Healthcare networks, a necessary component of the development of managed care, will become relics of the past as healthcare markets mature.
During the early and middle stages of managed care, networks of exclusive providers are needed by health insurers in order to obtain lower pricing through a selective contracting process. But as managed care becomes dominant, markets become increasingly payer-driven, and the need for and effectiveness of networks will diminish as reimbursement rates flatten.
When fee-for-service is still dominant, insurers need lower provider prices in order to introduce new, lower-cost health insurance products. Providers are willing to give discounted prices in order to establish exclusivity and gain business volume needed to offset the lower reimbursement they will receive as managed care spreads.
In mature markets, payers no longer need exclusive networks or exclusive contract relationships in order to obtain preferred rates. In most mature markets, insurers are basically offering "take it or leave it" rates that hospitals are hungrily accepting.
Despite these facts, hospitals and physicians are still eagerly forming or joining network organizations in order to develop greater bargaining power when contracting with payers.
For example, there are currently more networks formed or in formation in Massachusetts than there are major payers of care. Most of the health plans in Massachusetts have seen flat growth during the past two to three years and haven't experienced the levels of enrollment they experienced in preceding years. A major reason for this plateau in growth may be exclusive provider arrangements that were developed during the early and middle stages of managed care.
There appears to be a saturation point for HMO enrollment in each marketplace, which ranges from about 35% to 60% of the population. Growth beyond these percentages is slow, in large part because of lack of choice or broad access within the provider system. Business and industry are beginning to demand that health insurance products offer broader access to providers.
It's likely that most major health plans in the more mature markets throughout the United States will begin to open their provider networks and expand them during the latter stages of managed care. They are beginning to realize that expanded provider choice will enable them to increase enrollment levels.
Most networks that have formed throughout the United States, irrespective of the level of integration, haven't shown increased operating efficiency or an overwhelming ability
to decrease costs. The mere grouping of inefficient organizations doesn't, in and of itself, produce efficiency.
The major problem we are facing is excess debt. Any hospital that can't adequately cover yesterday's debt with tomorrow's reimbursement will inevitably go out of business. Integration and/or affiliation is only positive when it lowers total debt, reduces inefficiency and waste, and serves a community at a higher level of efficiency. Anything less produces only an illusion of effectiveness.
Today's rush to create an illusion of power, through networking and integration tactics, is causing many not-for-profit organizations to think and act like their for-profit counterparts. They are either self-centered and self-focused or they are regional-centered and regional-focused. Local community is all but forgotten in the process. The total dollar expenditure for network development and the hours of executive involvement are staggering. The actual positive results are at best minimal.
There will never be enough reimbursement dollars to cover the vast expenditures made for hospital acquisition by the major for-profit organizations. Any potential for long-term return on investment is almost nonexistent given declining reimbursement levels. Shareholder value in these organizations will inevitably plunge during the next few years.
In the not-for-profit sector, the development of foundation models and the acquisition of physician practices has been done with little regard to potential return on investment opportunity. Many physicians are willing to sell their practices to the highest bidder at a time when office overhead is consuming an ever-increasing percentage of their practices' net revenues. Physicians are willing to shift this cost to hospital administrators who frantically try to keep a strong base of physicians committed to their organization. Most of these practice acquisitions have lost money.
These provider-driven vs. payer-driven marketplace dynamics will probably continue for several years since each state and region is at a different stage of managed-care development. There are still areas in this country that have limited knowledge of managed care.
Each marketplace will probably go through the same levels of progression along the managed-care growth line, including all forms of integration and affiliation that other, more mature, markets already have done.
Is it possible for healthcare providers to do the right things for the right reasons? Can a hospital be successful in its marketplace by focusing on the real needs of its marketplace? Or must it wrestle in the mud of competition, scrapping for its portion of the healthcare pie, on as global a basis as possible, seeking to justify its existence?
It must be acknowledged that there can be great power even in an illusion. It is a recognized fact that perception is a reality. Even in a payer-driven state like Massachusetts, the illusion of power being created by many provider organizations as they affiliate has a profound effect on other hospitals and physicians, who fear they might be left behind if they don't join the frenzy.
Communities throughout the United States are in desperate need of provider organizations whose goal, vision and focus is to meet the needs of the market, not just to create the illusion of service.