The Narrowing of the Network

The concept of restrictive (oh let’s call them euphemistically “narrowed”) networks has for decades been the third rail of healthcare. Ask Hillary Clinton, who put her foot on that third rail in the 1990’s while attempting to reform healthcare. In the same vein, HMOs in the 90’s also tried to restrict networks, resulting in vicious backlashes.

One of those backlashes was the enactment in many states of so-called “any willing provider” or “freedom of choice” legislation. At last look, some 27 states still have a form of such legislation on their books. Most credible studies show that such laws increase the cost of healthcare.

Moreover, the ability of insurers to remove physicians from their network in many states is severely restricted by so called “fair hearing” legislation that makes the pain of achieving physician expulsion worse than the pain of leaving under performing physicians in network.

We understand that when a physician cries “foul” against an insurer, public sentiment will favor the physician, and over the years, it certainly has been  reflected in this and other legislative attempts to tie insurers’ hands.  After all, no one wants to go to the prom with a health insurer.

As a result of this and other phenomina, there has been the highly chronicled swoop toward mediocrity in the delivery of healthcare in the United States. And insurers have certainly contributed here. Up to now, insurers have paid physicians using the fee for service payment method. This method merely requires physicians to demonstrate that they performed a function, at which point they are paid at an amount that does not vary regardless of quality or outcome. This is a completely volume driven environment with predictable results.

And worse. With some exceptions, seasoned, high quality physicians (e.g., cardiac surgeons) are paid the same formula driven fee as the very worst, or the very newest. What other profession is paid in this fashion, and what does it say for our value judgment regarding the quality of physician care and outcomes? Not much.

We have had a health insurance cost crisis since, well, forever. The environment for rate hearings back in the early 80’s was toxic. I recall one of my first rate hearings in RI for that state’s Blue Medigap program in 1984 which attracted hundreds of seniors to a local auditorium in Providence. One such senior’s testimony, after being sworn in, consisted of the following, and I quote: “Piggy, piggy, piggy.” And then he sat down. It had the merit of brevity and directness.

It was a crisis then, and it is an even worse crisis today. The only relief has been that the government under Obamacare is paying for more and more of it for the financially-challenged. But that’s not a solution.

Health insurers are excoriated about the cost of coverage. And yet any time they try to do something the least bit disruptive (meaning effective), they are excoriated again. Pre-existing condition clauses, a perfectly valid underwriting tool, have gone down in flames. [Yes there were abuses, but you don’t throw the baby out with the bathwater.] Likewise, pre-authorization is met with howls of anger by the physician and patient communities (bean counters getting between me and my doctor). And it goes on. Regulators and the public demand that insurers “do something.”

Yet, at every turn, attempts at that “something” are resisted by all players.

So what exactly is an insurer to do today to reduce the costs of care?  As I’ve said many times before, ten percent of the cost of insurance/coverage(it can vary) constitutes  insurers’ admin charges and almost ninety percent constitutes claims expense. To put a real lasting dent in costs, we must reduce claims expense. There is no way around that.

Claims expense consists of price and use, price being the fee and use being the rate of use of services. In recent years, fee increases have moderated, but use increases continue at alarming rates.

So, with the tacit encouragement of Obamacare, insurers are again dipping their toes into the waters of narrowed networks, particularly on the exchanges. After all, there are few other remaining tools available for them to reduce claims costs. And the evidence is that more and more insurers are again forming narrowed networks in the non exchange environment.

Are narrowed networks bad or good? What is their likely future? Why can’t I see any physician I want, and particularly one who is reputed to be the rock star of surgeons? If a hospital or physician is very expensive, doesn’t that prove high quality? Doesn’t the recommendation of my aunt count for anything in this day and age?

Well, it is common knowledge that healthcare economics are “different.” They are in fact counter-intuitive as noted in a recent Rand review:

“Most studies have found that the association between cost and quality is small to moderate, regardless of whether the direction is positive or negative.”

The Dartmouth and other studies demonstrate that there is almost no relationship between the cost or volume of care and quality/outcome results.

Further, as David Dranove (Northwestern University Kellogg School of Business professor) and others have written:

“… these plans [narrowed networks] may provide our best opportunity for harnessing market forces to lower prices. Even high priced providers know they stand a good chance of being in broad networks. But insurers offering narrow networks can be picky about which providers they select.”

One of the real difficulties of narrowed networks is the scarcity of accepted/accurate quality and outcomes data kept on each individual physician.  Without such data, excluded physicians can well complain of unfairness, and building a narrowed network solely based on lower cost (lower fees) inspires no one’s confidence.  No one wants their healthcare done on the cheap.

I suggest that the use of quality and outcomes data is the only way to fairly measure and compensate physicians and build narrowed networks. But once we have such data, it becomes the bedrock core qualifier for inclusion and exclusion. And of course costs come into play and are another critical component of a narrowed network. Our out of control costs are the single biggest threat to the availability of healthcare. We have to, simply have to, get our arms around costs.

