The End of Networks?

Some healthcare experts are now predicting the end of regional payor networks—at least as we know them—in which providers grant discounts to commercial payors in return for guaranteed patient volumes. As unlikely as that idea may sound to hospital executives accustomed to tough negotiations with payors, it’s not as implausible as it might seem.

Power shift

Ubiquitous payor networks may gradually disappear over the coming decade as the pressure for transparency in healthcare forces providers to lure patients with better outcomes and value than their competitors. Such transparency, the thinking goes, allows some providers greater freedom to price their services closer to the way a free market might value them while offering less incentive to grant deep discounts to insurers, which would have less power over where their patients choose to go for care--at least “to the extent that market forces ever work in healthcare—they almost never do—but they might in this case,” says Richard Wade, senior vice president of communications with the American Hospital Association. “And the more these payors merge, we may get single-payor after all. The network may have a whole different meaning.” Such a scenario would be the flip-side of pay-for-performance, as physicians and hospitals bypass the middleman by contracting directly with employers and patients.

As it is, health insurers increasingly belie the “insurer” designation, taking on less and less risk—instead merging their way into becoming ever-larger intermediaries that can design complex incentive programs for self-insured employers.

Wade and others believe that as hospitals are able to demonstrate quality, they can increasingly demand better reimbursement—and get it. “Costs are what they are,” he says. “But by focusing on quality of care and demonstrating that quality, you can make a marginal difference for your hospital in growing volumes.”

But will payors, which have booked record earnings while passing along double-digit cost increases to employers and patients, go along with such a transformed system? “Absolutely,” says Patricia O’Brien, M.D., a healthcare consultant with DiamondCluster International Inc., in Chicago. “The third-party payor system is not their future.”

Transparency

What such a future marketplace might look like is still cloudy. But the premise hinges on the idea that patients will be increasingly willing, even eager, to travel for high-dollar, low-acuity care and that based on demonstrated quality metrics, employers and health insurers might even encourage it (see “Destination Medicine” in HealthLeaders, May 2006, p. 51). If it happens, performance-based reimbursement is in the short term likely to increase the gap between the haves and the have-nots among providers, says Stephen Neeleman, M.D., founder and CEO of Salt Lake City-based HealthEquity Inc., a consumer advocate and quality information source for members in regional insurers’ consumer-directed plans.

“The acute-care general hospitals that have to take all comers will have a hard time competing in this environment,” he says. “But there will have to be some subsidy for these folks.”

Such thinking assumes that when costs for care are widely available and searchable through Web-based engines, patients will gravitate toward the better performing organizations, which will have some pricing power for routine care or scheduled surgeries based on their quality and outcome scores. Such engines, driven by patient profiles that contain at least partial medical record information, will allow payors to morph into an advisory function for patients. Such engines are already in use for consumer-directed patients at large health plans like Humana Inc. and WellPoint Inc., through its Lumenos subsidiary.

Healthcare network pricing, by contrast, varies more widely by geography than quality. Prices for care in such networks are generally predicated more on state laws requiring certain services and the need to cross-subsidize generally money-losing payors and procedures—Medicaid and obstetrics, for example—with profitable procedures and payors such as commercial insurers and heart care.

“There are significant differences in costs from one region to another,” says Neeleman. “If you could put someone on an airplane to get their hernia fixed in a different part of the country, travel costs would be inconsequential.”

The weakest link

But patients can’t hop on a plane if they’re having a heart attack or stroke. The elephant in the room remains high-acuity and long-term care, which account for the majority of costs.

If hospitals return to billed charges, for example, and compete on low-acuity cases that are transitioning to outpatient status, will they raise high-acuity care to astronomical levels to cross-subsidize? “How effective will shopping be in the acute-care and long-term care situation?” asks DiamondCluster’s O’Brien. “That’s where 80 percent of our costs are.” For now, that’s an unanswerable question, she says, but the industry likely won’t have to wait long to find out. She cites projections from Forrester Research that consumer-driven plans will reach between 20 percent and 30 percent of the commercially insured marketplace by 2010.

Where patients really can make a choice, such as for elective orthopedic care and care for many types of cancers, shopping and traveling for cost and quality may be much more common, says the AHA’s Wade.

But smart hospital administrators and physician practice managers are starting to realize the power of posting data—and the more the better. “In the future there may be Web-based insurance plans that you can buy anywhere in the country that will specifically tell you that if you need elective general surgery or ophthalmology surgery or cardiac surgery, you would be given transportation and lodging for next of kin at some location in the country,” says Peter J. Plantes, M.D., vice president of clinical performance at VHA Inc., in Irving, Texas.

“Competing on quality is what will differentiate the hospital,” he says. “It will create more volume by presenting the hospital in light of publicly accepted transparent indicators of quality performance, so that either the consumer or corporate purchaser can be assured they can get a superior product.”

Philip Betbeze is finance editor with HealthLeaders. He can be reached at pbetbeze@healthleadersmedia.com.