Thursday, August 02, 2012

The Narrow Network Revolution

Today's Wall Street Journal has a must-read article on payer strategies: Remember Managed Care? It's Quietly Coming Back.

While the article focuses primarily on managed care's re-emergent love affair with prior authorization, it also highlights payers growing acceptance of narrow and tiered provider networks. These are usually "tiered" networks in which patients incur bigger out-of-pocket charges if they go to providers that aren't in the "top" category. The cost for an out-of-network provider is prohibitive.

The article is a useful reminder that the growth of preferred and limited pharmacy networks reflects broader healthcare changes. Expect plans in healthcare reform's insurance exchanges to feature narrow pharmacy networks.


As the article discuses, employer-sponsored insurance plans are adopting tiered network models that group providers the network based on quality, cost, and/or the efficiency of the care they deliver. These networks encourage patients to visit more-efficient doctors by either restricting networks to efficient providers, or by having different copayments or coinsurance for providers in different tiers in the network.

Here's what today's article says:
"Insurers have been experimenting with smaller provider networks for years, and are now rapidly ramping up, though they continue to simultaneously sell typical broad preferred-provider organization plans. The narrower plans can have closed structures that work like the classic HMOs. But they also have 'tiered' designs, with patients facing bigger out-of-pocket charges if they go to providers that aren't in the top category, then even-larger bills if they go completely out of network."
In 2011, 20% percent of firms that offered health benefits included a high performance or tiered provider network in the health plan with the largest enrollment (according to the Kaiser/HRET Employer Health Benefits 2011 Annual Survey).

Sound familiar?


There are now three basic alternatives  to pharmacy network design:
  • Open Pharmacy Network—the consumer can choose any pharmacy that participates in a plan's network. This is still the most common scenario.
  • Preferred Pharmacy Network—the consumer has a financial incentive to choose the dispensing pharmacy that reduces the payer's costs. These plans have taken off in Medicare Part D, as I show in Humana-Walmart Preferred Network Plan Wins Big in Part D. Almost one-third of all Part D PDP enrollees are now in a plan with a preferred pharmacy network design.
  • Limited Pharmacy Network—the consumer must use a narrower network that includes only specifically designated pharmacies, which is why this model is sometimes called a "restricted network." Commercial payers are adopting limited network models more slowly, with the possible exception of the Maintenance Choice model. Payers also may perceive bigger savings opportunities in other areas that have less potential beneficiary disruption, such as increasing cost sharing requirements.
Preferred networks are the most consumer-oriented plan design. Preferred networks use consumer incentives to shift prescription volume into the pharmacies that provide lower costs for the payer. Consumers retain the ability to choose their pharmacy, while being partially exposed to the costs of this choice. Hence, the widespread adoption in Part D, where individuals choose their own benefit design every year.

As the WSJ article notes:
"Insurers can reduce costs with narrow networks because they can exclude the priciest doctors and hospitals. Also, they can wring rate concessions from medical providers that fear losing patients."
Alas, since this is America, expect plenty of lawsuits from aggrieved providers over narrow networks under the "freedom of choice" banner. Here's the latest pharmacy example: Florida Pharmacy Association, Medicaid Patients, Independent Pharmacies & Pharmacists File Lawsuit to Restore Medicaid Patient Access to Pharmacy Care Providers Chosen By Medicaid Patients. Expect more to come.


  1. This comment has been removed by a blog administrator.

  2. So, PBM reps say independents are the cheapest providers (no ability to negotiate). This means that restricted chain networks make no sense for the plan sponsor. Most likely just another case of the plan sponsor being thrown under the bus do the PBM can benefit from a back door kickback from the chain.

