AHM Network Management: Analysis of Market and Health Plan Needs

Objectives

After completing this lesson you should be able to:

Explain how the presence of provider organizations and the level of market maturityaffect network strategies Explain how a health plan can use a competitive analysis to determine the size of the

network Describe some differences between network needs for large employers versus needs for

small employers Describe some of the challenges that health plans face when developing networks in rural

areas List several different areas for which a health plan should establish goals before

beginning to develop or revise a provider network

Introduction

To ensure that its members receive appropriate, high-quality care in a cost-effective manner, eachhealth plan tailors its networks according to the characteristics of the consumers, purchasers,providers, and competitors in a particular market. Other considerations for planning the networkare the health plan's own goals for quality, accessibility, cost savings, health plan-providerrelationships, and member satisfaction. Strategic planning for networks is an ongoing process, so,in addition to an initial evaluation of its markets and goals, a health plan must periodicallyreevaluate its target markets and objectives, then modify its network strategies accordingly toremain competitive in the rapidly changing healthcare industry.

In this lesson, we describe the ways in which health plans analyze the network managementaspects of potential and current markets. We also discuss the types of goals that a health planestablishes for a network.

Market Analysis

The structure, composition, and size of the provider network depend in part on the characteristicsof the specific service area. When a health plan considers establishing a provider network, itanalyzes the market for that network. The factors typically included in a market analysis are listedin Figure 2A-1.

Market Maturity

Even though the use of health plans is growing in virtually every area of the United States, healthplan market share and the rate of growth varies greatly among individual markets. For example,as of January 1, 2003, more than 48% of California's population was enrolled in an HMO, whileAlaska had no HMO enrollment, and in six other states (Alabama, Idaho, Iowa, Mississippi,North Dakota, and Wyoming), less than 5% of the population belonged to an HMO.1 Todetermine appropriate strategies for a particular market, a health plan should assess the currentlevel of market share for health plans and how the market share is changing. The level of healthplan penetration in the market is often an indicator of how knowledgeable providers andconsumers are about health plans, how receptive providers and consumers will be to health planprograms, and the level of competition among health plans in the area. Health plan marketmaturity may also provide some indication of which products are most appropriate for a particularregion. For instance, consumers and purchasers in a market with relatively little health planmarket share are likely to be more receptive to loosely managed plans, such as PPOs, than toHMOs.

One recent analysis views health plan market maturity as the result of a combination of 11 marketfactors.2 These factors are listed in Figure 2A-2.

Mature markets will have providers who understand how health plans function, and the providerswill be organized to interact with health plans. For example, the first three factors in Figure 2A-2relate to the formation of provider organizations, which are alliances among physicians orbetween physicians and hospitals that contract with health plans on behalf of the providers.Examples of such provider organizations are an independent practice association (IPA), a grouppractice without walls (GPWW), a consolidated medical group, and a physician-hospital

organization (PHO). (These provider organizations are described in Healthcare Management: AnIntroduction.) The presence of provider organizations may have a profound influence oncontracting strategies and the size and composition of the provider network. Members of theseprovider organizations may be unwilling or unable to contract on an independent basis. Individualproviders may also have formal or informal commitments to refer only to other providers in thesame organization. In many cases, health plans construct their provider networks around existingIPAs, PHOs, or multi-specialty groups.

From the health plan's perspective, contracting with provider organizations has both positive andnegative aspects. On the positive side, integrated organizations of hospitals, physicians, and otherproviders are more likely to have established systems of communication that allow for bettercoordination of care and quality improvement across providers. Wellness, disease management,and case management programs are potentially more effective when implemented by a team ofproviders who are used to working together and who understand the role of each provider in thehealthcare delivery system. In addition, provider organizations are often willing and able tomanage the risk of capitation or other performance-based compensation programs. Under a risk-sharing arrangement, an integrated delivery system (IDS) has greater control of its risk,theoretically, and can make better matches between resources and patient needs than canindividual providers.

