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.

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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.

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