As I said earlier, the costs are predominantly the claims expense consisting of fees and rate of use. Of course the fees matter, and of course a narrowed network will negotiate reduced fees in exchange for increased patient volume (note, I did not say increased claims per patient volume). And IF the quality and outcomes are better, further cost reductions must follow on the use side, in the old fashioned, slower way of reducing costs by making people healthier.

So why can’t you see the best doctor on the East Coast if you want to, even if she is outside of the network? Of course you always can, but you will come out of pocket for either a large portion or all of her fee–impractical. But, assuming she IS the best, she likely is outside the network either because her cost is exorbitant or she has not asked your insurer to be included. That latter item can be rectified, but it will take some time and the willingness of the doctor to apply.

People have shown a remarkable willingness to pay more for freedom of choice rather than a narrowed networks. Yet, are they are spending their money wisely IF the narrowed networks are limited to high quality and better outcome docs? I’d have to say no.

Let us make a leap of faith that the “scoring” of  doctors on quality of care and outcomes, and costs, is fair and appropriate. In such a circumstance, if a doctor is excluded from a narrowed network because of his scores, what will his most likely response be (besides consulting his lawyer)? It will be to move heaven and earth to improve his scores so that he can be included. A good thing given our assumption that the scores are based on appropriate and accepted measures. And what if we don’t have appropriate and accepted measures? For God’s sake let’s get on that.

Fundamentally, narrowed networks with adequate access (numbers and time) based on quality of care and outcomes primarily, and costs secondarily, ARE a good thing and start us on the path of recognizing and rewarding quality and  outcomes, and over time getting our arms around costs.

Moreover, once Accountable Care Organizations  are fully operational in the commercial (non Medicare/Medicaid) markets, they too will have narrowed networks so that they will be willing and able to be held accountable for their cohort population’s quality of care, outcomes, and cost of care.

Bottom line: IF narrowed networks are based on provable high quality and better outcomes, and to some extent cost, and if such networks lower claims costs and thereby the cost of purchasing healthcare coverage, it is hard to maintain righteous outrage about that.  Given the prohibitive cost of anything approaching “full coverage” today, narrowed networks will be much more common in the future.  And perhaps accepted.

Oh, and never listen to your aunt about doctor choices.


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7 replies »

  1. And is that a bad thing? Shouldn’t patients be “compliant” if you will, or pay the consequences? Why do we give patients a pass on this one? The real question is whether doctors will be permitted to avoid such patients.

  2. Thanks for commenting. IF I follow you correctly, I agree. IF we primarily measure doctors on outcomes, then the doctors are free to do as they wish, entrepreneurially or not. It’s just outcomes that count. I really wish there didn’t have to be ANY measuring, but I’m at a loss of what else to do to get out of this quagmire.

  3. Good points John. First, narrow networks in the past have been virtually entirely about driving a cost advantage competitively. Understandable, but as I did note, not something that inspires confidence. A narrowed network that truly is based on quality should inspire confidence, and also sends a signal to the patient that the narrowing is not all about the insurer. On your other issue, while that shouldn’t be a problem any more with on line listings (vs. paper), I agree it has been a problem. I always worry about consumer backlash absent a VERY good explanation about how the narrow network is better for the patient not only in price but also for quality and outcomes.

  4. When doctor’s outcomes will hinge on the patient’s compliance and cooperation, doctors may start to avoid patients with multiple problems or those that don’t “fall in line”.

  5. Well, if you want the seller to be the insurer and for the seller to compete, and for docs to simply be input factors of production, go for it. However, if you want the seller to be the provider-doctor and you want him/her to compete with each other, then you need to review Econ 101 with “many sellers-many buyers” free-market admonition. .

    In the long run, I dont think we would be happy with docs simply as factors of production. We need their innovation and creativity too much, especially now when the molecular future bekons. We and the insurers and plans need their entreprenuership to continue to advance scientifically. If all docs are input factors, the whole enterprize freezes.

  6. Here are my question/s:

    A lot of my doctor friends would argue that narrow networks are less about quality than they are about developing a competitive position in regional markets and playing local doctor + hospital politics. What would you tell them?

    For their part, a lot of patients are really upset about the networks. For one thing, updating network listings seems to be a real problem for many insurers. Has the industry done a good job of explaining the situation to customers? Do you worry about consumer backlash, given the HMO debacle?

  7. Excellent piece. I concur that narrow networks have potential to be a competition-based solution to high/excessive costs, and agree that hinges on how they are constructed and how payment is structured. The big risk is that it’s a lot easier to build them now based primarily on contracted price/cost…with quality and performance coming into serious play many years down the road. That has to be watched really closely.