How Effective Will "Tiered" Health Insurance Networks Be?

If you go to a hospital that delivers inferior care or that overcharges unfairly for the level of quality that they provide, should you pay more out of pocket? I believe you should, and in an effort to reduce employers' health costs more insurers are offering such products.

As I said, I'm all for it -- here in Massachusetts the clear leader in this movement is Blue Cross Blue Shield and their plan focuses in on 19 hospitals that either

* deliver inferior outcomes or

* deliver good outcomes but at a cost that far exceeds the quality level they deliver.

They have different products with different strategies, but that's the bottom line.

Two recent studies cast some light that suggests that the program may be ineffective or will work least well on the folks it ought to work on. Here's a summary of the two studies:

1 Employee Benefit Research Institute reports that the number of people who said that a lower cost network would be helpful or somewhat helpful in selecting more effective treatment declined (from 61% to 55%) somewhat in 2010 vs 2009. Moreover, those reporting that incentives to use a higher quality network also declined (from 45% to 42%).

2 Worse yet, the people MOST likely to search out a higher quality network are the younger employees. Also, lower income and minority employees were more likely to use the incentives.

Elsewhere the Robert Woods Johnson Foundation said that:

1 Since most people are healthy, incentives would be used mostly by folks who don't go to the doctor very often. As a result, the impact on health care costs would be small.

2 Patients often discriminated poorly. Yes, they reduced the number of inappropriate ER visits when cost sharing increased, but they also discontinued or reduced using prescription medications when the cost sharing increased, leading to higher costs down the road.

3 There was also dramatic proof that the Pareto Principle (80% of the results develop from 20% of the incidents) works in health care, too. The sickest 1% of Americans spend 23% of the health care costs, the sickest 20% spend 81.2%, and the healthiest 50% only spend 3% of the money.

What Does It All Mean?

What should we make of this? Well, here's my take:

* It's good that younger people are more willing to look around and take incentives -- they're "learning" their health care utilization model. Older folks have been raised on the "same payment for ANY doctor or hospital" that's been the model in our country for years. So the young will grow up into better healthcare shoppers. Good news for the long haul.

* Second, I think there's a huge difference between taking a survey ("no, I'm not interested in paying less") and actually spending your money. I suspect when people are faced with going to Hospital A and paying $1,000 deductible PLUS a $1,000 copay or going to to Hospital B and paying $150 copay that a lot more are going to select B than might indicate so on a survey.

* The fact that reduced use of drugs with higher copay led to more hospitalizations down the road only underscores the importance of Value Based Insurance Design.

One evolving model of plan design, Value Based Insurance Design (VBID) says that by only applying higher cost sharing to low-value services and actually reducing cost sharing for high-value services you can actually reduce the cost of health care. Meat-axe approaches to cost cutting only result in lots of cut meat. We want to cut wasteful use of health services, not essential uses, so we must carefully select the cost sharing items that we increase.

I believe that it's too early to write off plans such as Blue Cross's. The fact is that there are hospitals (and some doctors -- but that's a bit harder to get to) that overcharge for what they deliver or who do more damage than they ought to. Only by doing two things:

1 Incentivizing/deincentivizing hospital and doctor selection, and

2 Doing a much better job of communicating to employees before the fact that they'll pay more some places than others

will we be able to bend the trend in health care costs.

Employees are thrifty, particularly in this economy, and they are smart enough to understand new concepts. So if they're properly prepared for what they face before they have to make a decision, the more likely they are to choose intelligently.

Not every doctor who admits to the under-performing or over-expensive hospitals is required to exclusively admit to them. Many have admitting privileges at multiple hospitals... By educating employees ahead of time, when the subject comes up, the employee can let the doctor know that Hospital A will cost them an extra $1,850 or whatever and discuss alternatives.

These plans will work. There is a delay between learned use of the system and the ultimate payoff, but there will come a day when such utilization will result in lower costs. I think BCBS is on the right track. I hope (and believe) others will follow suit


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Massachusetts companies with up to 200 employees depend on Jim Edholm and his firm, BBI Benefits in Andover, MA. They offer a
free report entitled "Three Strategies Smart Business Owner Use to Reduce Health Care Costs" which you can receive by requesting it.