  3. Because PBMs and chains get along so well...?

  4. The concept of restricted or reduced pharmacy networks is by no means new. They have drawn more attention recently due to their being employed by Part D plans and some large employers (i.e. Caterpillar). I contend that in the private-payer world, particularly among self-funded employer-sponsored health plans, that the use of limited pharmacy networks will become more and more popular....I know it is the most discussed issue within our client list. Our organization educates our clients that it is not usually the large chain pharmacy you see on every corner that offers the best value but rather a blend of independents and certain chains. When you combine the use of pass-through pricing with a network based on best cost providers, the plan is going to experience a very cost-efficient model. All pharmacies, whether chain or independent, have to be careful what they wish for with regard to the lowest cost providers will win the business of the plan and its members (patients).

  5.  I would only add that it is important for payers to differentiate their retail and specialty pharmacy benefits when considering network design. While the economics of varying retail pharmacy networks are increasingly well understood (thanks in part, of course, to Adam), the impact of exclusive networks on specialty is still unclear. The greater volatility of the segment naturally compounds the difficulty. What I'm basically getting at is that, given the high cost and delicate therapies for most specialty drugs, factors such as utilization efficiency and patient compliance become much more important vis-a-vis overall spending. The effect of highly restrictive/exclusive networks on these important areas is still unclear; hopefully we can get some unbiased investigations into these issues, since they have the potential to dramatically alter the calculus of specialty benefit designs. Your thoughts Adam?

  6. Adam,

    Thx for the WSJ update, but as you know this is old news. 

    And honestly, I'm a little disappointing that you're not taking a stance on this.

    First of all, I'm a consumer and I like to choose where I want to go for my products. Any products. Rx or otherwise. I understand there are cost differentials involved and I'm happy to decide that with my wallet.

    Second of all, I'm a pharmacist and small business owner who contracts with PBMs. More importantly, I help fund Med-D through my tax dollars. With that in mind, you're right that the Any Willing Provider lawsuits will be flying over the next 6 mos. Something is very wrong when a provider (who actually helps fund the program) is willing to accept those terms....and maybe even slit their own throat in doing so....and then is simply shut out.

    I'm shocked that you don't address this broader issue. As I'm sure you are aware, it does not only apply to the pharmacy space.

  7. Of course, this is not a brand new topic. I've been writing about it for years on Drug Channels. Just see my historical posts under the narrow networks label.

    And I have certainly taken a stand: If you are spending your own money, then by all means choose your own pharmacy. But if you ask someone else—such as the American taxpayer or your employer—to pay for your drugs, don’t be surprised if they want you to save them money.

    Pharmacy network design is only one of the possible tools to increase competition and achieve cost savings. 

  8. Adam, we're all in agreement on saving dollars....yet I don't think you understand the Any Willing Provider issue when it is funded with our own money. 
    We're not talking a self funded group and ERISA does not apply.If we want to serve the American public, (public money),  then it should absolutely be open...but of course at the going rate. No need for waste!Am I missing something here?

    And yep, "pharmacy network design is only one of the possible tools to increase competition and achieve cost savings" Very true, but it's actually the smallest way to garner savings. It's no secret that formulary design and step therapy yield the largest savings.

    Have a great day!

  9. paul brissonAugust 03, 2012

    Adam--inasmuch as you are so up on all things pharmaceutical, can you explain to us uninformed folks the concept of spread.  my mother had a prescription filled at the local pharmacy and paid a $10 copay.  the pharmacist said that my mother's isurance paid nothing for the prescription, and yet when she received her eob, caremark cvs had charged her insurance plan $70....when a call was made to the pbm, they said they added $70 to the bill, an exact quote, "cause nobody told us we couldn't" exactly how does using pbms reduce the cost of drugs?  and please don't tell me this is an isolated incidence.  i reviewed her eob for the year, and found that on $2700 worth of prescription drugs nearly $700(almost 25%!!!)were charges added by the pbm. i was told this was the spread.  seems to me this is similar to going to b-n to buy a $10 paperback and when you get your visa bill it's $80....what am i missing here?

  10. If these spreads were the norm, then PBMs would report gross margins higher than 6-8%.