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Cost-conscious employers revisit HMOs

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Health insurers and employers are limiting plan members' choice of doctors and hospitals in a revamp of the once-popular health maintenance organization model that focused on runaway health costs.

Now, however, provider networks are being tightened to include only those lower-cost doctors and other providers who also produce better outcomes and improve patient satisfaction.

In late June, citing high costs and massive projected losses, Blue Cross and Blue Shield of Minnesota said it will offer only a narrow-network HMO to state residents who don't have employer-sponsored coverage. More than 100,000 people will have to find new coverage for 2017, according to the insurer.

BCBS has company in shifting to narrower networks, which limit the doctors patients can see and hospitals they can use without paying higher out-of-network charges. On public insurance exchanges established under the health care reform law, about half of plans had a narrow network in 2015, and median premiums for narrow networks were as much as 23% less than those for broad-network plans, according to a McKinsey & Co. study.

Employers are showing greater interest as well. In 2015, 26% of large employers offered “high-performance networks” — or narrow networks based on quality and cost — in some or all of their plans, according to the Washington-based National Business Group on Health.

“We think that there's going to be a strong future,” for high-performance networks, said Steve Wojcik, NBGH vice president of public policy.

The tactic, which sources say limits wasteful use of health care services, is not without its controversy.

Narrow networks, made popular by HMOs that became prevalent in the 1980s and 1990s, resulted in consumer rebellion against the limited choices of doctors and hospitals. Some critics say the approach often requires patients to travel farther to get care, and others argue many narrow networks lack enough specialists.

“Consumer choice was extraordinarily high on the consumer preference list” a few decades ago, said Dr. A. Mark Fendrick, director of the Center for Value-based Insurance Design at University of Michigan in Ann Arbor and a professor of internal medicine and health management and policy.

But as health costs have risen and individuals' share of the costs increased, there's been “a shift in terms of consumers willing to give up ultimate unlimited choice to be able to save some out-of-pocket expenses,” he said.

For example, out-of-pocket spending for hospitalizations of patients with private health coverage rose 37.3% from 2009 to 2013, when it reached $1,013 on average, according to a study published in June by JAMA Internal Medicine and conducted by researchers with the University of Michigan.

“This is a much more blunt instrument to try to control demand by the employees,” versus high-deductible health plans, which attempt “to get employees to use less of all care,” he said.

“A narrow network to us from a design standpoint is if we could have certain hospitals that we steer our employees to that says this is a good hospital for this type of procedure, we know your procedure is going to be even better … so we will incent you to go to those good hospitals,” said Carol Partington, employee benefits and compensation manager at Oak Brook, Illinois-based Elkay Manufacturing Co., a maker of stainless steel sinks.

Elkay introduced a narrow network for specialty surgeries, such as heart or knee surgery, in January. For employees who use one of the in-network hospitals, determined by Blue Cross Blue Shield based on outcomes data, Elkay will pay 90% of the employee's cost after the deductible, rather than the usual 80%.

Elkay, however, does not have a narrow network for primary care visits.

“It made more sense for the specialty surgeries because those are where your costs are,” Ms. Partington said.

But few other employers use narrow networks because “there are not a ton of high-performing networks out there that have demonstrated over time that they are effective,” said Dan Graovac, Boston-based principal of health exchange solutions with Xerox HR Services.

For a large employer with employees across the country, the narrow network strategy is more difficult to pull off.

“They need coverage across many states, and so oftentimes these broad networks are still the general preference of the employers that we work with,” said Trevis Parson, Philadelphia-based chief actuary of health and group benefits at Willis Towers Watson P.L.C.

Even so, experts expect high-performance networks to grow in popularity, especially as employers remain cost-conscious.

“There's a cost gap that employers are still continuing to have to solve, and they are not just looking at the dollar side of the cost equation anymore; they are also looking at the use side of the cost equation,” Mr. Parson said. “Where do we avoid unnecessary readmissions? How do we manage our message to employees and our contracts with providers in a way that puts programs in place that push away unnecessary use of services and drive better outcomes?”

And as HDHPs have become more widespread — 83% of large employers said they would offer an HDHP in 2016, according to the 2015 NBGH study — it's likely narrow networks also will become more common, said Sandra Morris, former senior manager of U.S. benefits design at Procter & Gamble Co. and now the owner of consulting firm About Quality Benefits Design L.L.C. in Cincinnati.