The ability of consumers to engage in a side-by-side comparison of plans on the individual and small employer (SHOP) Exchanges incentivizes insurers to compete on premium price like never before. However, the new essential health benefits and metal tier coverage requirements, guaranteed issue requirements, and community rating standards really level the playing field among insurers in terms of their ability to compete on cost. Therefore, insurers are turning to limited network products as a way to leverage more favorable pricing from providers, drive down unit cost, and lower premiums.
Historically, insurers had the ability to lower premiums by designing benefit plans that excluded, or offered minimal coverage for specific benefits. For example, an insurer may have offered a product that excluded maternity benefits, thus avoiding the costs associated with covering those benefits and attracting lower risk individuals and small businesses. But to ensure all individuals have access to comprehensive coverage, the ACA rules now require insurers to cover a set of 10 essential health benefit (EHB) categories, and each state to identify an EHB benchmark plan or default to the small group plan with the largest enrollment in the state, in accordance with the federal selection criteria.
Insurers must offer the EHB benefit package and design a cost-sharing structure within the confines of the metal tier (bronze, silver, gold, and platinum) actuarial value limits. Although insurers can still use medical management as a means to influence consumer health decisions, they must cover the defined set of EHBs within the cost-sharing limitations and have limited ability to use benefit plan design to differentiate their products from a pricing perspective.
Insurers have also been able to control premium costs through medical underwriting. In the individual market, an insurer could deny coverage to individuals with pre-existing conditions (guaranteed issue in the small group market was required prior to the ACA), thus ensuring those individuals did not contribute to the insurer’s claims costs. In both the individual and small group markets, insurers had greater flexibility in developing premiums, and could offer higher premiums to individuals and employer groups with higher risk profiles.
The new guaranteed issue and community rating requirements significantly change the medical underwriting landscape. Insurers can no longer deny coverage to individuals purchasing coverage in the individual market. Additionally, insurers must now calculate premium rates equally across both the individual and small group markets and can only differentiate premium rates at the individual level based on geography, age, and tobacco use.
These requirements, when taken together, significantly limit the parameters insurers can use to develop premium rates. Now, the most effective way for insurers to compete on premium price is to reduce their unit cost — the amount an insurer pays to a provider for services rendered to its members. To accomplish this goal, insurers are turning to limited provider network products. A limited provider network generally includes a smaller subset of providers within the insurer’s overall provider network. Members covered under a limited network product generally must receive services (with the exception of emergency services) from a provider within this identified subset.
Approaches To Limited Networks
Using the lowest cost providers. In developing a limited network, one approach is for an insurer to simply identify its lowest cost providers and include only those providers in its limited network. Under this approach, insurers are solely focused on decreasing unit cost.
Provider rebates tied to the medical loss ratio. Another approach is to provide incentive payments to providers within the insurer’s limited network if certain quality metrics are met and the insurer’s medical loss ratio (MLR) at the end of the year is below the federally required MLR. Under the MLR requirements, insurers must allocate 80 percent of premium revenue collected in the individual and small group markets to the payment of claims and for quality improvement activities. If an insurer falls below this 80 percent threshold, it must pay the difference between actual claim experience and the 80 percent in the form of rebates to members.
If an insurer is in a rebate position, rather than pay rebates, it will take those dollars and use them to make incentive payments to the providers in its limited networks for managing care below the required MLR target, provided they also meet the agreed upon quality metrics. This limited network contracting strategy allows insurers to address unit cost and the quality of care received by their members, and it aligns with the MLR requirements.
While limited networks may have the potential to mitigate premium increases and drive quality in the private marketplace, they also have the potential to limit a consumer’s choice of, and access to, providers. Therefore, stakeholders need to monitor the impact of these networks and work together to find the appropriate balance among cost, quality, access, and choice.