Healthcare providers have raised alarms over narrow provider networks in the public health insurance exchanges, but Moody's Investors Service says proposed rules to open up the networks could drive health plans to drop out of the new market.

Proposed federal rules that would limit the ability of health plans to craft narrow provider networks for the PPACA exchanges would benefit some hospitals, but tighter regulation could create an unbearable level of risk for insurers, market analysts say.

In a healthcare "sector comment" released last week, Moody's Investors Service predicts that plans to limit narrow networks in 2015 would benefit rural hospitals and safety net hospitals because those facilities are the most likely to be left out of a narrow network.

"If [hospitals] are considered essential, that would protect them from being excluded from a narrow network," Moody's Senior Vice President Lisa Martin said Monday of the new rules under consideration at the federal Centers for Medicare & Medicaid Services. "[They provide] protection in terms of market share."

The Moody's sector comment singles out CMS's plan to increase the percentage of "essential community providers" included in a health plan's provider network for a public exchange: "While not mandating the inclusion of a specific provider, the proposal requires insurers offering plans on the exchanges to provide adequate access to essential providers in order to be certified as a qualified health plan. Adequate access means that 30 percent of essential community providers in the plan area must be included in the network, an increase from 20 percent under current regulations."

Moody's defines essential community providers as "safety-net hospitals, children's hospitals, and other providers that serve low-income and medically underserved individuals."

A More Stringent Review Process
CMS's proposed rule changes for provider networks include the following justification for the higher essential community provider standard: "As only one issuer submitted a justification for the 2014 benefit year as a means to satisfy the 20 percent ECP standard, we anticipate that our intended proposal of this 30 percent ECP standard for the 2015 benefit year will be a feasible standard for issuers to satisfy."

The proposed rule changes for provider networks include a more stringent review process. According to the CMS Draft 2015 Letter to Issuers released Feb. 4, the network adequacy review for 2014 relied largely on an insurer's accreditation status, state review where the state standards were at least as high as federal standards, and the collection of "network access plans."

For 2015, health plans operating on the exchanges will be required to submit a "provider list" that includes all in-network facilities. "CMS will review the collected provider list to evaluate provider networks using a 'reasonable access' review standard, and will identify networks that fail to provide access without unreasonable delay," the federal agency's proposed rule change says.

The document says CMS will focus its adequacy review on areas that "have historically raised network adequacy concerns," including hospital systems as well as primary care, mental health and oncology providers.

'Difficult to Keep Those Costs Down'
Martin said placing tighter restrictions on narrow networks would undermine one of the prime strategies health plans have employed to lower premiums and provide affordable health insurance on the new public exchanges. "When the networks are narrower, the insurance companies pay the hospitals less in exchange for a higher volume," she said, adding that lowering overall healthcare costs is a top objective of federal reform efforts. "If there are regulations that discourage narrow networks… it's going to become difficult to keep those costs down."

Steve Zaharuk, a senior vice president at Moody's assigned to follow the US health insurance market, says narrow networks are among a limit set of cost containment tools available to health plans. "They look at levers they can push to limit costs, and one way is a narrow network," he said, noting that a relatively high level of benefit coverage is mandated on the public exchanges.

Moody's makes a dire warning to regulators to not push health plans on the exchange too hard: "Forcing insurers to expand their networks will result in higher premiums to cover higher cost networks, discouraging enrollment particularly for the younger and healthier population. If the trend were to continue, these products would eventually become unsustainable and insurers would leave the exchange marketplace."

Zaharuk said health plans will react to any curtailment of narrow networks on a state-by-state and market-to-market basis. "Each market is a little bit different, so I don't think you're going to see any one trigger."

There are no penalties for health plans that choose not to participate in the public exchanges, so large companies that "have other businesses they can pursue" could be tempted to pull out if narrow networks are curbed, Zaharuk said. "At some point, it's not worth it," he said. "Each company is going to have to make a choice on this."

Big Interest in Narrow Networks
The future of narrow networks in the public exchanges and other health insurance markets was a hot topic at last week's exchange forum hosted by America's Health Insurance Plans in Washington.

Diana Dooley, secretary of California Health and Human Services as well as chairwoman of the California Health Benefit Exchange, said she was a strong advocate for narrow networks. "It has been too easy for the plans to pass the costs along, and we need to give insurers more power to negotiate," she said during one of the featured addresses of the forum.

James T. O'Connor, principal and consulting actuary in Milliman's Chicago office, told forum attendees that narrow networks have become an essential consideration for health plans setting premium rates on the public exchanges. "Networks were a key factor in setting the rates we've seen," he said of premiums reported on the exchanges for 2014.

