How Benefit Designs impact choice and costs
and what are the different designs used by plan sponsors
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Have ever looked at a “Summary of Benefits and Coverage” document when you are selecting your health insurance plan and wondered why this stuff is so complicated. The answer is Benefit Design. About half of the US population, 150 million people get health insurance as a benefit from their employer. Rising healthcare costs are a persistent concern for plan sponsors (like employers) and individuals. Providers and carriers negotiate rates between themselves. The actual payers - plan sponsors and individual consumers aren’t even in the room. Plan sponsors use Benefit Design as a tool to manage (or shift) rising costs. As individuals, a large part of our experience with the healthcare system depends on how this benefit is designed. Catalyst for Payment Reform and Urban Institute explains Benefit Design as the set of rules that describe the health care services which will be covered by the health plan, the providers from which a member can receive a covered service, the cost-sharing amounts a member of the plan will be responsible to pay when receiving a service, and any other requirements or restrictions on how or when the plan member can receive covered health care services.
This post covers a high level overview of seven common Benefit Designs that try to optimize between consumer choice, costs, and care quality.
Narrow networks -
This design involves the selection of a narrow pool of health care providers based on cost and quality. Typically narrow networks comprise of 30 to 70 percent of providers in a given area. The design includes strong incentives to seek care within a narrow network with high cost sharing when beneficiaries get care outside the narrow network. In exchange for greater restriction on consumer choice, narrow networks offer lower premiums. In competitive markets, providers may be willing to negotiate lower prices since they are at risk of losing volume if they are left out of the narrow network. However, this model is only viable in competitive markets. Network adequacy laws that require a certain density of providers and specialities to be part of the health plan make it difficult for narrow network to exclude a dominant but low value provider.
Tiered network -
This design is an extension of the narrow networks concept with fewer restrictions on which providers can be seen by patients. Tiered networks designate groups of providers into levels, based on cost and quality of care. Cost sharing with beneficiaries is designed to be different between tiers, to steer care towards providers in higher tiers. Tier 1 providers are high value (low cost, high quality) and have out of pocket costs. Tier 2 providers are part of a broader network, but result in higher out-of-pocket costs. Tier 3 providers are actually out-of-network providers and may result in the highest out of pocket costs. This model is challenging to implement in non-competitive markets, where a dominant provider can demand inclusion in the highest tier even when they are a low value provider. The other challenge is that quality of provider services, unlike drugs, cannot be treated as a commodity good making it harder to tier services based on quality.
Center of excellence (COE) -
The COE model designates groups of providers that meet high standards for both, quality and cost of care for a particular service. These services are typically non-emergency, complex and costly services like joint replacement, heart surgeries, spine surgeries, bariatric surgeries, cancer care and organ transplants. The goal of this model is to provide a high value alternative while preserving choice. Many COE models will incentivize the patient to get care at the COE by making it financially favorable - zero out of pocket costs, paid travel, cash bonus, shared savings etc. This model has the potential to break free from the regional competitive dynamics by offering national alternatives. For example, a patient, who lives in a high cost, low quality, low competition environment may be offered a no cost option to travel to a center of excellence if they need to go for a knee surgery.
Alternative sites of care -
The goal of providing alternative sites of care in the Benefit Design is to shift care delivery from expensive sites like the ER or the Hospital to lower cost sites of care like worksite clinics, urgent care centers, retail clinics, at home care and Telehealth services. The use of these alternative sites of care is incentivized by lowering the cost share. For example a patient that chooses to receive immunization at a retail clinic instead of a hospital may not have to pay a copay. This model also seeks to lower barriers faced by patients in receiving appropriate care. Removing barriers will help patient seek care earlier and lower avoidable costs downstream.
Value Based Insurance Design -
Value based insurance design seeks to remove financial barriers to essential, high-value clinical services by eliminating out-of-pocket costs for evidence-based primary preventive services and encouraging consumers to seek care, improve health and prevent costly interventions downstream. There is a lot of discussion about investing in primary care with a value based outlook that improves health and controls costs at the population level. The challenge is that the benefits can take time to accrue but this design can result in higher costs in the near term. Employee churn means that those savings may never be realized by the plan sponsor.
High deductible health plans -
Most of us want the freedom to choose our provider but also pay lower insurance premiums. The high deductible health plan design offers a solution in the form of broader networks, more choices and lower premiums but shifting the burden of costs on to patients when they do need to get care. This design requires consumers to cover 100% of costs until the healthcare costs hit the deductible. The main objective of HDHP is to make consumers sensitive to healthcare costs. The goal is to make consumers sensitive to costs may lead to lower utilization and enable shopping behavior that lowers costs while preserving consumer choice. Tax advantaged accounts like HSAs and coverage for preventative services are part of the design to support patients paying for care costs.
Reference Based Pricing -
Continuing on the theme of expanding consumer choice, reference based pricing provides strong incentives to choose lower cost providers without restrictions. Instead of negotiating prices with providers, this design sets a standard price for a drug, procedure, service of bundles and requires that plan members pay any charges above the price. Reference prices aim to eliminate the wide variation in prices by signaling the purchasers view on reasonable pricing. Often these references are benchmarked as a percentage of Medicare rates, which are set by CMS.
Ultimately, all Benefit Designs try to optimize across co-pay, co-insurance, deductible, covered services, the size of the provider network etc. in hopes that it will create more skin in the game for individual consumers to manage their own utilization, choose high value providers and control overall costs. Plan sponsors often try to combine two or more complimentary Benefit Designs to build on strengths and tackle shortcomings. Recent regulations in support of price transparency and against surprise bills are aimed at driving greater choice and competition. These new rules may enable plan sponsors to create new innovative Benefit Designs that reward consumers for shopping. But there are still many systemic issues that are hard to overcome. For example, market consolidation has created dominant providers that use many anti competitive strategies that detract from the goals of Benefit Designs. National and state regulations can also limit the impact of Benefit Designs. Many state insurance regulators have network adequacy rules that make it hard for Benefit Designs to exclude certain providers. “Any willing provider” laws require any provider to be included in a network if they are willing to accept the terms of the carrier etc. These policies are well intentioned, but they do affect market dynamics. There is no silver bullet but Benefit Design is one of the few tools that plan sponsors have to offer high value healthcare options and control their costs at the same time. All these complex decisions ultimately shape the “Summary of Coverage and Benefits” we all use to choose our health insurance plan.
Benefit design is way more complex and we obviously haven’t covered many important aspects. Do you work in the Benefit Design space? Do you know this stuff really well? Reach out or comment below and share where I got things right and where I got them wrong. Always open to feedback!
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