Momentum has been gathering behind alternative provider network offerings, especially tiered networks as local employers seek relief from rising premiums while still wanting to maintain a broad range of options. Earlier this month, the Connecticut legislature sent to the state governor’s desk a healthcare bill that encourages cost transparency and the development of tiered health insurance networks.
This follows a study released in April by the Commonwealth Fund that concluded tiered hospital networks could potentially offer great savings for employers. Here, Oliver Wyman’s Tomas Mikuckis, Julia Ivanova, and Lucy X. Liu explore the challenges, trends, and potential innovations that underlie tiered provider network solutions:
As of 2012, most major commercial health plans and 20 percent of employers offered a tiered provider network product. Compared to narrow networks, tiered networks include a far broader set of in-network providers, and increased cost-sharing for non-preferred providers. Tiered networks rely on two principal levers to generate savings:
- Provider performance savings when more members are steered to preferred providers with greater cost efficiency
- Benefit (cost share) savings through an accompanying tiered benefit design, where savings are created by greater cost sharing and lower consumption of services from non-preferred providers
Marketed products are using these levers in different ways to support their price points today. (See chart above). Despite the increasing prevalence of these products, it remains challenging to generate savings from a tiered network. The inherent design forces a see-saw effect between provider performance savings and benefit savings. As more members seek lower cost sharing and migrate to preferred providers, the plan loses out on benefit savings. Both drivers have natural limitations in most markets.
Provider performance savings rely on the ability to create a large cost spread between provider tiers, which depend at a minimum on:
- The types of providers tiered: Within a given region, professional costs typically are not terribly divergent. However, there are markets where the provider performance spread is large enough to make the math work. In the right market, there will be a greater difference between provider unit cost and utilization (particularly among hospitals), and greater willingness to provide steep discounts to attract more volume.
- The breadth of the top tier: In order to make the network attractive to the market, the top tier cannot be too narrow. This means that from the outset, the product is likely to already contain half of the members in the top tier – leaving only the other half to contribute to either of the two principal savings drivers (see chart below).
Benefit savings rely on a cost share differential that is large enough to steer most members to preferred providers, but creates savings when members are subjected to the higher cost share. This driver has traditionally been limited by employers wary of excessively “penalizing” employees for using non-preferred providers. Attitudes are starting to change, as employers grow increasingly comfortable with shifting cost and responsibility to the consumer. The acceptance of higher deductibles and larger differences in cost share levels, is raising the ceiling on what benefits savings are achievable.
For health plans, this tailwind means that in markets where the provider spread is too small to support the requisite savings, a large cost-share differential can make up for what’s lacking in provider performance, at least in the near-term. In the long-term, if the top tier does not sufficiently outperform the rest, the product is merely shifting costs to the member. One direction some plans have taken to ensure that the top tier achieves sustained improvement is to weave in value-based healthcare constructs into the tiering design by tiering providers on total cost of care, for example, or on participation in Accountable Care Organizations.
In upcoming blog posts, we will examine why different approaches are being taken to design tiered networks in different markets, and also look at how health plans are using value-based design elements to create sustained market change in provider behavior and consumer engagement.