O'Connor said narrow networks provide some exchange consumers with a valuable option. "Narrow networks may be more attractive to healthy people," he said, adding narrow networks appeal to consumers who struggle to find affordable healthcare.

If narrow networks are allowed to thrive on the public exchanges, O'Connor predicted they will become a dominant feature in the evolving US health insurance industry. "Over time, the value networks are going to win out," he said.

President Obama's hallmark domestic policy initiative has been blunting the worst shortcomings of the US healthcare system. But it is unrealistic to expect the PPACA alone to totally transform the practice and financing of medicine.

"Every revolution evaporates and leaves behind only the slime of a new bureaucracy." – Franz Kafka

After receiving a recent HealthPocket.com study on the Top 10 medical services excluded from health insurance policies on the new public exchanges, my first reaction was "here we go again" – here is yet another black eye for the PPACA rollout.

HealthPocket.com, which is based in Sunnyvale, CA, found that eight of the top 10 medical services excluded from health insurance policies before the PPACA are also excluded from insurance policies on the new public exchanges. "There hasn't been a dramatic change from the pre-exchange market to the post-exchange market," Kev Coleman, HealthPocket.com's head of research and data, told me last week.

But on close examination, Coleman says, it becomes apparent why the pre-exchange and post-exchange Top 10 lists are nearly identical, for a host of financial, historical and moral reasons. "The health system expresses itself in that Top 10 list," he says.

The No. 1 medical service excluded from insurance policies before and after creation of the new exchanges is long-term care, which is associated with burdensome costs. "Long-term care is extremely expensive," Coleman said. "If you're inside any institutional facility, it costs tens of thousands of dollars."

Two of the other classes of medical services that appear on both lists, dental and vision care, have historically tenuous holds in the health insurance marketplace. "Originally, people paid out of pocket for all their healthcare needs," Coleman said. "Things like dental insurance and vision insurance come along much later."

And, he says, a strong moral case can be made against health insurance policies covering cosmetic surgery, which holds the No. 2 slot on both Top 10 lists of excluded medical services.

Evidence-based Medicine Raises Questions of Cost
Coleman and a pair of medical ethicists I spoke with Monday said the HealthPocket.com study contains elements of a brewing conflict over evidence-based medicine.

"Health insurance costs reflect costs of care," Coleman said, adding that evidence-based medicine seeks to "bend the cost curve by covering procedures that have the best clinical outcomes. But then you get into a very sensitive area."

Harald Schmidt, MA, PhD, an assistant professor at the University of Pennsylvania's Department of Medical Ethics and Health Policy, told me that doctors will have difficulties following the dictates of evidence-based medicine when treating individual patients. "They are very often at the sharp end of patients asking for something they saw on TV," he said of physicians. "On other things, there may be stronger shades of gray."

The murky areas present quandaries for all healthcare providers, Schmidt said. "Should you pay for useless care? That's the easy case. But what do you do when something works but it is expensive?" he said. "That's the really thorny one… There are always value judgments involved. That's something we're going to be looking at in the future as we define value when we have to figure cost into the equation."

One set of solutions to pay for treatments that are expensive but effective has been the steady increase in copays and other forms of cost sharing, Schmidt said: "Coverage alone isn't the only thing that matters."

Arthur Caplan, PhD, director of the Division of Medical Ethics at NYU Langone Medical Center, emphasizes that knowing the probability of clinical outcomes does not obviate the need to make value judgments about medical services that are marginal, longshots, or offer low benefits at high cost. "If you don't get agreement on the ethics, the evidence isn't enough," he said.

The Limits of Revolution
For those of you who find the HealthPocket.com study yet another discouraging report from the frontlines of the nation's healthcare reform battles, take comfort in humanity's past experience with revolution before you give up on the PPACA's impact in the future.

One of my first political science courses as an undergraduate included theoretical analysis of the French Revolution. I can see the instructor in my mind's eye and recall one of his fondest maxims: Revolution cleanses a society of its worst abuses, but fails to wash away the majority of longstanding institutions and traditions.

The evolution of the PPACA appears to be following this maxim.

President Obama's hallmark domestic policy initiative has been blunting the worst shortcomings of the US healthcare system, for example, by requiring insurance policies to cover pre-existing conditions. But it is unrealistic to expect the PPACA alone to totally transform the practice and financing of medicine.

"[The Obama administration] is finding that there's still a combination of unintended consequences as well as large issues that are not addressed," Coleman said.

The PPACA's focus on access and affordability has left the question of essential benefits in health plans largely off the revolutionary menu. "We never really have had a fight about benefits," he said.

CMS has issued a clarification on its rule governing how Medicare classifies and pays for short hospital stays, but healthcare providers are still crying foul over the new standard.

