Choose 2: Healthcare costs and choices

There are three competing choices in the American healthcare system.

• Reasonable costs
• Unlimited choices
• Quality care

At best this is a one plus one of two choice scenario.  You can have reasonable costs and quality care by restricting choices, you can have quality care and unlimited choices.  It is very hard to have reasonable costs and unlimited choices.  In unlucky or isolated areas, the actual choice set may be restricted to unlimited choices that are severely constrained because there is no other choice within a 3 hour drive at high costs and low quality.

Insurers try to break this straitjacket.  One way is to use tiered networks.  Another method is to use carve out contracting.

A tiered network splits the baby.  Instead of categorizing providers as either in-network or out of network, providers are grouped into three or more buckets.  The first bucket has the lowest deductible and best cost-sharing.  These are preferred providers.  They offer either the lowest contract price to the insurer or the best value (quality and price) to the insurer.  Good tiered networks are valued based, bad tiered networks are pricing based.  A second tier of providers will often get paid standard commercial rates.  They are still in network, but the deductible and cost-sharing might be twice as much as the preferred band.  And then the rest of the providers in the country are out of network and treated no differently in a tiered network than a standard.

The preferred tier can be very narrow but the standard in-network tier gives a cushion to people who need unusual treatment with reasonable cost certainty.  From the point of view of a sick individual, tiered networks are usually better than a super narrow network.

The other approach is to use carve-out contracting.  Carve-out contracting is usually used for hospitals.  An insurer will sign a contract with a hospital for a limited set of services to be in-network.  Usually these services will be high end services like transplants, burn units, blood clotting disorder clinics or other very high cost services used by very few people.  The rest of the services offered at that hospital like hip replacements, stress tests and maternity/delivery services which are common and widely available are considered out of network.

New Jersey  has a new set of bills that would restrict these attempts by insurers to deliver good care at reasonable costs:

If they pass as written, they would place a moratorium on the implementation of the OMNIA plan as well as other tiered networks introduced during the 2015 calendar year until Jan. 1, 2017. According to the proposed bill, anyone who already has signed up for these tiered plans would be allowed a special 30-day open enrollment period to switch health plans….

The four bills would freeze tiered network offerings, eliminate carve-out contracting, and require state owned facilities to be included in the top tier.  Those are the policy proposals I think are bad.  The other proposals for disclosure on how networks are built, and the actuarial models behind network construction are guaranteed to cure insomnia.  Beyond that, I have no problem with that.  What will happen is a lot of documentation that shows the preferred tiers are built on a combination of cost and quality concerns with some strategic intention if the payer is also an integrated healthcare provider system.

It is a policy proposal that is prioritizing more choice over less cost.  That is a reasonable personal choice to make, but if we are operating in an environment where we as a society are trying to get more people to sign up for insurance, cost has to come into play as a core consideration.  Transparent and fair tiered networks and carved-out contracts are a worthy goal and a viable mechanism to deliver high quality care at reasonable costs with wider choice spaces than restricting the low cost products to only narrow networks with hard gatekeepers.