Tuesday, 12 May 2015 05:28

Exchange and Narrow Network Dominance: Market Implications for Healthcare Providers

Written by R. Todd Stockard

Enrollment in health insurance exchanges is surging with profound strategic and financial implications for hospitals and health systems.

More than 12 million Americans purchased insurance on public health exchanges this year, while as many as six million selected benefits through private exchanges offered by their employers. This new method of purchasing health coverage is fueling cost transparency, with consumers being more heavily influenced by price than access to care. Health plans are recognizing and responding to this by building narrow networks, and as a result, some higher-cost providers are facing market exclusion.  

My advice to hospitals and physicians? Join or create a unified contracting entity and then work to become the lowest-cost, highest-quality network in your region. Experience tells us that the first healthcare providers in a market to form such affiliations tend to gain strategic advantages while laggards may lose ground in a variety of ways.

The scope of market changes

Just three years ago, public exchanges were an experiment from the Patient Protection and Affordable Care Act’s (PPACA’s) playbook. Now, these marketplaces have become a staple of our nation’s healthcare landscape, and they will continue to play a significant role. Assuming that the PPACA’s subsidies on federally operated exchanges withstand a test before the U.S. Supreme Court, public exchange enrollment will continue to grow in the coming years. Meanwhile, most major market surveys predict that 20 to 33 percent of employers will adopt private exchanges by 2017.

Data indicates that exchange shoppers gravitate towards the lowest-cost plans. Indeed, on public exchanges, 85 percent of shoppers picked bronze or silver plans – those with the lowest monthly premiums. On private exchanges, employees tend to select high-deductible, low-premium plans. 

Because health insurers must compete on price, and the PPACA requires all health plans to offer the same 10 essential benefits, carriers are turning to provider contracting as a mechanism to reduce costs. Many of the lowest-cost plans today offer a limited choice of doctors and hospitals with no sacrifice of quality.

This shift towards narrow networks puts unaffiliated, higher-cost healthcare institutions – such as academic medical centers, pediatric hospitals, and specialty cancer or rehabilitation treatment centers – at risk of market exclusion. Unaffiliated community hospitals are also under pressure in competitive markets. 

As an example from late 2013, only one of the insurance providers offering plans through the state of Washington’s exchange included the Seattle Cancer Care Alliance, and only three insurers included Seattle Children’s Hospital in their plans. Prestigious institutions such as UCLA Medical Center and Cedars-Sinai Medical Center in Los Angeles, Northwestern Memorial Hospital in Chicago, and Vanderbilt University Medical Center in Nashville also have been excluded by all but a few plans within their respective region’s local exchanges.

The solution lies in integration

Eighteen months ago, a leading health system executive predicted in a Modern Healthcare article that “narrow networks, coupled with PPO, POS, or HMO-style benefits, will encourage health system differentiation in terms of overall value, and … this over time may favor those who deliver superior health outcomes, service experience, and affordability.”

I couldn’t agree more. The first step for standalone institutions, though, is to unite with complementary providers in a single contracting entity. The organization could be a clinically integrated network, an accountable care organization (ACO), or simply a physician-hospital organization. Regardless of structure, the entity needs relationships with primary care physicians and outpatient care facilities. Furthermore, network leaders must commit, through a shared governance structure, to lowering costs and improving outcomes. Finally, it is best that the organization has at least one contract that directs funding into its model of coordinated care. Contracting entities make the soundest decisions for their communities when dollars actually follow care coordination and quality enhancement designs.

Once established, such an entity could agree to share risk with insurers, enter into an exclusive relationship with a large employer, and/or position itself as the provider of choice to exchange-sold plans.

Physicians and hospitals who are first in their market to join such networks gain the advantage of experience. They learn how to share revenue and information, drive improvement, govern collectively, and keep referrals in-network. First-time movers can also capture public, health plan, and employer attention as the leading integrated brand with a new approach to delivering value. Finally, iterative years in this contracting model provide crucial pricing information for future value-based contract negotiations. 

Hospitals that resist joining coordinated contracting entities will lose the opportunity to learn how to eliminate waste from the health system and forgo the experience of guiding patient behavior and governing jointly with physicians. In future contracting talks, they are also much more likely to become price-quality takers, not price-quality makers.

About the Author

As co-founder and chief operating officer of Valence Health,Todd Stockard works with providers to develop and implement better patient care strategies, focusing on the development of clinical and financial driven data models for managing provider-sponsored risk entities. Mr. Stockard has more than 20 years of healthcare financial and data management experience. He holds a Bachelor of Arts degree in economics from Princeton University, and in 2010 he and Philip Kamp, CEO of Valence Health, were selected for induction into the 2010 Chicago Area Entrepreneurship Hall of Fame.

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