A top policy official at the American Hospital Association says last week's Two Midnight Rule guidance letter from federal officials provides welcomed clarifications but leaves the policy fundamentally flawed.

"This is guidance that hospitals have been waiting for," said Priya Bathija, senior associate director of policy at the AHA. "It's been very hard for hospitals to operationalize Two Midnights without the guidance."

She praised the directive in the Feb. 24 guidance letter calling on Medicare Administrative Contractors to "re-review" all claim denials under the Two Midnight Rule's probe and educate process prior to Jan. 30. The Centers for Medicare & Medicaid Services says the MAC claim denial re-reviews are supposed "to ensure the claim decision and subsequent education is consistent with the most recent clarifications. The MAC may reverse their decision and issue payment outside of the appeals process if the MAC determines that a claim is payable upon re-review."

See Also: Hospitals Welcome Two-Midnight Rule Delay

Last week's guidance letter from CMS is the second is less than a month. On Jan. 30, CMS issued a guidance letter that included an update on physician certification of short-term hospital stays.

"The probe and educate review will be beneficial to find out whether hospitals are complying," Bathija said. "It requires the MACs to be consistent. All of the MACs across the country will use the guidance from Jan. 30 to evaluate claims."

Under the rule, which CMS issued last year on Aug. 2, hospitals that admit patients for less than two nights will receive reimbursement at Medicare B outpatient rates. The rule states that hospital admissions shorter than two midnights in length are "generally inappropriate for payment under Medicare Part A, regardless of the hours the patient came to the hospital or whether the patient used a bed."

CMS made its case for the so-called "Two-Midnight" policy in a prepared statement released with the final rule on Aug. 2. "The rule improves value and quality in hospital care and provides clarification about when a patient should be admitted to the hospital and responds to recent concerns about extended Medicare beneficiary stays in the hospital outpatient department," CMS officials said.

"The rule also moves forward with health care delivery system reforms made possible by the Affordable Care Act. These include a new program aimed at improving safety in hospitals and refining the Hospital Readmissions Reduction program."

CMS's prepared statement includes this comment from Administrator Marilyn Tavenner: "This rule helps improve hospital care and establishes clearer guidance to hospitals for when we will consider inpatient care to be appropriate so the system works better for patients and providers."

Rule Resistance
From the AHA's perspective, "This Two Midnights standard is just arbitrary," Bathija said, adding the policy penalizes hospitals for being efficient in patient care or providing treatments that involve a short-term hospital stay.

Bathija said the AHA is asking CMS to either develop a better payment methodology within the Two Midnight policy or to replace the rule with a better method to pay for short-term hospital stays.

The American Medical Association, which has also been an outspoken critic of the new policy, expressed an even more skeptical view following the release of last week's guidance letter.

"The new policy does not solve the problem of unanticipated financial liabilities for patients, and increases documentation burdens for physicians," AMA President Ardis Dee Hoven, MD, told HealthLeaders on Thursday. "Recent guidance from… CMS on the order and certification requirements for physicians leaves many questions unanswered, and has not alleviated confusion. While we are encouraged by CMS's recent delay in enforcement and the decision to have Medicare Administrative Contractors review their application of the new policy, these issues continue to cause tremendous difficulties for physicians and patients."

Hoven said CMS needs to cut its losses and move in another direction. "We will continue to work with stakeholders to rescind the Two Midnight policy and pursue alternative workable solutions," she said.

On Feb. 20, the AMA and seven other medical societies filed an amicus brief in a case before the Second Circuit of the US Court of Appeals pitting a half dozen Medicare beneficiaries against HHS Secretary Kathleen Sebelius.

In the filing, the medical societies assert that they are "concerned that those patients covered under the Medicare Program should receive the benefits to which they are legally entitled and that those patients do not suffer financial hardship on account of arbitrary administrative decisions."

The legal brief claims that the Two-Midnight Rule imposes an unfair burden on Medicare beneficiaries. "The refusal by HHS to afford the plaintiffs the benefits that come with inpatient status led many of them to substantial medical and financial hardships," the medical societies state. "The financial losses for each of the [Medicare beneficiaries] ranged from $4,000 to $30,000."

'Ill-conceived and Poorly Drafted'
Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital in Oceanside, NY, offered a scathing assessment of the Two Midnight Rule via email Thursday:

"The Two-Midnight Rule came out as a way by CMS to deal with the RAC process that they created, which resulted in a huge backlog of unadjudicated appeals and the mounting threat of lawsuits from the AHA and other interested parties on behalf of the hospital industry. It was ill-conceived and poorly drafted and it is why the 'enforcement' has been delayed until October 1, 2014, for now…

"I believe that instead of measuring/defining inpatient status based on the 'clock' they would have been better served to create a system, which they ultimately did do for the Transfer Issue back in 2002, whereby these short stays would be paid using the [diagnosis-related group] methodology but would be reduced for the fact that the stay was short. 

