Provider Network Instability: Implications for Choice, Costs and Continuity of Care

Issue Brief No. 39, June 2001 -- Ashley C. Short, Glen P. Mays, Timothy K. Lake

Many of the health care issues that mattered most to consumers -- including provider choice, costs and continuity of care -- depended on health plans' ability to maintain adequate networks of hospitals, physicians and other caregivers. When providers dropped out of plan networks, consumers could suddenly face the choice of switching caregivers or paying more for out-of-network services. Network instability was becoming increasingly common in health care markets across the country and could arise from contract disputes between health plans and providers or from provider organization insolvencies. This Issue Brief, based on the Center for Studying Health System Change's (HSC) 2000-01 site visits to 12 nationally representative communities, examined this growing trend and its implications for consumers, including reduced choice and higher costs.

Sources of Instability

The ability to choose one's caregivers had long been a concern for consumers in managed care plans. Traditionally, plans tried to control costs by directing members to networks of contracted providers, fueling consumer anxiety that preferred physicians or hospitals would be excluded. These worries about restricted provider choice had eased in recent years as health plans responded to market pressure by building larger, more inclusive networks.

Recently, however, consumers in many communities found their provider options threatened again -- this time by network instability. Network instability occurred when providers withdrew from plan networks, threatened to withdraw, or when health plans unexpectedly dropped providers. These changes created uncertainty for consumers about whether their health plan would continue to cover their preferred caregivers. When network changes occurred, consumers frequently had to switch providers abruptly or pay more to keep seeing the ones they had.

In contrast to two years earlier, network instability had become a major concern in many local health care markets. HSC found evidence of significant network instability affecting many consumers in more than half of the study sites: Boston, Greenville, S.C., Miami, Northern New Jersey, Orange County, Calif., Phoenix and Seattle.

Contract disputes between health plans and providers were the most frequent cause of network instability and typically revolved around disagreements over payment levels, financial risk-sharing arrangements and the accuracy or timeliness of payments. While disputes between plans and individual providers over these issues were common, some large and prominent provider organizations had recently taken a hard-line stance, threatening contract terminations that would disrupt care for large numbers of consumers. Many disputes had arisen not at the point of contract renewal but while existing contracts were still in force, adding urgency to the problem. Plans were left with the difficult choice of reconciling with providers or pursuing costly legal action to enforce existing agreements.

Insolvencies of large provider organizations, such as physician practice management companies (PPMCs), physician-hospital organizations (PHOs) and independent practice associations (IPAs), also caused considerable network disruption because these entities, rather than individual physicians, typically held health plan contracts. When these organizations collapsed, plans had to quickly develop new contracts with individual physicians to avoid periods when those doctors were not part of any plan's network. This was a major issue in Orange County when KPC Medical Management, a large PPMC, closed 38 clinics in late 2000 and filed for bankruptcy. KPC's failure raised fears about continuity of care and access to patient records for up to 300,000 people.

HSC also found instances where health plans themselves caused network instability by making wholesale changes to network size or composition with little or no warning to employers and consumers who had already purchased coverage. Plans took these actions after identifying high-cost providers deemed nonessential to current product offerings and dropping them when contracts expired.

Consumer Consequences

When a provider left a plan network, patients could continue seeing that provider and pay higher out-of-pocket costs; establish a new relationship with a remaining network provider; or switch to a different plan that contracted with the original provider, if that option was available. These choices were particularly difficult for patients with long-standing relationships with their caregivers or those receiving treatment for serious or chronic conditions. The sickest patients, who most needed uninterrupted care, were also the most likely to find out-of-network costs prohibitive, especially if they were in traditional health maintenance organizations (HMOs) that did not cover out-of-network services.

Network disruptions that occurred after an employer's annual open-enrollment period posed the greatest threat to continuity of care because consumers typically could not switch plans immediately to follow their preferred providers. Given the relatively brief enrollment windows offered by most employers, many disruptions fell outside this narrow period.

