In the past few months, I’ve spent a lot of bits and bytes talking about current trends in provider contract negotiations. I don’t have any indication of stopping, but now that the huge December 31 deadline has passed, it’s worth considering: what’s the deal, anyway? Why do we even have provider networks?
It’s a good question, and the answer to that requires starting with background information.
What’s a provider network in health insurance?
Many of the various regulatory bodies have a fairly specific definition of provider network, including HHS, CMS (PDF Link), NAIC, and the Kaiser Family Foundation. Synthesizing these various sources together gives us a good solid working definition:
A provider network is a group of healthcare providers — doctors, hospitals, clinics, allied health specialists, and other facilities — that contract with a health insurance plan to deliver services to the health plan’s members. As a part of that contract, the providers agree to provide their services to these members at negotiated, discounted rates. In return, health insurers “drive” patients to these providers by providing incentives for members to use them.
The most frequent incentive that insurers use to steer their members toward network providers is simple: better coverage and lower costs within the provider network.
Unfortunately, this reality is often framed negatively, with a statement that care received outside the provider network has coverage limitations and restrictions. The truth is that this setup can also be interpreted in a positive manner: coverage received from network providers tends to have fewer restrictions and carries a lower out-of-pocket cost.
Either way, the net effect to the consumer — that’s you! — is that care received from network providers is usually more comprehensive and costs less.
Aren’t networks a relatively new concept, originating in the 1970s?
No, actually. They’ve been a part of health coverage plans from the very start.
The first provider network was arguably a part of what is commonly accepted as the precursor to modern health coverage in the United States, the 1929 Baylor Plan. This “prepaid hospital” plan, which was offered to a group of teachers in Dallas, Texas, provided up to 21 days of hospital care for a fixed monthly fee. However, services under the Baylor plan had to be provided by Baylor University Hospital and its affiliates. Services received at other hospitals were not covered.
Thus, according to Health Insurance, Second Edition (p.7), this private health coverage plan was a PPO:
In today’s terms, we might think of the original Baylor single-hospital plan as a preferred provider organization. Subscribers had hospital coverage but only if they used the single hospital in the network. This gave consumers a financial incentive to choose one hospital over another. In fact, other hospitals in the Dallas area soon developed their own hospital service benefit plans.
The idea that networks originated in the 1970s is a common misconception, based on the fact that it was the 1970s when the passage and implementation of the Health Maintenance Organization Act passed, prompting the “rise of managed care” in the United States. Before the rise of managed care, most — but, as we’ve seen, not all — health coverage plans were indemnity plans. They reimbursed the member for what they actually paid to the provider, after application of guidelines such as a deductible and coinsurance, much in the same way that other insurance policies still work now.
As managed care began to become more common, the indemnity model transitioned over to the copayment model that was part of the HMO, PPO, and later POS and EPO plans. In this model, the plan pays the provider directly based on the services rendered. Rather than fronting the money and then filing for reimbursement, members were able to simply make a (much lower) copay at time of service.
This approach, often called first-dollar coverage, made managed care plans very attractive to consumers. It also, in theory, incentivized them to visit providers sooner when a medical problem occurs. That’s a good thing, because early intervention is known to reduce medical costs, both in terms of dollars and in terms of human suffering.
What were the effects of the rise in provider network contracts?
The challenge inherent in provider network contracts is that they significantly and directly affect how medical services are priced. Before the advent of provider contracting as a norm, providers could simply charge whatever they deemed appropriate, given current market conditions. Adding a provider network into the mix changed that by giving providers a choice: either they accepted the lower network contract rates, or they lost patients due to higher out-of-pocket costs.
Adding to the problem was the fact that consumers reacted very negatively to balance billing of the difference between the contracted rates and the providers’ preferred rate. In other words, provider networks naturally create conflicts between providers and payors.
As such, the prevalence of provider networks has waxed and waned over time. Today, however, we are at a point where they are critically important: per the HealthInsurance.org link above, 99% of people in the U.S. who are enrolled in health coverage are enrolled in a plan that includes a provider network.
There are a number of alternative approaches that have been tried in the past, and even more that have been proposed or are being tried now. What’s important to understand, though, is that the problem isn’t new, and neither is the current setup.
In the next post, I’ll talk about the impact of provider networks in today’s landscape, and how they actually solve as many problems as they create. We’ll also take more steps toward the bottom line: what all this means for you when you actually need care.