Health insurance provider networks: a disruption opportunity

“It’s easy to maintain your integrity when no one is offering to buy it.”

- Marc Maron

Commercial health insurance is hog-tied

More than 178 million consumers in the US have commercial health insurance provided by their employer or purchased directly from Healthcare.gov – representing about 50% of the total population. The cost of healthcare for this national plurality of consumers has faced annual inflationary cost increases far out-pacing any other market sector.

Why are the majority of US citizens facing unreasonable annual cost increases? It helps to look at the underlying economics.

Finite resources drive monopolistic behavior

If you wanted to open a new hospital tomorrow you would not be allowed to, unless you were in Arizona, Minnesota, or Wisconsin. This is because every other state requires some form of Certificate of Need. And existing hospitals and health systems fight vigorously to block approval of them. The certificate requirement is intented to help hospitals maintain financial viability by protecting them from competition. The logic being since they are critical social service they need special dispensation. However, the unintended outcome is monopolistic economic power in the commercial market across the country.

There are no major regulatory barriers to opening a physician practice, imaging center or specialty clinic today. But because there are a finite number of physicians in the US, particularly specialists, the provider community in each city and county effectively has similar economic monopolistic power in the commercial market. And keep in mind providers trained outside the US are prevented from becoming licensed here without a domestic degree and residency, keeping the provider resource pool finite.

Network adequacy hampers price negotiations

Health insurance carriers are required to provide an adequate provider network in all geographies in which they sell insurance. Even “narrow” Health Maintenance Organization (HMO) insurance policies must provide a minimum number of virtually every type of provider and facility within a reasonable driving distance in every county.

This network adequacy requirement paired with the local and regional healthcare delivery monopolies puts hospitals and providers in the catbird seat. Health insurance companies negotiate all kinds of deals with hospitals and provider groups, offering incentives, revenue sharing deals, threats and even begging. But at the end of the day, the care delivery channel has the upper hand and sets the underlying unit prices of commercial healthcare.

Without an external force challenging the local or regional healthcare community, the monopolistic price trend has continued unabated. Shifting to value-based care contracts and regulatory interventions have tempered the economics in some cases, but not materially. This is a classic example of a resource constrained system. Without the addition of new providers to the local commercial market, the high cost of care can be maintained.

A resource constrained system ripe for disruption

The rapid growth of retail and on-demand clinics has been in direct response to consumer demand for lower prices and increased access. This healthcare sector is expanding exponentially, with a market value in 2023 of $2.79 billion. Many operate at least partially on a cash pay basis, since for consumers the cash pay cost may not be that much more than the out-of-pocket costs imposed by their commercial health insurance plan – an easy tradeoff for quick, convenient access to care.

New market entrants that directly employ physicians and offer commercial insurers a lower unit cost, often paired with upside financial performance incentives, are uniquely positioned to expand the resource constrained provider pool and drive new competition. Examples include Galileo Medical, Teledoc and PlushCare. These companies often face objections from the local provider community based on continuity of care concerns or virtual provider referrals to in-person specialists for follow-up visits. But their rapid adoption by consumers tells a different story, as does their financial growth.

If your company has a goal of disrupting the healthcare monopoly, be sure to think strategicallyabout the multiple opportunities across the commercial healthcare spectrum and keep in mind the multiple consumer segments served.

What does this all mean?

When you look at both the regulatory and professional resource constraints on the commercial health market, it is no wonder the 2023 commercial premium trend is a 7% increase, compounded by a 10% deductible increase. The provider community highlights their high administrative cost burden, inflation impacts on salaries and finite resources – all of which are true. But non-healthcare companies in markets with open competition face similar challenges and have figured out strategies to control prices.

It is easy to fall back on year-over-year price increases when no one can push back. But there are new market entrants coming to town and expanding the provider pool. Time will tell what impact they will have on commercial market prices.

Copywrite 2itive 2024

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com