Provider Organization Narrow Network: Path to Savings?

Today’s Managing Health Care Costs Indicator is 30%

That’s how much CEO Ralph de la Torre has promised the new Steward Care health insurance product will save small employers. The narrow network health plan, which requires use of Steward hospitals and physicians in most instances,  is set to start enrolling members as of January 1, although it still requires Massachusetts Division of Insurance approval for this offering.

I’ve been skeptical of the promises of Cerberus Capital that it will reformulate the former Catholic hospital network here into a high quality low cost provider.    The for –profit company has not shed employees, promised unions it would respect existing contracts, has paid for expensive pension plans, and states that it’s also paid $80 million in taxes since the health system is no longer a nonprofit .  None of that helps lower the cost of health care.

Nonetheless, this promise to offer substantially lower premiums could be game changing in this market.    How could Steward offer so much lower rates in a sustainable manner?

  • Dramatically reengineer processes  Steward could remove extra steps and dramatically diminish waste in its system. The hospitals in this new network have long had lower reimbursement than some of their competitors, so they have had less to invest in technology and processes that increase cost.  However, to offer care for almost a third less will require substantial more work to prevent unnecessary ED visits and hospitalizations, and over time would probably require more use of non-physicians and better standardization to prevent expensive non-evidence-based care.  This is the approach that would most increase the total value of health care delivered.
  • Fill existing capacity Much health care has high fixed costs,  so the extra cost to take care of more patients might be a third or less of the full cost.  For instance, the resource cost to do an extra MRI scan when the machine is already on site and the staff are already paid is very small indeed.  Many of the Steward hospitals have historically had low occupancy rates – so this could be part of the strategy.  However, the elements of care that have the highest fixed costs (inpatient days, high cost imaging) are those that are generally overused already, so if Steward is increasing cost-effectiveness it could have even more spare capacity to fill.
  •  Risk selection.  It’s less expensive to take care of healthier patients, and it’s possible that those individuals and small businesses with substantial existing disease won’t feel comfortable with such a narrow network.  Hence, Steward will get more than its share of healthy members, effectively shifting cost to insurance plans that have a broader network. Many feel this is how HMOs appeared to save money in the early 1990s when they represented a minority of the market. 
  • Steward might not save enough money to sustain low rates.    The low-priced narrow network is an important strategic gambit –and it’s possible that Steward will initially offer very attractive rates, and will have to raise these substantially after suffering losses.  The 1990s saw a bevy of provider sponsored health plans that suffered bankruptcies and were unable to pay their bills – often because they were unable to deliver care for the low rates they promised.  The Division of Insurance should be certain that this plan is adequately capitalized so that it does not collect premiums and find itself unable to pay the bills.  That’s a challenge, because a health plan like this that goes wrong could lead to very disruptive hospital bankruptcies.

I’m hopeful that Steward will make this work through process improvement and filling existing capacity.  I expect there will be some element of risk selection that will help it out.   I worry that Steward won’t be able to sustain such dramatically lower rates.  

Posts last March on the for-profit Caritas conversion to Steward Health Care