Narrow networks. Nice idea but no panacea

In Health Insurers Get Tough on Hospital Prices, the Wall Street Journal reports that health plans and employers are using narrower provider networks to negotiate lower prices with hospitals. The idea is that hospitals should be willing to make concessions when that gives them the opportunity to exclude their competitors from a health plan’s network.

No doubt this approach works, at least up to a point. Aetna is excited enough about the idea to brag about it at a recent conference. Apparently the company is even bringing its employer customers along to hospital negotiations to show it isn’t bluffing.

But the approach isn’t as productive or sustainable as it sounds. First of all, we’ve been here before. There were plenty of narrow network HMO products offered in the early 1990s. Patients didn’t like it, especially when the network changed from year to year as the employer changed health plans or the plan changed its network (partly when those providers who’d provided concessions decided they’d had enough).

Second, when providers (hospitals or physicians) cut pricing to one health plan it has little to no impact on their overall costs. Providers look to maintain or increase their incomes by doing more procedures, upcoding, or sticking it to somebody else –like commercially insured patients from other health plans.

Third, narrow networks mean more patients go out of network, whether due to necessity or choice. Out-of-network providers can generally still get paid by the health plans, and can charge more or less whatever they want. See yesterday’s post (Entering the murky world of out-of-network charges) for more.

Fourth, narrow networks involve more than just hospitals. It has to encompass physicians, labs, etc. And that means a patient can go to an in-network hospital and end up with high charges from out-of-network specialists. Good luck keeping track of network status when you’re recovering from surgery!

Fifth, national health plans and employers talk a tough game, but when it comes right down to it they aren’t that powerful in local markets. Sure, there are a few company towns where a GE or IBM facility drives the health care market. But in most places the biggest employers are governments, universities and, (this is funny), hospitals themselves! That doesn’t even account for the biggest payers of all: Medicare and Medicaid. So Aetna coming to the table with a big employer isn’t as big of a deal as it sounds. (On the other hand there are markets where Blue Cross Blue Shield plans are dominant enough to matter.)

Sixth, providers have tools other than price to stay in network if they want. As noted in the article, the Tenet hospital chain has national scale. If Aetna wants to exclude a specific Tenet hospital from a local provider network, Tenet can cause trouble in another market. In many markets there are just a few big, consolidated provider groups. They have high market share and brand equity and can’t easily be excluded. My hometown of Boston is a prime example. In places where competition exists now, expect a sustained trend toward narrow networks to impel those providers to consolidate.

September 15, 2010

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