CHICAGO (Crain's)—A new health insurance option that promises deep discounts through a "narrow network" is being shopped to big, self-insured companies in the Chicago area, a move that could intensify competition among insurance providers and hospitals to hold on to patients.

The Chicago office of Towers Watson & Co., a New York-based consulting firm, has teamed up with Salt Lake City-based Imagine Health Inc. to launch a pilot version of the Smart Employer Network in Chicago in 2013. Employers in Idaho, Texas and New Mexico, where similar networks have been launched since 2007, have seen double-digit reductions in provider reimbursements, while hospitals and physicians have at least doubled and many times tripled their patient loads, Imagine Health CEO Allison Robbins says.

But none of these test markets is as spread out as Chicago, where large companies attract workers from Rockford, Ill., to Joliet, Ill., to northwest Indiana. “That's going to be a challenge for them to get the right mix of providers,” says Nancy Daas, a partner at Chicago-based benefits consultant CMC Advisory Group.

Steve Riedl, a Towers Watson senior consulting actuary who is leading the charge to implement Smart E here, acknowledges it's an ambitious effort and a “significant investment for companies” that participate, but the consultancy projects that companies will save millions of dollars within a few years and have healthier workforces.

Narrow networks, in which people seek care with a limited number of hospitals and physicians in exchange for discounted rates, are becoming more popular as health care reform pushes hospitals and physicians to be more accountable and employers look to cut costs as medical expenses soar.

But introducing another insurance option in Chicago could be challenging, industry experts say. Many carriers already offer narrow networks and have or are rolling out incentive plans tied to high-quality care. Also, workers might be hesitant to cut longtime ties with doctors who don't get into the network.

“You have to make it an awful big difference financially to get somebody to say I'm going to leave my current doctor because I can save some money,” says John Dougherty, a Glen Ellyn, Ill., attorney who has been involved in health care for 30 years.

Imagine Health started building custom networks for large employers in 2002 as a way to help companies brand their health insurance plans, Ms. Robbins says. The company now covers about 150,000 people in seven states, with plans to expand in up to six major metro markets next year, including Chicago.

“There's pessimism really as to whether we're going to be able to put something together that results in a lower cost point and higher performance,” Ms. Robbins says. “I think that's normal when you're innovating and you're doing something very new for folks.”

The Smart E Network would offer deep discounts to employers for seeking care at a select number of hospitals and physician groups, which must bid to be part of the network. Their inclusion is based on the quality of the care they provide determined through a variety of metrics, such as patient outcomes and readmission rates. Providers agree to the discounts in exchange for a surge of patients.

Towers Watson is in the midst of a two-month feasibility study with five metro Chicago companies, each with at least 5,000 employees. Companies could save up to $1,500 per employee in health care costs a year, according to Mr. Riedl. For a company with 5,000 employees, that would amount to $7.5 million in annual savings.

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Employees, who still would have access to a broader network, also would save. Their total out-of-pocket costs would be half that of a traditional PPO, he says.

Each participating company would pitch in to implement and maintain the network, with the cost likely to be based on a subscription model, including the number of participating employees and retirees and how much their medical care costs. Ideally, insurance carriers would offer the network alongside other options they provide to participating companies. But if they don't, a third-party administrator would.

Mr. Dougherty says every local carrier except Blue Cross & Blue Shield of Illinois, which dominates with nearly half the market share in Illinois, should be worried about a new potential rival.

But Bill Berenson, Aetna Inc.'s regional president of Illinois and four other Midwestern states, says the Hartford, Conn.-based company doesn't view the Smart E Network as a threat. “Everybody's going to be looking for innovative solutions,” he says.

Not qualifying for the network could be a blow to hospitals already struggling to remain independent amid costly health reform changes and rock-bottom reimbursement rates. Though Chicago's South Shore Hospital receives about 80% of its reimbursements from Medicaid and Medicare, CEO Jesus Ong says he'd like to keep any privately insured patients he can.

“We take care of a lot of poor patients. When you talk about commercial payers, we don't have much,” Mr. Ong says of the 125-bed community hospital on the city's South Side. “But to lose the little we have, of course it will affect us financially.”

Hospitals in other markets that haven't gotten into the network typically shift their effort and budget dollars to improve results with the hope of becoming included later, Ms. Robbins says.

Kristen Schorsch is a reporter for Crain's Chicago Business, a sister publication of Business Insurance.