What Goes Around Comes Around: Insurers Re-Discover Selective Contracting

Insurers and employers are turning to a once-popular, then-demonized strategy to reduce and control health care costs: creating closed networks of providers.

"Brand name" insurers such as Aetna, Wellpoint/Anthem and UnitedHealthcare are experimentally rolling out health plans which save participants money by limiting the hospitals and physicians they can see, and severely restricting...or even denying...benefits when they use non-network providers.

For those with a grasp of ancient history, HMO's and Preferred Provider Organizations (PPO's) were a foundation of the "managed care" movement of the late '80's and mid-90's. Insurers would assure selected providers of increased patient volume in exchange for favorable reimbursement rates. Providers which would agree to the rates usually did experience an increase in business, usually at the expense of providers not in the preferred networks.

Selective contracting is one of the relatively few broad strategies which could be proved to save consumers money over time. But they were not popular with two groups. The first group consisted of providers who didn't win contracts with insurers. The second group was insurers which didn't have the market share to enable them to develop favorable contracts with hospital and physician networks.

By the late 1990's, selective contracting was under assault by these interests, cloaked in the guise of "limited consumer choice." The steady drumbeat of this criticism, together with the move toward provider consolidation in most local markets, succeeded in undermining the effectiveness of selective contracting as a cost-containment strategy.

(The case could be made that a major impetus for the evolution of "health systems"...hospital and physician networks...was a backlash against insurers' success in using selective contracting to control costs. In communities like Cleveland, with significant excess capacity, selective contracting was a demonstrably successful cost containment strategy. But in an environment of provider consolidation, restricting insurers' contracting options to two or three instead of 25 or 30 helped providers keep their prices up.)

But with employers' concerns over hyperinflation in health costs, and with increasing pressure on Medicare and Medicaid to control health care cost inflation, insurers are betting that consumers will be willing to accept some limitations on provider networks as a way to keep some control over costs.

And with insurers facing new restrictions on plan design, especially limitations on deductibles and co-pays, look for products featuring limited provider networks as The Next Thing in cost containment. It worked 25 years ago, and it'll work today.