Charging a fee for access to a group of healthcare providers has been a fantastic business. Low investment in capital assets, minimal labour costs and bountiful cash flows attract the US’s smartest investors...
Charging a fee for access to a group of healthcare providers has been a fantastic business. Low investment in capital assets, minimal labour costs and bountiful cash flows attract the US’s smartest investors. With margins above 60 percent, it is no surprise that the Goldman Sachs’ of the world own networks. With any good deal, one must ask if it is too good to be true. Will it last? There are some evolving market forces that suggest the traditional notion of paying for access to a group of healthcare providers is coming to an end.
A health network is a group of physicians, hospitals, and other healthcare providers that agree to provide medical services at pre-negotiated prices and rates. Health networks generate income by leasing access to their group of providers for a fee. Network access fees range, on a per-employee, per-month basis, from under $10 a month to $20 a month. A payor entertains these access fees in the hope the network of providers will deliver healthcare services at a lower price than if the payor purchased the services directly.
Networks are the consummate middlemen, inserting themselves between buyers and sellers with arguments of price efficiency and convenience. To date, they have done a wonderful job of creating brands and other barriers for payors and providers to work more closely together. In fact, the mere suggestion of proceeding with a health benefit plan outside of a recognised network will cause many to predict financial ruin. Is this suggestion still accurate? Are traditional networks worth their price of admission? Is it possible to receive healthcare services at an equal or better price without paying $14 per employee per month?
The payors
A driving force behind the creation of health networks is their connection to payors. Insurance companies created groups of healthcare providers in an effort to manage the cost of care they were funding on behalf of their insured customers. The network’s relationship with insurance companies created a double-edged sword where payors felt they needed a network to obtain the best price from healthcare providers and providers felt they needed to be in a network to gain access to funding from the payors. Network growth throughout the country exploded because of these symbiotic motivations. Take away either perception and the idea of paying a middleman for access to healthcare services may lose its appeal.
For a variety of reasons, not the least of which is healthcare reform, the makeup and characteristics of payors are changing. Self-insurance by employers is rising dramatically. The government is becoming an even larger market participant with Medicaid, Medicare, and individual market funding.
Traditional fixed-cost insurance companies are no longer confident in their monopolies. Mergers of the country’s largest insurers are being negotiated as each tries to assert relevance in the new market. Turnkey insurance solutions such as the stop-loss group captive are created and controlled by groups of employers with far different motivations than for profit insurance companies. These pooled insurance solutions enable an entire community of employers to negotiate directly with that same community’s providers. These community health plans can be delivered in a regulatory-compliant insurance solution in weeks.
All in, a healthcare provider is no longer beholden to the traditional insurance company as its only source of payment for services. No wonder the healthcare providers are now asking themselves whether network participation is the most attractive way to deliver their services. Could healthcare services be provided without the network middlemen?
Market Darwinism
The market is a tough critic and permits little to remain that is not contributing for the better. Like dinosaurs, health networks may be confined to an insurance-themed amusement park, sort of like Jurassic Park, if they cannot support their place in the healthcare delivery system.
Because payors are undergoing such a dramatic transformation, it is probably best to look at how the new payors are pushing out the old payors and their networks with them. Like many of nature’s creatures, lethargy and softness creep into many a market participant’s makeup. For insurance companies that control the US’s largest networks, outsized overhead and substandard services are the signs of a long successful tenure atop the healthcare delivery system.
These characteristics do not bode well for survival in today’s healthcare delivery environment, where cost and quality control the agenda.
The government has passed, or will be passing, laws that change how healthcare providers are being paid for the services delivered to beneficiaries of the Medicare, Medicaid and exchange systems. These changes limit what is paid based on a per patient amount or capitated fee. Excess overhead and services delivered without the latest technology cannot survive. Why would a seller engage an intermediary if that intermediary is not offering access to the highest payment available?
This is especially relevant when the payment is capped. If the traditional fixed cost insurer is offering the healthcare provider 60 cents of a fixed capitated fee and the provider can deliver the services through a new payor with one fourth of the overhead, will the traditional network survive? Why settle for 60 cents of the capitated fee when 85 cents of the same fee is available from today’s new payors?
This is just the government payor market. What about the commercial market? As mentioned, groups of self-funded employers are now pooling together through innovative funding mechanisms known as stop-loss group captives. These captives function perfectly as the chassis for a community health plan. Healthcare providers deliver their services to the community of employers directly and all participants of this variable cost insurance solution benefit when costs are reduced.
The medical captive facilitates healthcare services to the employees at a reduced cost through lower overhead and the latest technology. The symbiotic motivation of the healthcare providers and the traditional insurance companies has been interrupted. Providers no longer believe they need to be in a network to gain access to payment.
Why should a healthcare provider entertain a reduced fee from the traditional network payor when another payor in the form of a self-funded medical captive can offer a more reasonable payment because of its lower overhead and fixed expense insurance solution?
They shouldn’t, and the provider market is developing these self-funded community health plans throughout the country.
The tipping point
Improved communication is a disruptive force in the market, no doubt. It serves to drive out redundant and inflated costs.
For networks that relied on claims of convenience and cheap access to a group of healthcare providers, many other payment platforms now compete and offer improved provider communication and access at a reduced cost.
Is $14 per employee per month still needed to gain cost-effective access and communication? Does the regulatory-compliant insurance solution need to be delivered at an overhead and profit cost of 40 cents of the premium dollar? Are healthcare providers realising there is a choice beyond the traditional network? No, no, and yes.
The removal of an unnecessary intermediary fee is good news for those interested in creating a more cost-effective healthcare delivery system.