On the negative side, the presence of provider organizations can reduce the number of choicesthat health plans have in a market. For instance, the Minneapolis provider community has nowconsolidated into three major provider organizations. Health plans operating in Minneapolis mustchoose from the three organizations for provider contracting. Employer purchasing coalitions inMinneapolis have attempted to "unbundle" these organizations in order to reestablish the range ofchoice they prefer. In addition to limiting health plan choices, the integration of providers intonetworks also limits the ability of health plans to match resources with the needs of patients. Theplan may decide that it needs two of the three provider organizations in a community to have an

adequate supply of primary care physicians (PCPs), but those two provider organizations maycarry with them more specialists than the health plan needs to serve its members.

In addition, the collective bargaining leverage possessed by provider organizations may reduce ahealth plan's ability to obtain favorable or even competitive reimbursement arrangements. This isparticularly true in smaller markets with limited competition among provider organizations. Insome cases, provider organizations have higher average service costs than might be expected dueto the expense of developing and maintaining the organization. Finally, integrated providerorganizations that span urban and rural areas may reduce competition among referral centers forthe patients coming from rural communities, as we will discuss in the section on urban and ruralmarkets.

The Provider Community

A thorough assessment of the provider community is a critical component of the market analysis.The health plan needs an accurate estimate of the supply and location of physicians, hospitalbeds, pharmacies, and other ancillary services. When evaluating a provider's location foraccessibility, a health plan considers the distance between the provider's location and members, aswell as geographical barriers, such as mountains and road patterns, that may affect access. Foreach type of provider, the health plan also examines typical patterns of utilization and averagecosts for selected services. In most cases, physician data is reported by specialty, or at leastdivided into PCP and specialist categories. Because inpatient care is typically more costly thanthe same services delivered on an outpatient basis, a health plan gives special attention to the ratioof inpatient to outpatient utilization.

To research the provider community, health plans may use any or all of the data sources listed inFigure 2A-3.

While aggregate utilization data is usually available, a health plan often experiences difficulty inobtaining reliable utilization information about individual practitioners who have not previouslyparticipated in one of the health plan's networks. Utilization data received directly frompractitioners may be inaccurate if the providers have not developed adequate systems formonitoring utilization.

In addition to determining the number, types, locations, and utilization patterns of providers, thehealth plan needs to understand the existing referral patterns or other relationships in the providercommunity. Even in markets without provider organizations, most PCPs have establishedrelationships with particular specialists and ancillary care providers. The PCPs may be reluctantto refer members to unfamiliar providers, even if those providers happen to be in the same healthplan network. To make sure that their members have access to inpatient care and other hospital-based services, the health plan must also consider which physicians have privileges at thedifferent hospitals in the area. Health plans often lack the time or resources necessary tothoroughly investigate referral patterns, so the extent of research into referral patterns variesamong health plans.

Competitive Analysis

Besides considering the condition of the provider community, the health plan also analyzes itscompetition in the market. It identifies the other health plans operating in the market, the level oftheir market penetration, and the characteristics of successful and unsuccessful health plans, suchas panel sizes and premium levels. This information helps the health plan decide what strategies itshould use in developing its provider network. For example, one way for a health plan todetermine the optimal size for its provider panel is to examine the provider networks of themarket's other health plans. This analysis should answer the following questions:

What are the provider panel sizes, premium levels, and cost-containment strategies of thehealth plans with large or increasing market shares? What are the physician-to-enrollee ratios of the successful health plans? What are the characteristics of health plans that are losing market share? How satisfied are providers with the competitive plans, and what are the reasons for their

satisfaction or dissatisfaction?

By correlating the current market share and the growth of market share of competitive healthplans with provider panel size, premium prices, and other competitive factors, the health plan canunderstand the competitive dynamics in the market. The health plan needs to know:

Are customers willing to accept a smaller provider panel in exchange for lower prices? What price reduction appears to be required for acceptance of narrower panels? How important are out-of-network benefit features? Are PPO or POS products more successful than HMO products of the same panel size?

Given the competitive characteristics of the market, the health plan can determine how manyPCPs, specialists, facilities, and ancillary providers to include in the network in order to meetmembers' healthcare needs and the expectations of both members and purchasers.

General Economic Conditions in the Market

The economy of the target market can influence a health plan's approach to network developmentin several important ways. The health plan must consider the level of growth or decline in theeconomy, the size of employers, and the types of industry in the market.

