Modernize your network for near term savings


Plans must act now on near-term medical cost reduction opportunities to strengthen their competitive position.

Thanks to the mandates of the Patient Protection and Affordable Care Act (PPACA) and the fundamental need for reform, the healthcare industry will undergo profound long-term transformation in the pursuit of improving care and patient engagement and lowering costs. As part of this transformation, every facet of the healthcare system will face scrutiny, including care delivery, payment models and patient engagement.

However, there are sizable opportunities to improve medical value in the near term, and that health plans should not ignore these while more systemic, transformational change unfolds.

Health plans can achieve savings of between 6% and 12% in the near term without compromising quality of care or longer-term initiatives. For example, a major regional health plan had identified roughly $300 million in savings as part of a cost-cutting effort. Another $200 million (or 6% of total costs) was identified in many of the same cost areas the health plan had been working on.

Specifically, there are three categories of opportunities with high potential to reduce medical costs in the near term: modernizing the network, controlling specialty pharmacy costs, and differentiating between specialized and non-specialized services and devices.

Modernizing the network

Traditionally, many health plans have used broad, inclusive networks to differentiate themselves. As a result, plans can find themselves keeping low-quality providers in the pursuit of broad access. But a modernized network, as described below, strikes the right balance between cost and quality.

Although most health plans have some network design and pilot initiatives underway to tier and/or narrow their networks, very few have implemented those initiatives broadly in their markets. The few preferred networks are based on fee-for-service unit costs and process quality metrics. A handful of health plans have started to use sophisticated analytical tools to segment their providers by holistic episode costs and quality outcomes data. One health plan has projected 4% to 6% medical cost savings through tiering of its network using this type of segmentation. Eventually, the total cost of population management, along with quality and consumer satisfaction, should be the basis for provider tiering. Using this standard will align a plan’s network strategy with the objective of improving cost, quality, and consumer satisfaction.

Narrow and tiered networks have strong potential to improve medical value; however, implementing them across multiple dimensions is a challenge. Limiting access, particularly to the highest-cost providers (e.g., academic medical centers), could result in significant pushback from a market accustomed to unrestricted access. It could also have a negative impact on the health plan’s brand.

Given these issues, health plans should implement cost and quality requirements for the network, allowing providers to improve their performance. The process should be transparent and collaborative: plans make the objectives and standards clear, point out quality issues and make suggestions to providers on how to improve quality.

In general, narrowing the hospital network will offer the highest value, but it may be the hardest step given the difficulties in access it could create (especially in markets with few hospitals). Modernizing the specialist-physician portion of the network provides the second-best increase in value and is somewhat easier to manage. The sales team should be prepared to “sell” the modernized network and proactively handle any negative market perceptions about narrowed and/or tiered access.

Controlling specialty pharmacy costs

Specialty drugs make up 30% of total drug spending for commercial health plans, and that percentage is expected to rise over the next five years, driven by increases in both unit costs and utilization. This category presents great potential for cost savings in the purchasing of both the drugs themselves and the attendant services.


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For example, some plans are collaborating with providers to develop and follow clinical pathways. In addition to offering cost benefits, pathways enable providers, such as oncologists, to obtain the latest, best thinking about treating various diseases and help doctors select the drug that offers the best balance between toxicity and benefit.

Optimizing the site of care is another opportunity to trim near-term costs in specialty pharmaceuticals. Develop incentive programs to help steer specialty-drug administration from hospitals to lower-cost sites, such as outpatient facilities. Supporting high-quality lower-cost providers helps ensure that they can stay in business-a genuine concern given the trend for academic centers to purchase such practices and brand them as part of the medical center.

Having a capability in companion diagnostics-that is, systematically incorporating the use of diagnostics to identify or rule out therapy options, particularly in oncology-reduces guesswork and trial and error. The result is lower costs, improved patient care, and a more positive experience for the patient. Finally, optimizing the specialty pharmacy distribution with such options as white bagging and split filling, offers greater transparency into drug spending and reduces waste.

Differentiating between specialized and non-specialized services and devices

Although modernizing the network is as much art as science, specialized services represent an opportunity to apply basic principles of purchasing and supply chain management.

Health plans purchase a number of ancillary products and services-dialysis, durable medical equipment, diagnostics/imaging, and infusions, among others-from a variety of vendors at a variety of prices. Some of these are differentiated in their design and quality, and others are not. Health plans should identify the service categories that are undifferentiated and should drive business to the lowest bidder for these services, while maintaining a threshold of good quality and experience; for differentiated services, health plans should steer members toward high-quality, lowest-cost service providers.

One effective method for rationalizing the cost differences is establishing bundled payments, or end-to-end packages for specific, well-defined medical services such as knee replacements, for which procedures are fairly standardized. To capture value, health plans can analyze provider care on a comparable basis across a standard bundle of care, and reimburse providers that have a high cost per claim at the average episode costs. By using this approach for its dialysis patients, one payer was able to save $2,450 per case annually.

Another approach is to offer incentives to both networks and patients to seek undifferentiated diagnostic services in outpatient settings instead of in hospitals. By using such incentives, one health plan has been able to redirect 12% to 17% of its consumers to lower-cost CT or MRI options, which often are not just less expensive but also more conveniently located for patients. The average savings was $940 per case.

Finally, implantable devices represent another opportunity for savings. An analysis of the implantables supply chain found that manufacturers and group purchasing organizations are collectively garnering margins of approximately 25% of the manufacturer’s cost, and hospitals may mark these items up by as much as 350%. Health plans can reduce costs by acting as or working with a group purchasing organization (GPO) for hospitals, driving manufacturer discounts by standardizing devices for specific applications. Alternatively, they can act as a carve-out distributor, purchasing directly from manufacturers and distributing devices to hospitals.

Strengthen competitive position

Virtually all health plans experience waste, or misuse of resources, to some degree in the delivery of care. At the same time, most are able to achieve savings while preserving-or even improving-the quality of care by focusing on some of the initiatives outlined above.

Health plans that wait and focus only on the long-term, transformational initiatives are taking an unnecessary gamble. Although they are essential, payoff from such initiatives is more uncertain, and by definition more distant. Health plans that choose to act now on near-term medical cost reduction opportunities will strengthen their competitive position while making themselves more nimble and better equipped to fund and manage longer-term transformation. Insurers will find it is not a matter of choosing one course over another, but of pursuing all opportunities to improve medical value.


The authors are members of the health payor practice at Booz & Company, leading the firm’s work around medical value management.

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