Tiering Approaches for Health Plans Incentives and Information for Consumer

Copyright 2002 © Allan Baumgarten

Health plans, employers and hospitals are returning to notions of preferred providers and health plans. Some of these concepts are being tested in states like Minnesota and California. Minnesota Managed Care Review 2002, Part One, was released June 14 and includes an analysis of these issues. For information on the new report, go to: https://allanbaumgarten.com/cfusion/mn_report.cfm

The basic notion involves dividing hospitals and groups of physicians so that even though all of them may be listed in that thick provider directory, not all are created equal. For example, a hospital may say that 10 of 12 hospitals in an area are on a preferred list. If an enrollee is admitted to one of those hospitals no co-payment or deductible is required. But if the same enrollee goes to one of the two local hospitals that are not on the preferred list (“affiliated hospitals”), they are required to pay a deductible or co-payment of anywhere from $100 to $400 per day.

These arrangements are referred to as “tiering” of providers. Another version of tiering occurs in markets where employers are contracting directly with organized networks of physicians and hospitals, sometimes referred to as care systems. The care systems are also grouped into tiers, usually low, medium and high, based on their costs. Under certain systems, the care systems may set their own price and decide for themselves whether they want to be in the low, medium or high tier. Consumers who choose a low-cost care system will pay little or nothing as a premium contribution or as a co-payment for service. But they can buy up to a more expensive care system at their own expense.

From the health plan perspective, the move to tiering is partly a response to a change in the economic balance of power between health plans and providers. Many hospitals used their newly found leverage to exit from contracts in which they accepted significant capitation risk. That has been a key factor in the decision of some HMOs to exit the Medicare+Choice market, since their financial model required shifting risk to providers. Some hospitals systems went a step further, and said that they would no longer contract with every health plan in their area, but would seek to develop closer ties to a select group of health plans.

In turn some of the largest health plans in the state have gone back to the future and reintroduced the notion of a preferred provider and incentives to consumers or employers to use those preferred providers. In the early days of managed care health plans did not contract with all hospitals and clinics. Instead, they offered a limited panel of providers the promise of more patients in exchange for discounted prices. Soon the sales people took over and decided that very broad provider networks were needed in order to match the competition, resulting in the extensive network overlap that now exists.

By establishing tiers of providers, some health plans have returned to the old notion of identifying certain hospitals as preferred. At this point, that preference is based on pricing, although health plans say that they want to reach a point where tiering of hospitals and clinics would be based on measures of quality. One measure could be progress of hospitals in implementing the initiatives of the Leapfrog group. Leapfrog is a coalition of major purchasers that has tried to seize the opportunity created by the new attention being paid to hospital safety after the recent Institute of Medicine reports. These health plans are now trying to enlist employers to present benefit plans that strike a new balance – you can still use all the hospitals in the area, but you will have to pay out-of-pocket to use those hospitals that did not make it onto a preferred list.

In California, PacifiCare and Blue Shield now offer plans in which hospitals are divided into preferred and non-preferred lists based on their pricing. An enrollee admitted to a non-preferred hospital will pay a deductible or daily co-payment, but if you use the preferred hospital you will pay less. PacifiCare, which has produced report cards comparing provider organizations for a few years now, expects to introduce quality measures into its tiering process and to extend the tiering to physician groups.

Sacramento is one of the regions where PacifiCare and Blue Shield are pushing ahead with their tiering of hospitals. It turns out that only one hospital in the area (not including KaiserÂ’s two hospitals) was not on PacifiCareÂ’s preferred list, namely the University of California at Davis Medical Center (which is actually in Sacramento). The UCDMC represents about a third of the hospital revenues in the region and it also provides the largest share of county indigent care in the area. Blue Shield also did not put UC Davis on its preferred list, but has been negotiating with the hospital. (See Kathy RobertsonÂ’s story about hospital tiering in the Sacramento Business Journal, June 14, 2002 print edition.) In 2003, Blue Shield will likely gain tens of thousands of public employees in the Sacramento area whose coverage is organized by CalPERS. UC Davis Medical Center and other hospitals would not want to lose easy access to such a large number of patients.

