The Steward-Tufts deal and the looming threat of provider-led narrow network insurance

The Stewards-Tufts deal announced today will create a narrow network insurance product targeting the small group segment. As reported, members covered by the plan must get all routine care from Steward providers except for complicated procedures and when authorized by a Steward physician. In return, premiums should be 15-30% below other products. Tufts and Steward will share the premiums.

Some local market context:

  • Steward Health Care is owned by Cerberus Capital Management is the only major for profit system in the market.
  • The deal follows at the heels of a move by the leading provider system (Partner’s) to acquire a local Medicaid plan (Neighborhood Health) — thus is the second recent forward integration of a provider into insurance.
  • This is the latest in a recent series of “joint venture” style health plan deals between provider systems and insurers (the Aetna-Carilion deal in March is one of the earliest examples).

The deal and its predecessors provoke two questions

Are narrow networks now ready for prime time?

Narrow network options have historically been rejected by consumers and relegated to niche segments since the insurance system moved away from vertically integrated blocks and tightly controlled HMO products. Consumers wanted choice and did not trust an insurer to close down provider options for them.

It seems like narrow networks are coming back: BCBSMA has its Hospital Choice plan, the Group Insurance Commission (which buys health insurance for Massachusetts government employers from Harvard Pilgrim and Tufts) has upped the focus on tiering, commercial ACO models have used prospective attribution and various tools to keep patient care inside the model.

Will these efforts succeed? Here are a few hypotheses on the implicit bets:

  1. Plan sponsors have run out of other options to control costs (e.g., consumer cost sharing) and now willing to face the employee confusion and grumbling narrow networks generate. For example, the cost share in small group in Massachusetts has dramatically increased the last few years.
  2. The economy has reset a lot of expectations and consumers are relieved to have any sponsored benefits.
  3. There is growing awareness that high price of care does not necessarily mean high quality of care (there certainly has been a lot of public reporting in Massachusetts on this topic recently).
  4. There is growing awareness that integration of care across providers working closely together is a more critical driver of quality than the quality of any one particular procedure or episode.

The broad uptake of narrow network products is yet to be seen, but the times do feel different – especially if provider are increasingly espousing them and especially for the most cost sensitive segments.

When is a narrow network product best offered by a provider or by an insurer?

Narrow networks create value in two ways:

  1. Reduced average unit price either because providers lower prices in return for more volume or changing the mix towards more cost effective care settings
  2. Reduced unit volume because of better integration across care providers resulting in reduced provision of unnecessary/duplicative care.

Insurer-led narrow networks (put together from an insurer-created network structure and “enforced” by consumer incentives and steerage tools) tend to focus on the first source of value. Generally, the insurer supports integration of care as best it can through medical management regardless of network and it is hard to do something differentiated with a narrow network unless the product is centered around some larger blocs of providers (e.g., supporting an ACO type model).

Provider-led narrow networks (assembled by providers and built on some integrated organizational structure) can get at both sources of value. The organizational structure (e.g., single delivery system, ACO arrangement) allows incentives to be aligned around more cost-effective clinical protocols and workflows. Further, provider-led narrow networks can have some brand halo because the average consumer trusts doctors more than health insurers.

Whether insurer or provider led narrow networks will be advantaged depends on several factors, among them:

Under this analysis, Steward’s advantage appears to be a mixed bag:
Big enough to meet a lot of the healthcare needs of its potential members
However, price has been the most important driver of care cost in Massachusetts, suggesting less differentiated opportunity for attacking volume of utilization
Also, I would argue that local insurers have a pretty good reputation (despite recent flair ups) especially if compared to a for-profit player like Cerberus, relatively new to the market.

Further, Steward faces a potential mirror-image competitor given Partners’ acquisition of Neighborhood Health Plan. The new strategy for Neighborhood has not been publicly specified, but a narrow network product could certainly be put together built around Partners. In addition, Partners has recently launched a major effort to take 5% out of its clinical costs. That’s a long way from being able to match the 15%-30% average premium discount but it is not hard to imagine Partners figuring out more ways to trim costs if it can control the full continuum of care for each patient via a narrow network. It will have plenty of practice trying to get Neighborhood’s legacy Medicaid business to make money. While a Partners-centered narrow network product may not be as cheap as Steward’s, it doesn’t have to be given Partners reputation.

Implications for payer strategy

Expect more narrow network products, especially targeting segments where coverage has gone aggressively “bare bones” in the last couple years. The economy remains soft, utilization will inevitably rebound and purchasers are still looking for more ways to keep healthcare affordable.

Expect more big provider systems to pursue forward integration strategies; it is a smart way to create a differentiated offering, especially for “attackers” like Steward. Further: in addition to worrying about ACO-driven provider consolidation leading to tougher rate negotiations, payers will need to worry about newly vertically integrated players competing with them head on in the local insurance markets

To secure an advantage in narrow networks, payers need to find a way to access the volume-based savings accessible to integrated delivery systems. Patient-centered medical homes, for example, might be able to achieve much of the same utilization value without having to align or create a potential competitor through an ACO. Time to finish piloting those platforms/services to support providers manage more effectively and start getting them into production.

Payers should accelerate building capabilities for ASO type offerings for small/mid size groups where the provider narrow network may have most appeal. Sure, there is cannibalization risk that will need to get managed (ASO being a lot less profitable than risk business), but ASO could be an effective answer if a particular customer is looking for low cost and considering a provider-led narrow network solution.

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