Economic Growth

Many times, economic growth in a market indicates an influx of new, often young, workersattracted by employment opportunities. The addition of many young people lowers the averageage of the population. A lower average age influences the healthcare services that will be needed.We discuss the effect of age on the composition of the network later in this lesson. In a tight labormarket, companies tend to increase employee benefit levels as employers compete with eachother for workers. Broader ranges of benefits often mean that health plans will need to increasethe number and types of providers in the network. A growing economy often signals growth inthe medical community as well, with expanded hospital facilities, higher-level diagnostic andprocedure facilities, and more physicians.

A sluggish or declining economy can have the opposite effect on healthcare needs in an area.Young workers may leave the area in search of jobs. The remaining population is likely to beolder and more subject to chronic health problems. As the average age of employees goes up,healthcare premiums will rise to account for the increased healthcare needs of older workers.Employers have turned to health plan programs to respond to rising healthcare costs. Otheremployer strategies designed to address rising costs include increasing employee contributionsfor health plan coverage, especially for traditional indemnity programs.

Depending on the current supply of providers, a declining economy can either stimulate or stiflecompetition for health plan contracts among providers. In a market with a large supply ofphysicians, for example, physicians may be more willing to negotiate with health plan programsto avoid losing patients in a declining economy. On the other hand, a declining economy oftendiscourages new physicians from entering that market. The current supply of physicians mayresist price negotiations in the knowledge that health plans have no alternative providers toinclude in the network.

Size of Employers

The composition of the local economy also influences the provider contracting process. Forexample, the sizes of the businesses in the market affect the types of health programs that will bepurchased. In general, larger companies (those with more than 1,000 employees) have adoptedhealth plans more quickly than smaller companies (those with fewer than 100 employees).Although health plan coverage is less costly than indemnity coverage, small companies have beenslower to contract with health plans. The decision makers in small companies typically have lessknowledge of health plan products. Small companies often lack the administrative or financialcapability to offer multiple health options.

In a market with predominantly small employers, health plans may want to develop broadprovider panels so that small groups will be more attracted to a health plan as the sole healthbenefit program. Products with out-of-network benefits, such as PPO and POS products, are morelikely to be successful in these markets, than an HMO that offers no out-of-network benefits.

A market dominated by larger employers has a different contracting complexion. Although fewerfirms of all sizes are offering employees a choice of health plans, choices among healthcarebenefit plans are still more common in larger firms. In markets where employees have health planchoices, products with relatively small panels may have better growth opportunities. While thegeneral trend in consumer preferences is toward larger provider panels, some consumers arecomfortable staying within a limited provider network and will choose a narrow panel plan if it isless expensive. Employee choice among different health plans allows health plans to reach thisniche market. Narrow panels can have several advantages for health plans, as listed in Figure 2A-4.

In order to make the narrow panels more appealing, health plans serving a market dominated bylarge employers need to ensure the quality of their networks by including quality and membersatisfaction measures in the provider selection process and in provider incentives.

Types of Industries

The industry mix of the target market also has implications for the provider network.Manufacturing companies are more likely than professional or service organizations to negotiateemployee benefit packages with unions. Frequently, union negotiations for healthcare benefitsemphasize preserving the worker's choice among providers. High-wage professionals such aslawyers, accountants, and physicians generally prefer high levels of benefits and unrestrictedaccess to any provider. Service industries such as restaurants, hotels, and laundries typically favorlow-cost, minimal-benefit healthcare plans, if health benefits are offered at all. Health plansselling to the service industry often develop narrow panels and manage access closely in order tocontrol costs.

The type of industry in a market also affects the composition of a network. Manufacturing andheavy industry jobs have more back injuries, while carpal tunnel injuries are more common incomputer-oriented businesses. The differences in the types of injury seen most often influence themix of providers needed for a workers' compensation network.

Rural, Urban, and Suburban Markets

Health plans often adopt different approaches to developing networks in rural, urban, andsuburban markets. The most obvious reason for using different approaches is that the number and

types of providers vary greatly among these markets. Less obviously, the expectations ofconsumers and providers also vary according to the type of community involved. Health plansmust factor in these variables as they develop their provider networks.

Rural Markets

The greatest challenge for the development of health plan networks comes in low- populationrural areas where the number and types of providers are limited. In general, when providersupplies are limited, providers are not likely to offer discounts to health plans in exchange fordirected patient volume. Further, when there is a small supply of providers, the consumer demandfor broader provider panels usually outweighs the value of any additional discounts that the healthplan could obtain through directing volume to a smaller panel.

