As the healthcare industry continues to re-orient itself around more personalized therapies and services to match the specific needs, expectations and means of any given individual, one area that has witnessed dramatic product innovation involves the bundling of providers into specific networks that consumers can access through their insurance plans. The proliferation of “narrow networks” has been nothing short of extraordinary with 2,930 such plans being offered now, over 1,000 of which were introduced just in 2015 alone according to a recent McKinsey study. In fact, over 90% of all Americans had the choice to purchase either a broad or narrow network insurance product in 2015, up from 86% in 2014. Undoubtedly as insurers sort through the losses from insurance exchange products, we are likely to see a rationalization in the number of networks.
Narrow networks contain a greatly reduced number of providers and in-network facilities than traditional networks, often leading to significant decreases in premiums. Narrow networks are an attempt to return more negotiating leverage back to payers, much of which was lost in the face of provider consolidation over the last dozen years. In 2014, 70% of all exchange plans sold were narrow networks and they were on average 17% cheaper per McKinsey.
Much of the transformation of the “business of healthcare” is driven by fundamental payment model reform. This has created significant revenue opportunities for many technology vendors, which are selling enabling solutions to manage these new risks and revenue streams. Goldman Sachs tracks 15 public healthcare technology companies and recently reported that, as a group, those companies saw 12.4% and 17.9% revenue and EBITDA growth, respectively, in 2015. Expectations for 2016 continue to be strong with estimated growth for both revenues and EBITDA in the “mid-teens” percent. It is this transformation that is driving such significant VC interest as well. According to CB Insights, over $5.8 billion was invested in 903 “digital health” companies in 2015.
Given the breadth and depth of this wave of transformation, it is unlikely that recent economic volatility should materially impact 2016 growth estimates, even in light of the recent announcement from the Institute of Supply Management that its index decreased from 55.8% to 53.5% over the last month; weakness in this barometer has been highly predictive of a recession. Further bad news was released last week as domestic industrial production declined 0.4% in January. All of this has caused the S&P 500 and NASDAQ indexes to trade down by 6% and nearly 13%, respectively year-to-date. Clearly there will continue to be significant and, at times, painful reduction of valuation multiples.
Unfortunately for many consumers, there has been significant confusion and anger around narrow network design and what services are included. Ultimately consumers, and increasingly regulators, are worried about a decline in the quality of these networks as many of them tend to exclude the branded, high-cost providers. In fact, the National Association of Insurance Commissioners recently announced the development of “network adequacy” models and are actually encouraging payers to go in the other direction and broaden networks. The map below highlights the patchwork nature of how narrow networks have proliferated across the US. One possible explanation for this dispersion seems to be that in states with a high prevalence of HMO’s, there tends to be a greater percentage of narrow networks.
The Massachusetts Group Insurance Commission (GIC) recently observed that consumers lack basic understanding of choice and quality when purchasing health insurance, and advocated for greater plan design transparency; that is, clearly explain the trade-off between the cost and quality of the providers included in each network. Surprisingly, the GIC found that consumers are quite loyal even to low-quality providers underscoring the difficulties of getting consumers to switch health providers. Interestingly, in one study, when consumers were offered a three-month “premium holiday” only 12% switched plans; the most significant item cited was loyalty to primary care providers.
Notwithstanding the level of activity, there are still a number of important issues that need to be addressed around narrow networks:
• Fundamentally, do narrow networks actually drive better outcomes at lower costs?
• What is the impact on access to care?
• How best to judge adequacy of the network?
• Do narrow networks unintentionally allow for discriminatory practices?
• What are the appropriate measurement standards?
• Best approaches to communicate, promote and educate consumers/members?
• And significantly, are the regulatory frameworks adequate and/or appropriate for narrow networks?
The Center of Health Insurance Reform has put forth a regulatory model that sets forth a floor on consumer protection to drive adequate transparency and oversight, which underscores the considerable debate around how best to govern these networks. At the end of 2015, California regulators imposed fines on Blue Shield of California and Anthem Blue Cross because their provider directories were inadequate. A recent Harvard study found that almost 15% of health plans sold on the exchanges lacked providers in at least one specialty – that is an extraordinary number.
So why is this all of this important to a healthcare tech VC? Many of the exciting start-up’s we see today have solutions that can be used to help create, manage, evaluate narrow networks. Through better (big) data collection and analytics, there will be greater transparency and the ability to assess impact and effectiveness. Creating more compelling care pathways and care coordination platforms is at the heart of many of these solutions. More effective use of specialists should lower downstream medical costs. Might we even get to a point where consumers could create their own “synthetic” narrow networks by piecing together their own set of providers. Arguably the advent of narrow networks is another version of population health management as specific consumer groups coalesce around a specific set of providers and services.