The economic and strategic advantages of tiered network health plans
The Boston Globe ran an article this week on “Tiered health plans cutting costs, restricting options”. Tiered health plans, now offered by all of the local Managed Care Organizations (MCOs), are plans that stratify member cost-share by the providers used. The member generally pays a lower co-payment or deductible if they use a low-moderate cost healthcare facility that also meets a high quality benchmark. Conversely, a member would pay a higher co-payments and deductible for a high cost and/or lower quality healthcare facility. Based on a set of certain criteria – a controversial topic in and of itself – the insurance carrier determines which tier hospitals fall into. As you can imagine, it’s the teaching hospitals like Dana-Farber, Brigham and Women’s and Children’s Hospital that are in the higher price/quality category, while other area hospitals such as Faulkner and Winchester that are in the lower priced/quality category. Some plans vary all plan copayments by healthcare provider used while some plans vary only the inpatient hospital copayment by hospital used (arguably inpatient services are among the biggest healthcare expense). These are sophisticated health insurance products designed to save money by steering people into lower cost healthcare providers. If the insurance company is able to save money on a claim by paying a lower price for services, they are willing to pass this savings onto the consumer in the form of a lower cost-share requirement.
It is important to understand that insurers developed these products in response to a demand from customers for lower health insurance premiums and a way to slow the pace of inflation. Indeed, how long can we expect employer groups (and employees) to sustain double digit premium increases? Given that health insurance is a requirement for every resident of this state, soon to be the country, the outcry for cost-effective health insurance options has been loud and clear. Fairly new to the scene (though not necessarily unique in concept) these products are viewed in the marketplace as a consumer-driven option with a creative spin designed to allow members control their own outlay of cash. Tiered network products, offered in both PPO and HMO configurations, are currently priced at 10-15% lower than standard, non-tiered PPO and HMO products. On annual medical insurance premiums in excess of $4M (typical annual spend for a group of about 300 people) a 15% savings can equal up to a whopping $600,000!
Economically, and strategically, I see some advantages to health insurance products like this. Not only are there lower premium opportunities for consumers, but perhaps it isn’t such a bad thing to steer members to some of the lesser-known, but just as capable, hospitals in this area. It also puts a bit of pressure on some of the big name healthcare providers to be competitive from a pricing standpoint, which is one thing that is always missing in the equation, after all let’s not forget where healthcare expenses originate. Maybe a plan like this will motivate hospitals to cut costs so as to put themselves among the lower tiers which would equal a higher volume of patients. It might take a while, but I believe that this is the theory.
And while we can talk strategy, and the rationale for plans like these, none of it really matters when you read a story like the one about the McCarthy family in the Globe. Here is a consumer, enrolling in a health plan he may or may not fully understand, faced with certain adverse health circumstances and as a result of the parameters of the tiered network plan, he is forced to pay a very large out of pocket cost. I’m not sure that it’s the tiered network product that is at fault here as there have been many examples of uncovered healthcare expenses that are unanticipated by the consumer. For example, when staff model HMO plans first came out and members had a medical necessity for providers that were not affiliated with the HMO, the entire cost of the service would be borne by the consumer. Or in a PPO plan, the deductible and coinsurance for medically necessary non-network services can equal thousands of dollars in out of pocket expense, not to mention the new enrollee in a High Deductible Plan that has a catastrophic event on January 1st and must satisfy the entire deductible. It’s unfortunate and it happens.
While there really is no medical insurance product that is both perfect and affordable, what we can do, as employers, as consultants and as industry experts is to emphasize the importance of education when it comes to making a health plan choice. With webinars, conference calls, recorded presentations, podcasts, and Skype there is no excuse for a lack of education. It is unclear if the McCarthy family had a choice for a more liberal health plan, and if they did, it was probably unaffordable. So it then becomes a cost-benefit analysis that each and every consumer of healthcare must perform before electing a health plan for themselves and their dependents. If someone is electing a lower premium cost plan, 9 times out of 10 it is going to cost them more out of pocket if they get sick. Consumers need to truly understand what their exposure is and how they can hedge their bets for future healthcare expenses, for example, by setting the premium savings aside in an FSA account.
One thing for sure is that when you introduce a tiered network plan to your health care plan options, or perhaps it’s the only option, education on the product is essential. All of the premium savings in the world does not matter to a member when they are sick and need medical attention.
About the Author
Sara LaVallee is a Senior Vice President at WGA, where she focuses on full-scale service to large groups. Her role involves the handling of all lines of coverage in an account management and retention capacity.