A different approach to tiering is in the care system model first developed by the Buyers Health Care Action Group (BHCAG) in Minnesota. Since the mid-1990s, the BHCAG companies have contracted with 15-20 care systems in Minnesota to provide comprehensive health benefits to their employees. Two years ago, the employers turned over management of the plan, called Choice Plus, to Patient Choice Healthcare, a start-up company. Patient Choice has taken the Minnesota model to several other local markets. It offers the plan in Denver and in Portland, OR, and is now working on provider networks for the Boston area.

In that model, the provider care systems bid a claim target – a per member per month amount needed to provide all covered care. (The ability to set your own price is a crucial element and is something that the physicians especially like about that system.) The targets are then grouped in tiers. In most cases, the employer will pay all the cost of employee coverage in the lower cost tier, and employees are free to buy up at their own expense. In an earlier Trend Note, we noted that Choice Plus/Patient Choice did very well with employees at the University of Minnesota, which began to offer the plan effective January 1, 2002. https://allanbaumgarten.com/cfusion/view_news.cfm?id=33

The Minnesota Department of Employee Relations, which buys coverage for 150,000 employees, dependents and retirees, also made a major change in its benefit plans this year. It created the Advantage plan in which physician networks are organized based on existing relationships or on historical patterns of referral and utilization. Those groups are then tiered based on price data. Employees pay the same amount for their premium contribution, regardless of which network they choose. But if they choose a higher cost network, they will pay higher co-payments at the time they receive care.

The two largest unions of state employees went on strike over this new plan. The strike was eventually settled when the state agreed that it would set a lower limit on out-of-pocket maximums and that it would ensure that employees throughout the state would, in effect, have access to a low-cost tier network even if all the networks in their area were more expensive.

The challenge here is to create incentives for consumers to choose health plans and providers based on price and quality. That requires making meaningful information available to consumers. The Blue Shield and PacifiCare models in California set differential cost-sharing based only on the unit prices for hospital care. The Patient Choice model is based on risk-adjusted total cost, not just unit price.

Other findings from Minnesota Managed Care Review 2002, Part One

o HMOs increased their premium revenues per commercial enrollee per month by 14.3% in 2001, the third straight year of double-digit increases. In 2001, HMOs increased their average commercial premium revenues from $166.40 to $190.20 per member month. Premium trend increased by 11.7% in 1999, 13.1% in 2000 and 14.3% in 2001. Last year, Medica collected more than $202 per commercial member per month.

o With the help of those increases, Minnesota HMOs made a profit of $104.2 million in 2001, including $63.2 million on their operations. Except for Altru Health Plan and Mayo Health Plan, which have now closed, all HMOs had profits on operations in 2001. And the HMOs also reported strong profits on their commercial plans.

o Profits on public programs (Medical Assistance, General Assistance and MinnesotaCare) fell in 2001. Public programs have been very profitable for Minnesota HMOs in the past five years, but the results in 2001 were weaker. Profits went from $39.3 million in 2000 to $17 million in 2001. Those will likely decrease in 2002 and 2003, since the Legislature reduced payments to HMO as part of it budget balancing efforts.

o Enrollment in public programs grew by 12% in 2001, from 323,000 to 361,000. As in other states, the number of enrollees in welfare and medical assistance programs grew in 2001.

o Enrollment in insured commercial plans continues to drop. Enrollment in insured commercial (employer-sponsored) HMO plans declined by about 29,000 in 2001, with some of them going to self-funded plans administered by local HMOs. From 1998 to 2001, enrollment in insured commercial plans decreased from more than 1 million to 790,000.

Excerpts from the report, including the popular “Minnesota HMOs at a Glance” page, can be viewed at https://allanbaumgarten.com.