The ability to have to monitor this at the Hospital level has added untold burden and cost and does not lead at all to the triple aim (Patient Satisfaction, Quality Outcomes and Lower Cost) as well as it in fact shifts the financing cost between Part A (Medicare tax component of FICA) and Part B (basically a premium-based financing) and shifts cost to the Medicare Beneficiary…

Bogen, echoing the AMA and AHA, said "the Two-Midnight rule needs to be repealed and a more thoughtful process needs to be contemplated."

As health systems across the country look for ways to adapt to a changing marketplace and a wave of federally driven reform efforts, Sanford Health is enjoying the benefits of a strategic leap it took nearly two decades ago.

The evolution of provider-payer relationships is one of the great mysteries of healthcare reform efforts in the United States. Built on mutual need, these two parties have evolved from politely tolerating each other to something that lately has more closely resembled a Punch and Judy show.

But these relationships continue to evolve. What was once unthinkable is now trending upward. Some health systems are launching their own health plans while others are considering partnering with payers to offer in-house health plans.

Ruth Krystopolski knows what they are facing. And the South Dakota-based health plan executive knows what they stand to gain. "The health plan became a central depository," Krystopolski, president of Sanford Health Plan in Sioux Falls, told me last week. "It collected [valuable] information from a variety of sources."

Sanford Health began offering insurance through its partner health plan in 1998, starting in the health system's established market in Iowa, South Dakota and Minnesota, says Krystopolski, who helped craft the plan.

In addition to acting on the realization that it would be "good to have the information others had on us," she said Sanford Health determined that there was an unmet need in the marketplace—many workers throughout the region had limited options for health insurance.

"We wanted to understand what the employees in our market wanted," Krystopolski said of the research her team conducted before launching the plan. "It was really to respond to the needs of the market and get the information."

The result has been the creation of a partnership between Sanford Health and Sanford Health Plan that aligns with the needs of patients. "We are able to co-manage," the health plan president said. "We have a shared responsibility for a patient… We know they belong to us from the day they enroll and we reach out to them."

Together They're Stronger
The coupling of a health system and a health plan can help providers be more responsive to patients. "Learning what [patients'] needs are has made us more thoughtful," Krystopolski told me.

And having an in-house health plan has helped Sanford Health achieve several healthcare reform goals in recent years, in part because it brings flexibility to help adapt to change, Krystopolski said. "Because we are the payer and the provider, the lines… allow you more room to be creative," she said, citing the health plan's ability to work closely with Sanford physicians if there are complications billing an office visit.

The health plan helped Sanford Health stay ahead of the healthcare reform curve on quality reporting, continuous improvement projects, and comparisons of provider performance. "We had insight into some of the transparency reforms because we had been doing it for a while," she said.

And having the health plan has helped Sanford Health extend access to healthcare services in its market, she said, noting that the petroleum industry boom in the Dakotas has led to a transient segment of the population with few health insurance policy options. "It helps us understand where we might have access challenges," Krystopolski said. "We typically hear of it first at the health plan."

Sanford Health Plan has grown with its partner health system, to about $500 million in 2013 claims since its inception 17 years ago. Krystopolski says selecting good partners has been a key factor in the health plan's success.

State Regulators as Collaborators
While the health plan has an actuary on staff, Sanford Plan works with the Seattle-based consulting firm Milliman to conduct audits and help develop rates through modeling services. Sanford Health Plan has also had a partnership with Epic to develop an electronic medical records system that connects the health system and the health plan. "The technology is so much better than it was," Krystopolski said, recalling the early days of the health plan when patients would file paper claims. "But I believe we are only at the beginning."

Sanford Health had at least one advantage over current health systems considering the formation of a health plan: a supportive and relatively simple regulatory environment. Krystopolski says state insurance regulators have played a key role in the growth of Sanford Health Plan, contrasting state rules with often burdensome new federal regulations. "They have helped guide us and helped us do the things we had to do to establish regulatory compliance," she said of state officials. "They've been a key collaborator and partner."

As health system executives look for business models that will strengthen their capacity to face industry changes yet to be seen, in-house health plans appear to be a fine companion.

Join our webcast featuring Alan J. Murray, President & CEO, North Shore-LIJ CareConnect as hospital leaders outline the strategic transition from provider to payer, and new opportunities for controlling costs, managing risk, and maximizing reimbursements. March 28, 2014, 1:00–2:30 p.m. ET. Register today.