New Products on the Health Insurance Exchange: What is Old Becomes New

November 11, 2013

When I was at Blue Cross Blue Shield of Michigan, we used to say that you couldn’t sell any products without having all key providers included in them. But, that was at a time when health benefits were considered “fringe benefits,” unions were powerful drivers of benefit designs and employers covered most of the health insurance premium. Times, however, are different now: in part because of the economic changes in our country and in part because of the design of the Affordable Care Act. And, as a result, some of the emerging products look quite different from what we have seen in the past.

Whether the old watchword has changed or not is something that only time will tell (and our Center examines the growing categories of health plan products and provider arrangements in the commercial market and how they may affect consumers in our brief, Emerging Health Insurance Products in an Era of Health Reform). But, the fate of these new products will say much about the future of the employer market for health insurance as well as how much impact the current trend of consolidation of providers will have on the cost of coverage.

Consumers are indicating in polls that they are increasingly willing to trade off access to providers if it means lower health care costs. As a result, health plans across the country are at least dipping their toes into the market for what are known as “narrow network products” or products that use “reference pricing” as a cost-control strategy. In the world of health care cost control, neither of these are new ideas but they have been packaged and named differently from what they looked like in the past.

The narrow networks of the past were generally staff or network model HMOs. That is, these were products that used a limited panel of physicians and hospitals as “in-network” providers and patients needed permission to go outside this network in order for any benefits to be paid. These products also generally paid providers under a different mechanism than fee for service—usually capitation or salaried approaches, or some mix of the two.

The narrow networks of today are more specifically focused on providers willing to accept a particular price, within some quality parameters. And, they generally focus on hospital providers. They may or may not use financial incentives to improve performance, but they generally don’t use capitation as a payment mechanism.

The reference pricing strategy of the past is what old-line commercial insurance companies used to do when they paid health insurance claims. They directed their payment to the covered individual and provided up to whatever their maximum rate was to that individual who then was responsible for paying their provider.

The reference pricing strategy of today entails a health plan letting members know what the maximum amount is that they will pay for a particular service; an identification of who accepts that maximum amount and then, letting the member go anywhere but they have to pay the difference in price at the higher cost providers. Generally, health plans today pay the provider directly and the member pays the provider for any differential payment beyond what the health plan pays.

The narrow network approaches of the past changed in the mid-1990s to become managed care but with many more providers included. The networks expanded because most consumers did not want to get their care from health plans that had limited access. But, these broader network products generally resulted in higher health plan costs in trade for the addition of more providers.

The old style reference pricing strategy failed because employers did not feel this approach resulted in effective management of the cost of health care because few commercial carriers provided meaningful limits on how much they paid for services.

Times have changed and the emphasis of these products has changed from the approaches of the past. If consumers are, indeed, ready to make the tradeoffs that they were seemingly not ready to make before, then more employers may be comfortable shifting their products to narrow networks to follow this trend or consider encouraging employees to get coverage through the individual health insurance exchanges. And, if reference pricing becomes acceptable to consumers, then there is reason to worry about the potential for an increase in health care costs in markets where there is considerable provider merger activity occurring.

In any case, these trends will be fascinating to watch as health reform unfolds over the next several years.