June 25, 2015

The medical insurance industry is changing, and returning to some old tactics

Ever since the HMO Act passed in 1973, insurance companies have been competing for contracts with health providers of all kinds, including general practitioners, specialists, diagnostic testing centers and hospitals. In the ensuing years, preferred provider organizations (PPOs) – which deliver favored pricing to an insurance company – have dominated the health care and health insurance landscape.

The idea behind a PPO is to offer preferred pricing to the carrier that drives members to a preferred health care provider, and the patient receives a discount or pays a smaller share of the cost for the visit. The insurance carrier pays the negotiated rate to the provider.

While this all seems well and good, I’ve been noticing an alarming trend among employers lately: employers’ in-network participation is nearing 100 percent, meaning almost all of their employees’ and their dependents’ claims are in-network. So, while employers are receiving the benefit of the contract rate, if almost all providers are “in-network,” then the value of being “preferred” is diminished. It’s like going to a store and finding a 25 percent off sale on everything, permanently; it completely eliminates the benefit that comes along with receiving a discount.

This begs the question, what does this mean for employers who pay for the insurance? And, what does it mean for the employees paying their share of the premiums? I see three trends that will move the needle in this space.

The new preferred network

First, well aware of the dilution of “preferred” status, insurers and large employers are back at the negotiating table with providers having a new conversation. But, this time they are armed with data – lots of data.

One of the most critical issues is quality of outcomes from episodes of care. That is, how quickly does the patient get better, with what complications, and at what total cost? It stands to reason that quicker recovery yields overall lower costs, even if individual provider unit costs are more. It is this data that carriers and employers are using to create what I call the “New Preferred.”

Employers can expect to see offers of smaller networks from carriers, where inclusion is based on the quality of outcomes. Ultimately, this will be better for patients because it will increase their quality of care and quality of life. It will take some work to change the frame of mind of employers who believe that a larger network is more beneficial, but in the end, better quality of care lends itself to less illness, minimizing the necessity of frequent care and reducing costs.

Referenced-based pricing

Employers have been turning to reference-based health pricing to help improve quality of care and reduce costs. Reference-based pricing allows a carrier to place a cap on the amount they will cover for certain medical procedures and services that have wide cost variations, encouraging consumers to shop around for health care and value. If the charges are far above the “referenced-based cost,” the excess will be paid by the patient. Employees will need access, training, and encouragement to avail themselves of the best tools for determining price and value. However, it’s difficult to determine the true quality of health care, as many consumers’ criteria comes down to the providers’ attitude and manner, which is not a gauge of professionalism and expertise.

Accountable Care Organizations (ACO)

Accountable Care Organizations (ACOs) are organizations of health care providers that agree to be accountable for the quality, cost, and overall care of a group or population. The ACO is provided a set dollar amount to “treat the patient.” If the myriad providers involved in a course of treatment agree about how to share the revenue, and it results in lower costs, the ACO shares in the savings. If more care is delivered and there are cost overruns, the ACO is on the risk for shortcomings. This approach places a very high value on quality, with significant oversight.


Employers of all size will be hearing about new – and not so new –approaches to providing benefits to their employees. The Preferred Provider concept born some 40 years ago is experiencing iteration, pricing of medical care is now compared among service providers, and the idea of paying for outcomes is becoming mainstream.

We need to take care to be sure we help our employees understand, and especially appreciate, what is happening and why it is best for them, too!

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