After readily embracing tiered drug formularies as a way to contain costs, health plans now are applying the same concept to providers.
At least three large California HMOs are exploring a new type of health plan that promises big savings-but only if patients go to a discount "A list" of hospitals within the plan's regular provider network. Those who choose to go to a "B list" provider will be forced to pay several times more.
All three plans are promoting this tiered model as a way to cut employers' expenses by forcing workers to be more cost-conscious when deciding where to get hospital care. But in addition to stemming hospital costs, such efforts ultimately could give insurers renewed leverage when negotiating contracts with providers, many of which have been enjoying increased clout at the bargaining table.
Santa Ana-based PacifiCare Health Systems is rolling out a new product called the Select Hospital Plan to medium and large employers in California, where it has some 1.7 million enrollees. Health Net and Blue Cross of California, both based in Woodland Hills, are working quietly on similar products. Neither one, however, has set a launch date.
Under the Select Hospital Plan, which will be available Jan. 1, members who choose to receive care from PacifiCare's list of "select" hospitals-facilities that have agreed to provide services at cheaper rates-won't pay any out-of-pocket fees. But those who opt to go to the other hospitals in PacifiCare's network will be socked with copayments of $100, $250 or $400 per visit, depending on the cost-sharing arrangement employers choose.
Passing along costs
Premium savings for employers are expected to range from 5% to 20%, says PacifiCare spokeswoman Cheryl Randolph. The insurer predicts 10% of its customers will transfer to the lower-cost plan next year.
Facing double-digit rate increases, "employers are looking for ways to pass more of their benefit costs down to employees, who basically have been shielded by $5 and $10 copays," Randolph said. "What we are trying to do is tie the members' medical costs to the true cost of care."
The tiered HMO is reminiscent of a PPO in that members are encouraged to choose from a network of "preferred" providers. But unlike PPOs, the tiered plan ranks providers within its own network.
About a third of the 300 hospitals that PacifiCare contracts with statewide have agreed to join the program. The list is dominated by California's largest hospital chains: Tenet Healthcare Corp., Sutter Health System, Catholic Healthcare West, HCA, Sharp HealthCare and Scripps Health.
Absent from the list, though, are some large standalone hospitals, including 849-bed Cedars-Sinai Medical Center in Los Angeles and the 528-bed University of California-Davis Medical Center in Sacramento. The latter is still in talks with PacifiCare.
"There are a number of factors to consider," says UC-Davis spokeswoman Bonnie Hyatt. "For one thing, is it financially feasible for us (to join)? And if we don't join, how many patients would be affected?"
It's through this sort of dilemma that tiered health plans could provide PacifiCare and other insurers with a new bargaining chip at contract time. The plans give HMOs the power to steer potentially large numbers of patients toward hospitals that are willing to offer them discounts-and away from those that balk.
"If hospitals don't cut a deal, they face the possibility of losing business," says Glenn Smith, a healthcare consultant with Watson Wyatt Worldwide in San Francisco. "Basically, what these health plans are saying is, `We've steered business toward you, but if you don't deliver, we'll relegate you to the B list."'
Targeting hospital spending
In addressing hospital costs, health plans are trying to rein in one of the leading causes of medical inflation.
According to a report released in September by the Center for Studying Health System Change, healthcare spending rose 7.2% in 2000-the largest jump in a decade-with hospital spending accounting for nearly half, or 43%, of the total increase.
While inpatient hospital spending rose just 2.8% last year, the increase was up from a 1.6% jump in 1999. This rise reverses a trend from 1994 to 1998 when inpatient spending actually dropped by as much as 5.3% a year.
Indeed, these new products represent an about-face from HMOs' recent push to lure customers by providing fewer restrictions, more services and broader networks. That strategy, health plans say, has led to higher costs-and higher premiums-because enrollees have lacked any financial incentive to choose lower-cost care options.
"If HMOs are going to hold the line on costs, they need to recognize that they can't make every provider available to their members at the same cost," says Health Net spokesman Brad Kieffer, who declined to comment on the company's new health plan other than to say that it would be introduced "as soon as possible."
Health plans are banking on the belief that patients will be willing to travel a bit farther to get a better deal. State law requires HMOs to offer providers within 15 miles or a 30-minute drive, but members can elect to drive farther, says Blue Cross spokesman Michael Chee.
"It's based entirely on member choice," Chee says. "As a member, I can decide to go to hospital A, which may be a little closer, or to hospital B, which gives me a price break."
Consumer advocates, however, are taking a more cautious attitude toward tiered HMOs.
Members in PacifiCare's new health plan will have to choose a physician who uses a "select" hospital, and many people may not be willing to switch doctors, says Beth Cappell, an advocate for Oakland-based consumer group Health Access California.
"The jury is still out on how successful these types of plans will be," Cappell says.
To be sure, the network-within-a-network concept isn't unique to the Golden State. Tufts Health Plan of Waltham, Mass., plans to begin offering a similar type of product, called the Choice Co-Pay Plan, to Massachusetts employees next year. Under the plan, the inpatient admission charge paid by enrollees will be twice as much if they receive care at an academic medical center instead of at a community hospital.
But the idea seems to be catching on with particular speed in California, where insurers have been increasingly stymied at the bargaining table by big hospital systems.
Blue Cross, for instance, was forced to make significant concessions to Sutter Health System this year after a lengthy skirmish over reimbursement rates. Analysts said the 2 million-member insurer would have lost much of its clout in Northern California had it failed to renew its contract with Sacramento-based Sutter, which operates 26 of the region's hospitals.
Whether Sutter will choose to become a part of Blue Cross' upcoming "A list" remains to be seen. But Bill Gleeson, a spokesman for the hospital system, says Sutter will opt out of any health plan that doesn't offer adequate reimbursements, regardless of how many patients it may lose.
"The days of contracting with as many health plans as possible are over," Gleeson says. "Healthcare organizations are having to make increasingly difficult decisions. It's become a matter of survival."