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

Part One  Part Two  Part Three  

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Health Care Cost Containment in Massachusetts

 The battle continues to be sure that close-to-universal health care doesn’t break the state budget and the budget of small businesses –and there have been three interesting developments over the past week.

1. The state Division of Insurance, which rejected proposed rate increases for dozens of small group policies, is playing hardball.  It threatened fines if health plans did not return to writing small group and individual policies at 2009 rates – and a judge rejected the health plans’ request for an injunction.   Most of the health plans have complied – although Harvard Pilgrim and Fallon  again submitted rates higher than the state wants (stating that other policies with these rate increases had been approved earlier in the year.   

The DOI is in a bind – if it is successful at forcing these lower rates on the health plans, they will lose substantial amounts of money – and the DOI’s other job is to be sure the health plans are adequately capitalized so there is no risk they will collect premium revenue and not be around to pay for related claims.   The health plans are in a bind, because they’ve negotiated multi-year deals that lock in their unit costs in fee for service contracts – so they’ll need lower utilization and/or concessions from providers on unit price to make this sustainable.

2. Partners (Mass General, Brigham and Womens and others) announced that it would give insurers rebates of a total of $40 million  this year to support selectively lowering rates for small business.   Interestingly, Children’s Hospital did something similar – announcing a price rollback in exchange for some up-front payment to build infrastructure, in fall, 2009.   Other hospitals  are figuring out their next steps – Partners and Childrens are both paid rates higher than other providers – so these rebates probably still don’t level the playing field, and it will be hard for the lower-paid facilities to match this.

3. State Senate President Therese Murray  outlined her plan to control health care costs, with initiatives including

·         Insurers would gain approval of their proposed rate increases as long as they pledged  to have “medical loss ratios” of at least 90%.  This means that 90 cents of every dollar would go to paying medical claims – the other 10% would include all administration costs including marketing and profit  (or reserves for nonprofits).

·         Allowing insurers to change rates based on age (rather than 5 year age group), which will mean no huge rate increases when someone turns 50, for instance).  Also, allowing insurers to increase base rate if necessary to prevent a “rate shock” to a specific subgroup

·         Annual enrollment (to prevent people from coming into the insurance system for an elective procedure, and then leaving again)

·         Prohibiting those eligible for employer plans from entering the individual market (to avoid adverse risk selection)

·         High risk reinsurance pool

·         Require narrow network products with lower cost. 

·         Give a 5% discount to employers who establish a wellness program

·         Ask for $100 million in contributions from providers in good financial shape

·         Establishing a purchasing coalition for small groups through the Connector

·         Review all mandated benefits every four years

In my opinion, the most important effort here is the narrow network option.   This has the potential to substantially lower unit cost – in part because narrow networks encourage providers to compete on price (There is no reason for providers to try to deliver a lower price to an all-inclusive network, as they maintain very high leverage when every health plan needs every provider).  The Globe today  offers some evidence that narrow networks are starting to gather some momentum.

Avoiding adverse risk selection is critical (article in tomorrow’s NYTimes shows what happens if the healthy opt out of  purchasing insurance.)  Therefore, it’s important to require an  annual enrollment only, as well as to guard against employers sending a few sick individuals into the small group market.

Small businesses overestimate the savings they’ll get from group purchasing – the larger groups are less expensive because there are genuinely lower administrative expenses for insurers to enroll 25,000 covered lives all at once, rather than as 1000 separate 25 person companies, and because there is less opportunity for adverse selection in a large company than with multiple small companies.  I did a more complete review of the reasons why small companies pay more in Fall, 2009. 

Wellness programs are not likely to save 5% in the first year or more when they are implemented. Therefore, a mandate to offer small businesses with wellness programs a 5% discount will raise the cost of health insurance for all.  It’s not a bad idea – and might lead to better, healthier lives.   However, this is not going to help us control health care costs over the next 1-3 years.

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Proposed Health Care Bill in Massachusetts Would Regulate Price Increases - Not Prices

The Massachusetts governor filed a wide-ranging bill  last week which would further regulate the small group and individual insurance market in the state, while encouraging selective networks and reducing state mandates. Health care provisions represent 6 1/2 pages of the bill, which is entitled  “An Act Providing for Job Creation by Small Businesses.”

The proposed legislation doesn’t regulate prices – it regulates price increases by both health plans and providers.  Therefore, this bill would likely prolong the current situation, where different provider networks are paid vastly different sums for the same care.  The bill will not address the problems outlined in the Attorney General’s report on pricing in the commonwealth.  

One interesting provision would mandate that small group plans offer narrow network plans with lower premiums.  This could substantially increase competition, since health plans currently lack leverage to press for lower prices as long as every health plan must include all providers. However, the bill only requires these narrow networks for individual and small business accounts, although they could be made available to other health plan clients.

The bill also extends a moratorium on new mandates and gives plans for individuals and small businesses a very narrow window to ignore current state mandates. 

Overall – this bill might give the state a bully pulpit to discourage increased prices from providers and health plans.  It will not address large price disparities, and is not likely to substantially lower overall health care costs.  The state legislature is generally unlikely to pass the health care elements of this proposed bill without substantial revisions.

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