What employers should know about limited network health plans

Long before the Affordable Care Act became law, insurers and employers saw limited network health insurance as a means to control costs.

These plans — also known as health maintenance organizations (HMOs) and preferred provider organizations (PPOs) — operate under the premise that the cost of medical care and the quality of care vary greatly from one provider to another. To wit: The American Medical Association found in one of its studies that hospitals across America charged anywhere from $1,530 to $183,000 to treat appendicitis. The median charge was $33,611.

Talk about wild swings and unpredictability.

To bring rational order to these swings in price, limited network plans restrict patients to “in-network” hospitals or doctors who could provide high quality care within a predictable range of pricing.

While absolutes rarely exist in health care, HMOs have proven to be an effective cost containment strategy. Unlike many professional services, where the higher the price the better the outcome, in healthcare, there is actually an inverse correlation between price and outcome.

Providers have found ways to offer high quality care for low cost pricing through repeatable efficiencies. As a result, health insurance carriers want to push their membership to these providers, while at the same time prevent their membership from seeking care from high cost, low quality providers.

This is the crux of an HMO. Barring the occurrence of the unexpected and uncontrollable high dollar claim, HMOs can drive costs down.

For employers and employees, limited network plans typically do have lower premiums and lower costs than other plans. Statistics also have shown that providers in narrow-network plans typically provide a higher quality of care at a lower cost than other providers.

One reason for that is they are incentivized financially to do so. If the providers' costs are abnormally high, insurers are likely to eliminate them from their networks, causing a loss of patients and revenues for the providers.

Given the popularity and effectiveness of limited network plans, an obvious question for employers and employees alike is: What's going to happen to these plans as the implementation of the Affordable Care Act continues?

The Affordable Care Act has addressed the issue of accessibility. But what is left to be seen is the impact it will have on healthcare affordability.

With the added pressure of increased utilization, coupled with steadily rising costs, the concept of incentivizing high quality, low cost healthcare is going to be even more prevalent going forward.

To that end, we've seen the rise of Accountable Care Organizations (ACO). ACOs seek to reduce costs by leveraging small networks of providers that take an integrated and coordinated approach to delivering care. As outcomes improve, and costs are reduced, the providers in the ACO are rewarded by sharing in the overall savings.

With performance based medicine, everyone wins. Providers are rewarded financially for providing higher quality care, while members enjoy lower costs and better outcomes. Most importantly, however, the US healthcare system has a sustainable future."