicare & Medicaid Services (CMS) took notice of the narrow networks trend and updates its requirements for plans on the state’s exchanges annually. For 2016, CMS will require payers to include at least 30% of the essential community providers in an area on their exchange plans. In addition, they must submit detailed provider data for their networks and have a provider directory available to patients.
According to the National Conference of State Legislators, 27 states have ‘any willing provider’ laws on their books, including one passed by South Dakota in late 2014.
Regulators in states such as Pennsylvania, Maine, New Hampshire and Washington have banned insurers from switching customers to narrow network plans or selling plans deemed too narrow on their exchanges.
The issue has been especially controversial in California, where two lawsuits were filed late last year against Cigna and Blue Shield of California-one by community advocates and another by the organization Community Watchdog. Both claimed providers misrepresented the number of doctors in their plans. In 2014 a class-action suit was filed against Anthem in California for allegedly misrepresenting its network sizes.
In a 2014 study by the Medical Group Management Association, 80% of responding physicians were taking part in insurance exchange plans. With narrow networks not abating, it will be important for providers to understand where to draw the line with these contracts.
A payer’s goal is to increase the volume of patients offered to providers so that the payer can negotiate for lower reimbursements.
But physicians have to be careful not to set a precedent of participating in contracts with reimbursements that are too low. The McKinsey report offers ways providers can estimate whether narrow network contracts are worth lower margins.
Providers need to know their break-even price and volume levels before coming to the negotiating table. Factors to consider include: market dynamics, enrollment numbers, the demographics of the population buying coverage, projected utilization rates and patients’ appetite for narrow networks, says Noam Bauman, MBA, a partner at McKinsey.
Smaller practices will need to focus on their internal performance. including panel needs, profitability drivers and growth aspirations.
“Are they really going to see a lift in volume?” Bauman asks. “There is a much more limited pool of volume at play than figures would suggest … partially because there may be more of a shift in coverage as opposed to new coverage (on the exchanges).”
For example, Bauman says, about 16 million people purchase insurance on the individual market, or about 5% of the U.S. population. If about 70% of consumers in that group are buying narrow plans, that means about 3% of the total population is in these networks.
Narrow networks are no friend to most providers. In markets with an oversupply of hospitals or physicians, insurers likely will be able to narrow their networks and raise prices. “It’s like having four gas stations on the same corner,” Blumenthal says.
But in some markets providers might not have to take lower reimbursements. Providers with either reputation or market dominance may be able to maintain or even negotiate higher reimbursements.
“Ritz Carlton or Mercedes can charge higher prices because they have a brand value that justifies a higher price to the consumer,” Blumenthal notes. “It might be the same for a local community hospital if there is no competitor.”
For providers lacking market power, keeping reimbursements up will be more difficult, but not necessarily impossible. Some viable options for doing so include performance improvements or alternative payments.
James Caillouette, MD, is chief strategy officer of Hoag Orthopedic Institute, a practice that includes a hospital, two surgery centers and two large orthopedic groups in southern California. It is an area accustomed to working in a system with the narrowest of networks-Kaiser Permanente-that he says accounts for one quarter to one half of the region’s patients.
Caillouette says Hoag Orthopedic has been proactive about anticipating market change and was, in part, created because its physicians recognized that they would need size and leverage to compete successfully in the industry.
In anticipation of the passage of the ACA, the providers joined together with their community hospital to create a joint venture in which orthopedists and a surgery center shared equal ownership and risk. They participated in bundled payment models early on, and have been part of bundled pilot projects.
“We actually go to payers now and talk to them about putting different payment type of models together for their patients,” Caillouette says
Hoag’s owners also understand the need for value. Instead of hospitalizing patients receiving total hip replacements or back surgery, these procedures now are conducted in ambulatory care centers.
“We take that to the payer community and say, ‘You can do this in a hospital, or you can do it safely in a different setting and it will cost 20% less,’” Caillouette says. “We work with payers where we feel we could be vulnerable in the future to educate them on what we are doing and why we can bring value to them.”