Patients who chose to remain in their plan's network could encounter disruptions in care continuity and administrative complications, as happened with KPC patients in Orange County. In response to KPC's dissolution, some plans assigned groups of patients to new providers through "block transfers" that did not account for prior patient preferences or established patterns of care within families. In some cases, family members ended up assigned to different physicians. More serious problems arose from delayed transfer of medical records, which jeopardized continuity of care. Plans also had difficulty finding physicians willing to accept new patients. Some Orange County doctors were reluctant to take KPC patients because they either lacked capacity or worried about pent-up demand for costly services that patients may not have received in KPC's final months of operation.

The extensive publicity surrounding network instability also generated consumer anxiety. Communities had watched through news media as provider organizations dissolved, terminated contracts and contested payments. Plans and providers in recent contract disputes had used advertisements, mass mailings and other direct appeals to patients to present their side of the story. These tactics, combined with reports of actual disruptions, fueled consumer worry about the security of their own provider relationships.

Employers, Plans and Policy Makers Respond

Network instability confronted employers and health plans with a difficult tradeoff. While instability threatened to erode the broad networks consumers strongly valued, costs would rise if health plans averted disruptions by offering providers higher payments. In Orange County, the newly negotiated rates of a dominant hospital system -- St. Joseph Health System -- were expected to contribute to double-digit premium increases in 2002. Network instability also put policy makers in a difficult position, forcing them to balance consumer protection against market dynamics.

Faced with a relatively tight labor market and consumer demand for broad provider networks, some employers were pressing plans to prevent disruptions. Policy makers in some sites had also acted to limit the effects of instability on consumers.

Responding to immediate threats, while some employers preferred to stay out of contract disputes, others had intervened to push for resolution. Large employers could pressure plans to maintain broad networks by threatening to drop plans that lost key provider groups. In Boston, Tufts Health Plan faced intense pressure from employers who threatened to take their business elsewhere if Tufts did not retain Partners HealthCare System, a prestigious hospital system with more than 4,000 affiliated physicians. In Seattle, GTE mediated a dispute between a large provider group and health plans, and in Miami, one plan found that employers were willing to contact providers on the plan's behalf.

Policy makers had also used their influence to avert disruptions. California regulators tried to protect members of KPC's ailing predecessor, MedPartners, by placing the company into receivership. When KPC began to struggle, the state asked plans to lend temporary financial assistance, a strategy that ultimately failed. Network instability also drew the attention of the Massachusetts attorney general. When negotiations between Partners and Tufts stalled, the attorney general encouraged both parties to resume talks to prevent consumer disruptions. More recently, concerns about Partners' negotiating power reportedly prompted the attorney general to weigh in on the now-resolved dispute between that system and Harvard Pilgrim, a financially troubled plan that the state had shored up.

Looking to guard against future instability, employers, plans and policy makers were putting in place performance guarantees and policies aimed at ensuring continuity of care and provider organization solvency. In some communities, employers established performance guarantees requiring plans to minimize physician turnover, maintain adequate provider numbers and provide notice of contract terminations or face financial penalties. Employers and some public purchasers also explored requirements for plans to disclose provider contract expiration dates or guarantee that providers listed in directories would serve enrollees for the full contract year. While these requirements might encourage plans to keep networks intact, they also promised to increase administrative costs and further undermine plans' negotiating leverage with providers.

Some health plans had begun reexamining their contracting models and network management strategies to reduce exposure to instability. In Miami, several plans were moving away from full-risk contracts with PHOs and other contracting intermediaries that represented large portions of their networks. Instead, they were using direct fee-for-service contracts with individual physicians and hospitals, making it less likely they would lose large numbers of providers at once. Plans in several markets also started monitoring the financial health of contracted providers and offering consultation to providers in financial difficulty to prevent disruptions from insolvencies.

Policy makers were also keeping closer watch on providers' financial status. Spurred by provider organization failures and the resulting chaos, the California Department of Managed Health Care announced regulations requiring provider organizations accepting risk to furnish detailed financial information quarterly. In Medicare, Congress provided Medicare+Choice plans with increased funds under the Benefits Improvement and Protection Act (BIPA) in December 2000, allowing plans to use the money to improve provider networks. This was the most common use of the funds, with plans representing 65 percent of Medicare+Choice beneficiaries using the money solely to enhance provider networks.

Policy responses also included steps to protect consumers when providers left networks. Many efforts focused on preventing network instability from disrupting care for patients in an active course of treatment. Policies in use or under consideration in some states included contract termination regulations requiring providers to continue treating active patients under the terms of the previous contract for a specified period, and contract notification regulations requiring plans and providers to give specified notice before terminating or not renewing contracts.

