In my last post, I explained what health coverage provider networks are and where they came from. In addition, I mentioned that they create a natural point of friction between providers (medical professionals) and payors (health coverage plans).
So why are they even considered a good idea these days? What problems do they actually solve?
In the current U.S. healthcare setup, provider networks provide a structure to solve some of its most foundational problems. They enable first-dollar coverage to exist; they help to stabilize medical costs; and they create an easily-accessed framework for coordinated care.
Without provider networks, first-dollar coverage would be very limited.
In the past, health coverage was true health insurance: it reimbursed patients after they had suffered a financial loss due to a medical condition. This required the member to pay the provider up front and then file the claim. Once filed, the claim would then be adjudicated and the deductibles and coinsurance subtracted from the amount the member paid. If there was anything left over — and there often wasn’t — the insurance company would then cut a check back to the member.
From a consumer standpoint, the problems with this setup are obvious. Since medical care can’t be easily predicted, consumers were often unexpectedly hit with, at best, having to “carry” bills of several hundred or even thousand dollars while waiting for a reimbursement that might come and might or might not be for the full amount spent. It’s impossible to budget around that sort of financial impact, and consumer behavior showed it: they often didn’t seek medical care until a problem had progressed to the point where it could no longer be ignored.
By using a network of primary-care providers, a health coverage plan can offer preventive services and routine checkups with the consumer only needing to front a small part of the bill, called a copay. Thus, consumers were more likely to get those preventive services and checkups (which tended to cost less overall), and a need for medical care was no longer the grave financial crisis it had been. This is an enormous benefit to consumers, and the popularity of first-dollar coverage is evidence of just how important that benefit is.
At the same time, from a provider standpoint, while the provider might have to accept a slightly lower reimbursement than they could get on the open market, they were exchanging that for a near-guaranteed payment that came not from the consumer, but from the carrier. This solved the problems of consumers who ran up huge medical bills, promised to pay, and never did (regardless of whether it was for a good reason). That made the providers’ cash flows more consistent, which meant they could afford to stay in business and keep treating patients.
It’s a win-win, and a big one that shouldn’t be ignored.
Provider networks stabilize medical costs and encourage competition.
This is best understood in terms of the economics of pricing pressure. If the payors have multiple providers in their networks, that gives them leverage at the negotiating table. Providers, in turn, are required to compete with each other not only for patients themselves, but for inclusion in networks that meaningfully drive volume.
That competition matters. In addition to creating downward pressure on prices — which carries a clear benefit to the consumer — it also gives providers more predictable revenue. The more patients a provider has, the more stable its cash flow becomes and that means the ability to add more treatment capacity, innovation, and additional investments in their practice.
Without provider networks and contracts, medical costs would be even more wildly divergent than they already are, and in some cases rates would be effectively unilateral, with little to no external constraint. Consumers would also be left needing to “shop around” for medical care at the very time they can least afford to do so — when care is urgently needed, information is incomplete, and delays can carry serious consequences.
By using provider networks, the health coverage plans have effectively already done that shopping on behalf of their members. Even better, the payor has already pre-negotiated payment terms with the participating provider(s). This helps keep their costs (and their members’ costs) more consistent and predictable, benefiting both parties. It also removes a major stressor at a time when consumers can be reasonably imagined to need all the help they can get.
Provider networks allow for coordination of care.
It’s not unusual for a single medical condition to require the work of more than one medical provider. Even something as simple as a broken bone can involve physicians, nurses, medical laboratories, X-ray technicians, physical therapists and durable medical equipment providers — all of whom provide vital services for the patient’s course of treatment.
Provider networks create a structure that allows those services to be coordinated rather than fragmented, which both reduces costs and improves medical outcomes. When providers are in the same network, there are established communication pathways, shared administrative processes, and uniform expectations about roles and follow-up requirements. Without provider networks, consumers could be faced with having to select individual providers on their own — providers who may or may not have the same systems, expectations, and understanding of each others’ roles.
A provider network, on the other hand, removes that administrative burden from the patient. Instead, treatment can be delivered using a team-based approach that lets the patient focus on recovery — the part where their energy and participation is most critical.
In Conclusion
Provider networks aren’t perfect, and in the next post, we’ll explore some of those pitfalls and problems. But before doing that, it’s important to understand that they solve real, fundamental problems in health care delivery and financing. Any systemic changes that remove provider networks must have plans in place to solve those same problems: enabling first-dollar coverage, stabilizing prices, and supporting care coordination. If they don’t, those burdens won’t disappear. Instead, the system will collapse, and everyone — consumers included — will pay the price.