A small supply of PCPs can make it difficult for a health plan to fulfill its obligation to providecomplete healthcare services for its members. If the number of PCPs is low in relation to the areapopulation, many PCPs may be unable or unwilling to accept new patients from the health plan.In addition, the PCPs may not be able to provide 24-hours-per-day, 7-days-per-week care, so ahealth plan may need to arrange for after-hours services from local urgent care centers or hospitalemergency departments.

Towns with a population of 30,000 or less are likely to have only one hospital or no hospital atall. In smaller towns, the population typically has a large proportion of Medicare beneficiariesdue to the migration of younger people to urban areas. As a result, small-town hospitals areusually heavily dependent on Medicare revenue and may receive county or city tax support. Suchhospitals typically have low occupancy and most have low operating margins. Consequently,rural hospitals are generally reluctant to give price discounts to health plan companies.

Older physicians are less likely to be board-certified and physicians in towns of 30,000 or lesstend to be older than the average physician population. As a result, many family and generalpractitioners in rural areas are not board-certified, so a health plan may need to modify itscredentialing criteria.

Physicians in rural towns generally function as solo practitioners or in small groups. Specialtyservices are frequently provided by a single small group of doctors in a particular specialty or byphysicians from larger cities who periodically travel to the smaller towns. Few effectivelyorganized PHOs or IPAs exist in rural areas, and rural physicians often lack familiarity withcapitation or other risk-sharing arrangements. As a result, rural practitioners often have difficultymanaging financial risk. In addition, the health plan may not immediately be able to directenough patients to the physician to support risk-sharing. Health plans will often need to make fee-for-service (FFS) payments, even in HMOs, until a physician's HMO patient load is sufficient forrisk-sharing. Physicians in rural areas, particularly PCPs, generally charge lower fees thanphysicians in urban areas, so rural physicians tend to resist price discounts. Both hospitals andphysicians in rural areas have fewer resources and less organizational structure for thedevelopment of quality improvement activities. Therefore, health plans should be more involvedin developing and implementing quality improvement initiatives for their rural provider networks.

Creating a competitive advantage through provider contracting in a rural environment ischallenging. Since a rural area may have only a single provider for certain services (onepediatrician, for example), all the health plans competing in this market share the same resourcesfor care received locally; thus reducing each health plan's ability to negotiate for discounted fees.

The low supply of providers makes it very difficult to selectively contract among rural providers.Many rural referral hospitals command substantial monopoly power because consumers in a 100-mile radius may view these hospitals as the only reasonably available source of specialty care.The specialists associated with such rural referral hospitals often share in this negotiatingleverage

Consumers in rural areas often travel to another community for healthcare. Many rural residentsobtain a significant proportion of their healthcare services in another, usually larger, town or city.However, rural consumers usually travel to obtain services not available near their homes or forcare perceived to be better than local services. Even though a health plan may be able to negotiatebetter prices for primary care in a larger town, asking consumers to travel 20 miles for servicessimilar to those available in the consumers' own communities is generally not an effectivestrategy. Federal access requirements for federally qualified HMOs and Medicare health planslimit this practice as well. In addition, rural employers generally feel a community obligation tooffer health benefits programs that include the local hospital and physicians.

Since a significant proportion of healthcare dollars is spent for specialty care received outside therural community, the greatest opportunity to create competition in rural areas is among thespecialty care providers in other nearby communities. Frequently, rural doctors have their choiceamong several larger medical centers when they make patient referrals. If rural doctors haveenough information to choose efficiently, competition among the larger medical centers can beencouraged. Health plans can facilitate this competition by providing information about referralhospitals to the rural PCPs and by negotiating discounts with the nearby specialists and largermedical centers. Health plans should monitor the market for development of urban-ruralintegrated provider organizations that funnel the majority of rural patient referrals to a singleurban center. The development of urban-rural provider networks may minimize opportunities forthe health plan to reduce costs and improve quality through selective contracting. Another optionthat health plans may consider when designing networks for rural areas is telemedicine. Insight2A-1 provides describes telemedicine and how it may be used to enhance rural providernetworks.

