Center for Studying Health System Change

Patients Face Cost-Choice Trade-offs With Tiered-Provider Networks

Hospitals and Physicians Resist Health Plan Efforts to Differentiate Providers

News Release
Nov. 20, 2003

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ASHINGTON, D.C.—In a bid to control costs and regain leverage over hospitals and doctors, more health plans are experimenting with tiered-provider networks, which typically give patients a broader choice of hospitals and physicians if they are willing to pay more out of pocket, according to a study released today by the Center for Studying Health System Change (HSC).

Conceptually similar to tiered-pharmacy benefits, tiered-provider networks allow patients to make trade-offs between provider choice and what they pay out of pocket instead of health plans restricting access to certain providers. However, sorting hospitals and physicians into tiers is considerably more difficult than tiering pharmaceuticals with the same or similar therapeutic effects but different prices.

"Many of the plans experimenting with tiered networks have encountered operational difficulties and provider resistance, raising questions about the ability of these new designs to slow rising health care costs in the near term," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

The study’s findings are detailed in a new HSC Issue Brief—Tiered-Provider Networks: Patients Face Cost-Choice Trade-offs—available here. Based on site visits to 12 nationally representative communities in 2002-03, the study examines tiered network development trends in Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

Nine health plans in six of the 12 communities were experimenting with tiered networks in 2003, but employer adoption has been modest so far. Most tiered-network products exclude relatively few providers from their preferred tiers, and several health plans acknowledged that the inclusive nature of their preferred tiers means relatively modest premium savings compared with single-network products. However, several health plans indicated that the inclusive nature of their preferred tiers resulted at least in part from some high-cost hospitals and medical groups accepting lower payment rates in exchange for preferred-tier placement.

"So far, tiered-network designs seem to be more useful in increasing plans’ negotiating leverage with providers than in channeling patients to more efficient providers," said Glen Mays, Ph.D., an HSC consulting researcher from Mathematica Policy Research, who co-authored the study with Gary Claxton, an HSC consulting researcher from the Kaiser Family Foundation, and HSC Research Analyst Bradley Strunk.

"Finding the right balance between provider choice and costs remains a key challenge for tiered-network products," Mays said. "If plans water down their tiering requirements to get a community’s most popular but costliest hospitals and medical groups to participate, then there probably won’t be significant savings. On the other hand, if plans don’t include popular providers, they may have problems getting employers and consumers interested in the products."

Other key findings include:

• Most health plans have based tiering primarily on unit prices or costs. Other plans establish tiers by using hospital and physician claims data to estimate the average cost of an entire episode of care, controlling for differences in the severity of patients’ conditions. Providers with significantly above-average costs are assigned to nonpreferred tiers. Although more complex, this approach potentially allows providers with higher unit prices to be placed in preferred tiers if they perform well in limiting overall costs by reducing unnecessary services and avoidable complications.
• Some health plans are trying to incorporate quality measures into tiering criteria, but the absence of readily available data on quality of care for hospitals and physicians remains an important barrier.
• Tiered networks can potentially stimulate price-based competition among health care providers, but only if sufficient numbers of employers and consumers show interest in these products.
• Tiered networks may not be viable in smaller markets where there are too few competing providers.
• Employer interest and support will be critical for overcoming provider resistance to tiered networks, particularly in communities where providers have significant market power.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.