Monday, February 16, 2009

The Network of the Future

Today, most people who are covered by a commercial health insurance plan get their care from some kind of a “network” established by the plan. If they select a healthcare provider that’s included in the network, they pay less for care than if they select a provider outside the network. But they generally pay the same price for care inside the network, no matter which provider they pick, even if that provider’s costs are higher than another’s.

As a result, it’s up to the health plan to keep costs down by negotiating with providers about the price they will accept to be included in the network. As in any negotiation, success depends heavily on the ability to walk away from a negotiation. Small providers rarely feel that they can walk away no matter what a plan demands. And that leads to pressures for small providers to consolidate or organize themselves to increase their negotiating power.

However, because most consumers like to have maximum choice of providers, health plans also seek to make their networks as broad as possible. As a result, the plans’ ability to walk away from the negotiation is diminished, and consequently their ability to hold costs down through this method is also diminished.

This has led to a desire to make networks narrower, in order to create stronger negotiating pressure. Indeed, there have been recommendations that Medicare should be authorized to estabish a network like a commercial plan and to extract even greater price concessions from providers for being included.

The phrase “we need to think outside the box” was invented for situations just like this. As long as people perceive that the only way to organize healthcare is for payers to create networks of providers that consumers will use, it will be impossible to ever find a solution to the “broad access” vs. “cost control” tradeoff.

A completely different paradigm is needed, and fortunately, it’s already been tried and it works. Let providers form networks, and let consumers choose between them based on cost and quality. The Patient Choice system in Minnesota has done this — providers organize themselves into care systems (they don’t have to be formal integrated systems under a single corporate ownership). The care systems define their prices for providing comprehensive care to consumers, and the consumers pay more if they use a higher-price system. Consumers have complete freedom as to which care system they use – they’re not constrained to choose from a subset selected by the plan. Consumers pay more if they use systems with lower value, but it’s not because the provider is in or out of a plan’s network, it’s because that provider is part of a system that has decided to charge more. Importantly, care systems function more like true coordinated systems of care with a focus on managing cost and quality, whereas current “networks” are little more than lists of uncoordinated providers. Providers organize themselves into systems to do a better job of managing costs and quality, rather than to increase their negotiating power with health plans.

It’s hard to imagine how Medicare would ever be able to establish a network in the way commercial health plans currently do. But it’s not hard to imagine how Medicare could create a Patient Choice-style system. It would simply ask Medicare providers to form networks/care systems and “bid” to provide Medicare services, i.e., define the price that they will charge for caring for beneficiaries. Medicare wouldn’t select the winning bidder — the Medicare beneficiary would. Lower-price networks/care systems with equivalent quality would get more Medicare beneficiaries as patients, which would encourage the providers in the other networks to become more efficient so they could lower their costs. It’s worked in Minnesota with much smaller patient volume — imagine the impact if Medicare were to participate.

It may sound radical, but it’s not all that different from the Medicare Advantage program, where beneficiaries choose a health plan based on its cost and quality, and the health plan then contracts with providers to deliver the care. The Patient Choice model uses the existing fee-for-service structure for both billing and payment, which makes it easy for providers to participate.