Implications

Network instability had fueled consumer confusion about health care choices and costs and threatened to disrupt established physician-patient relationships and continuity of care. These events were likely to become more frequent and widespread, particularly if rising medical costs continued to draw providers and plans into conflict over payments and employers intensified pressure on plans to control costs.

Several market developments might lessen the problem, but each came with associated costs. Employers might move away from plans that relied on large, single-signature contracts with intermediary organizations such as PHOs, since these arrangements were particularly vulnerable to wide-scale disruption. However, without such arrangements, plans would find it harder to engage in risk contracting that gave providers a financial incentive to manage costs. Alternatively, employers might favor staff- and group-model HMOs that were inherently more stable, though with more limited provider networks. Both Kaiser Permanente in Orange County and Group Health Cooperative in Seattle expected to gain membership as a result of competitors' network instability problems.

Network instability might also lead consumers and employers to favor preferred provider organization and point-of-service products offering out-of-network coverage. With this approach, consumers would not be immune from instability but would have some coverage for preferred providers if a disruption occurred. In exchange for greater stability, they would forgo the added benefits typically covered by HMOs and might face higher premiums and greater out-of-pocket costs.

Employers and consumers might also opt for new types of products that helped minimize network instability. Health plans in several communities expected to introduce products allowing employers and consumers to choose among multiple tiers of provider networks, each with different premium and cost-sharing levels based on providers' payment rates. Some anticipated these tiered products would help keep networks intact by giving plans more flexibility in the rates they could offer providers. However, such products might put some providers out of reach for employers and consumers who could not afford the higher-priced options and could complicate efforts to manage care.

As employers, plans and consumers grappled with network instability, policy makers would increasingly be pressed to protect consumers from significant care disruptions. Several states were already experimenting with options ranging from mediation and informal problem-solving to regulatory standards establishing rules of engagement and disengagement between plans and providers. The successes and shortcomings of these interventions would provide insight into how policy makers could address network instability meaningfully without imposing excessive costs on the health insurance market.

Network Instability in Medicare and Medicaid

Medicare and Medicaid beneficiaries who relied on managed care encountered even more severe problems with network instability than privately insured patients. Because Medicare and Medicaid plans received fixed government payments, they had less flexibility than their commercial counterparts to negotiate payments with providers, leaving them especially vulnerable to instability. In Medicare, plans could charge beneficiary premiums, but plans often felt constrained in what they could charge and still remain competitive. In many communities, health plans had been unable to maintain adequate networks for their Medicare and Medicaid products, leading them to drop these products entirely and reducing plan options for beneficiaries. For example, difficulties maintaining provider networks reportedly led Seattle's Regence Blue Shield to discontinue Medicaid contracting at the end of 2000, forcing 50,000 Medicaid members to find new plans.

When network disruptions occurred in Medicare and Medicaid, enrollees faced the same decisions as commercially insured people about switching providers or paying more to see their usual caregivers, but with distinct differences. Unlike many commercial managed care products, Medicare and Medicaid HMOs typically provided no out-of-network coverage, so enrollees remaining with a provider who had left a network had to bear the entire cost of care. This option was unrealistic for many Medicare beneficiaries and certainly for most Medicaid enrollees.

On the other hand, Medicare managed care enrollees -- and in some states, Medicaid beneficiaries -- could switch health plans once a month, which allowed them to maintain access to their providers but left health plans vulnerable to major enrollment shifts. Medicare planned to eliminate this option in 2002 by phasing in an enrollment lock-in period similar to commercial insurance plans.

Notes

1. Strunk, Bradley C., Kelly J. Devers and Robert E. Hurley, Health Plan-Provider Showdowns on the Rise, Issue Brief No. 40 (June 2001).

2. Ibid.

3. www.hcfa.gov/medicare/bipafact.htm

Sources and Further Reading

Kaiser Family Foundation — Employer Health Benefits Survey — Annual data on employer-sponsored health insurance trends.

CMS — Health Insurance Marketplace — Federal marketplace information and enrollment resources.

Health Affairs — Peer-reviewed health policy research and analysis.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care system performance and coverage.