The Narrow Network Revolution

Today's Wall Street Journal has a must-read article on payer strategies: Remember Managed Care? It's Quietly Coming Back.

While the article focuses primarily on managed care's re-emergent love affair with prior authorization, it also highlights payers growing acceptance of narrow and tiered provider networks. These are usually "tiered" networks in which patients incur bigger out-of-pocket charges if they go to providers that aren't in the "top" category. The cost for an out-of-network provider is prohibitive.

The article is a useful reminder that the growth of preferred and limited pharmacy networks reflects broader healthcare changes. Expect plans in healthcare reform's insurance exchanges to feature narrow pharmacy networks.

NOT JUST FOR PHARMACY

As the article discuses, employer-sponsored insurance plans are adopting tiered network models that group providers the network based on quality, cost, and/or the efficiency of the care they deliver. These networks encourage patients to visit more-efficient doctors by either restricting networks to efficient providers, or by having different copayments or coinsurance for providers in different tiers in the network.

Here's what today's article says:

"Insurers have been experimenting with smaller provider networks for years, and are now rapidly ramping up, though they continue to simultaneously sell typical broad preferred-provider organization plans. The narrower plans can have closed structures that work like the classic HMOs. But they also have 'tiered' designs, with patients facing bigger out-of-pocket charges if they go to providers that aren't in the top category, then even-larger bills if they go completely out of network."

In 2011, 20% percent of firms that offered health benefits included a high performance or tiered provider network in the health plan with the largest enrollment (according to the Kaiser/HRET Employer Health Benefits 2011 Annual Survey).

Sound familiar?

MEANWHILE...

There are now three basic alternatives  to pharmacy network design:

• Open Pharmacy Network—the consumer can choose any pharmacy that participates in a plan's network. This is still the most common scenario.

• Preferred Pharmacy Network—the consumer has a financial incentive to choose the dispensing pharmacy that reduces the payer's costs. These plans have taken off in Medicare Part D, as I show in Humana-Walmart Preferred Network Plan Wins Big in Part D. Almost one-third of all Part D PDP enrollees are now in a plan with a preferred pharmacy network design.

• Limited Pharmacy Network—the consumer must use a narrower network that includes only specifically designated pharmacies, which is why this model is sometimes called a "restricted network." Commercial payers are adopting limited network models more slowly, with the possible exception of the Maintenance Choice model. Payers also may perceive bigger savings opportunities in other areas that have less potential beneficiary disruption, such as increasing cost sharing requirements.

Preferred networks are the most consumer-oriented plan design. Preferred networks use consumer incentives to shift prescription volume into the pharmacies that provide lower costs for the payer. Consumers retain the ability to choose their pharmacy, while being partially exposed to the costs of this choice. Hence, the widespread adoption in Part D, where individuals choose their own benefit design every year.

As the WSJ article notes:

"Insurers can reduce costs with narrow networks because they can exclude the priciest doctors and hospitals. Also, they can wring rate concessions from medical providers that fear losing patients."

Alas, since this is America, expect plenty of lawsuits from aggrieved providers over narrow networks under the "freedom of choice" banner. Here's the latest pharmacy example: Florida Pharmacy Association, Medicaid Patients, Independent Pharmacies & Pharmacists File Lawsuit to Restore Medicaid Patient Access to Pharmacy Care Providers Chosen By Medicaid Patients. Expect more to come.