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Network management: Why major change is on the way

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  By Jim Evans, VP, financial and network performance, McKesson Health Solutions, October 8, 2012

Jim Evans In recent years, network management has been somewhat overlooked as a function and considered more administrative than strategic. With healthcare reform, however, value-based networks of select providers (e.g., high-performing or tiered networks) are becoming essential for delivering better quality care while also driving down costs and supporting advanced reimbursement and delivery options.

Accordingly, network management is returning to prominence as a core function that helps a health plan differentiate itself from the competition and deliver on its competitive strategy. In this new way of doing business, network management will also serve as the nexus point at which providers and payers partner to coordinate around products, care delivery models and payment approaches.

In this three-part series, we’ll look at what forces are driving the need to reexamine the function, what technology infrastructure will be necessary for providers and payers to meet the challenges of reform, and how an integrated approach to network management can transform cost and operational efficiencies to help establish a significant competitive advantage.

The rise and fall and rise of a function 

As a function, network management has waxed and waned in focus and importance depending on how healthcare has been delivered. Its advent was linked to the introduction of managed care. Health management organizations (HMOs) required patients to select a primary care physician, who would, with the support of the network management team, help that patient navigate the wider system of available providers. Basic network management functions included selecting and recruiting providers and then communicating and strictly monitoring adherence to utilization, referral and other care delivery rules.

A decade later, when preferred provider organizations (PPOs) became dominant, the role of the network management function was to ensure that the health plan offered whatever coverage was necessary to be competitive in a given market. The network itself was essentially an aggregation of provider data rather than any integrated system. Choice was far more important than cost, “any willing provider” was included in the network, and coordination was minimal. Indeed, a given network of providers could even be leased across multiple plans.

Such broad networks may provide adequate coverage, but they do a poor job of managing the cost, quality and access pressures we now confront.

Four disruptions

Today, most health plans rely on network management as a means of fulfilling their PPO product portfolio. However, a series of market disruptions will soon force major changes in the way payers manage networks and the way providers participate in them.

The first disruption is from new models of care delivery, such as patient-centered medical homes (PCMHs) and accountable care organizations (ACOs), which becoming increasingly common. The goal is to deliver higher quality care, but achieving that goal requires tighter, more selective networks, with more coordination between providers and stricter adherence to care protocols.

The second disruption comes from advanced reimbursement models, such as episodes of care or pay for performance. Health plans are experimenting with small groups of providers to test new approaches, and those strategies will never be rolled out to an entire PPO network since the variability of quality and approach inherent in a loose network would make the risk of the proposition untenable. If such strategies are to succeed at scale, tighter networks will again be necessary.

The third disruption is demand from plan sponsors, both large and small, for new products and benefit designs. As value-based insurance design becomes more prevalent, tailored products and tiered networks are exploding in the market. The appeal is not only the promise of better outcomes for members at a lower cost for plan sponsors. Plans can more readily demonstrate value to their clients, and those clients in turn can more easily communicate value to those who use the products.                                                      

The fourth and arguably most important disruption is imminent. Health insurance exchanges (HIXs) must be certified and operational by January 1, 2014. Although many organizations are dithering on whether or not they will participate, the reality is that a market of 50 million new customers (arriving through Medicare and HIXs) cannot be ignored. Major plans will need to participate in exchanges to remain competitive, and even niche or regional players will see significant opportunity for financial gain.

Health plans are already highly skilled at managing at-risk business and have many tools needed to participate in the new market. As we’ll see, however, better network management will be fundamental to their success.

The healthcare consumer: another worry, or a new opportunity?

To gain business, health plans must be able to clearly articulate their competitive differentiation to customers in the government or in the employer space based on product, price or the provider network, or some combination of the three. With the advent of the exchange (HIX), many employers are expected to forgo group-sponsored health insurance because paying the employer penalty instead is often cheaper than their premium contribution. This will result in an influx of consumers on the exchange.

Consumers often view their out-of-pocket expenses and payroll deductions as the cost of healthcare because for years the true cost has been hidden with employer-sponsored health insurance; however, in many cases employers cover up to 80% of the premium. Once they start shopping on the exchange, customers will face sticker shock. This makes it all the more important for health plans, which have traditionally had a B2B focus, to deliver their value propositions in a way that educates consumers.

How well will those individual consumers understand the value proposition they are selecting? The benefits and limitations will need to be sold to consumers in a very different language. Moreover, if those products aren’t transparent, or if consumers are poorly informed about what they are gaining or giving up, a backlash will be inevitable. Imagine a patient walking into the same clinic he or she has used for years, expecting to see a specific doctor and being refused; or receiving the same care as always, but at a much higher price. Plans may change, but priorities remain.

A health plan will tailor products to meet consumers’ varying concerns, based largely on some trade-off between choice and cost. Low-cost coverage will restrict what services are available, which providers can be accessed, and how quickly care can be obtained. Premium care with few restrictions will be more expensive.

However, a health plan that plays the consumer game well may win greater market share and more good will by meeting or exceeding expectations. Consider the market for automobile insurance now dominated by former niche players like GEICO, founded to provide insurance to government employees before moving into the larger direct-to-consumer market. Attracting customers on the premise of a quick turnaround on plans that offer low-cost coverage, GEICO retains its market hold through the excellence of its customer service and the quality of its network of assessors and auto body shops.

Health plans may well need to connect with consumers through gimmicky advertisements, too. The longer-term challenge, however, will be whether they can deliver on their promises.

If you build it, will they stay?

A consumer-driven health insurance market will not be as stable and static as an employer- or government-driven one. Individuals will be quicker to drop out, move on or change options. Such churn will seriously impact the profitability of any plan or provider organization because most of the investment in an individual patient occurs at the front end. Assessments, screenings and initial treatments are necessary to meet a baseline of health status that can then be managed more cost effectively over the long term. Healthcare premiums are built around the premise that a health plan will make money if a member remains enrolled for at least three years. If patients leave early, plans will bleed money.

The viability of a health plan product will be based on customer satisfaction. What services are being offered, how they are priced, and how well that value proposition gets communicated will all be critical to achieving satisfaction. However, the ability to deliver on the value proposition will be based on the integrity of the network providing the services.

This fundamental shift will require health plans to treat network management as an essential, strategic function that supports a product framework. It will also contribute significantly to a new relationship between payers and providers. “Any willing provider” will no longer be a tenable proposition for a network. Payers will need to be highly selective about the providers they bring into a network that has been designed to provide specific products at strategic cost levels.

For similar reasons, providers will want to be more selective about the networks they join and the plans they participate in. Any decision around changing networks or signing on to deliver a new value proposition will have real ramifications. Will the current patient base be retained? Will an influx of new patients lead to improved revenues? How will the providers’ own values and preferred care delivery approaches be affected? How much of an investment in new tools and administrative processes will be necessary? Providers will have many strategic questions to consider.

Under the PPO framework, the relationship between providers and payers has been largely transactional and administrative. Going forward, providers and payers will need to work closely in a real partnership to develop and support a seamless alignment between product, care model and payment approach. This kind of coordination is simply not possible without a significant upgrade in the network management function.

In the second part of this three-part series, we’ll examine the changes that will be necessary to give the network management function the basic capacity to support new care delivery models, new consumers and new reimbursement approaches.


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