Small Cities

Small cities (for the purposes of this course, cities with populations under 500,000) share some ofthe characteristics of rural areas. Employers in a city with two hospitals may be reluctant topurchase a health plan that includes just one of the hospitals because consumer loyalty may besplit between the two facilities. Another frequently cited concern is that channeling patientvolume to one of the hospitals will drive the other out of business and thus reduce local choices.The concern about fewer choices effectively reduces the negotiating power of health plans.Although small cities may have multiple groups of physicians in each specialty, selectivecontracting is still more difficult in small cities than in urban areas. Consumers are more likely tobe aware of the 3 cardiology groups in a city of 250,000 than they would be aware of all 20cardiology groups in a larger city. A health plan may successfully market a network made up ofone-half of the specialists in a large city, while it will encounter market resistance to the sameratio in a small city. However, the health plan's ability to negotiate prices and transfer financialrisk to physicians, hospitals, and other providers increases significantly in cities with populationsabove 150,000.

Large Cities

Larger cities (with populations above 500,000) typically afford significantly more flexibility inprovider contracting. However, even in large cities, health plans must be sensitive to the size ofphysician panels, particularly in primary care networks. Consumers, whether urban or rural, aremore likely to choose a health plan or to be satisfied with the health plan they have, if theirregular physician is included in the panel.

As health plans grow and consolidate, they must serve the needs of larger segments of thepopulation. Having a larger membership inevitably puts pressure on health plans to broadenprimary care networks. The pressure for larger panels, in turn, places greater emphasis on healthplan methods for working with providers to achieve the desired cost, quality, and satisfactiongoals. Geographic access to providers also reemerges as a significant factor in urban areas. Whilenearly every provider is within 30 miles or 30 minutes of most consumers in a city of less than300,000, this is certainly not true in larger urban areas.

Health plans typically have more alternatives when contracting with specialty physicians andother healthcare professionals in urban areas. While patients with significant chronic or acutehealth problems may already have relationships with particular specialists, most consumers donot. Health plans can selectively contract with specialists and other providers who fit the desiredquality and cost-effectiveness profiles, or health plans can contract with integrated providerorganizations that include specialty as well as primary care services. In an urban area, limiting thenumber of specialists on the panel affects the network's market appeal less than limiting thenumber of PCPs, because the majority of consumers are not familiar with the reputations ofspecific specialists.

Hospital contracting is also easier in large urban areas. Overcapacity of inpatient hospitalresources exists in nearly every size market. However, cultural and political factors affect theability of health plans to use this overcapacity to their advantage when contracting with hospitalsin rural and small city markets. In urban centers, the combination of overcapacity and the largenumber of healthcare facilities allows health plans to readily negotiate discounted prices and, insome cases, risk-sharing arrangements with hospitals. In a market with 50 hospitals, a health plancan promote as a broad panel a network that includes two-thirds of the hospitals. In a market withthree hospitals, a two-hospital network may be inadequate for many purchasers. When planningto negotiate with hospitals, health plans must keep in mind that some states have regulations thatmandate hospital reimbursement rates.

The health plan's freedom to negotiate rates does not remove market pressure to include a highlyprominent hospital, health system, or provider organization in the network. Many employers andconsumers evaluate the quality of health plans based on the inclusion of prestigious institutions,such as teaching hospitals or hospitals that serve as regional referral centers. The growingconsolidation of provider organizations can limit a health plan's ability to develop broad-basedhospital networks. In a community in which the healthcare provider market has consolidated intotwo or three large provider organizations, a health plan that wants to have the majority of areahospitals on its provider panel needs to contract with every provider organization. The health planmay have to make price concessions to secure contracts with all three groups since the health plancannot promise directed patient volume in exchange for discounted prices.

Suburbs

The effect of suburban areas surrounding a city on network development depends on the size ofthe urban area. In a mid-sized urban area such as Kansas City, healthcare providers in thesurrounding suburbs and providers in the city itself are viewed as one system by consumers andemployers. Frequently, suburban providers can deliver primary and secondary care, but tertiaryproviders in the core city are necessary to round out the network. In contrast, larger urban marketslike Chicago have suburban areas with medical complexes that rival those in the inner city forscope and complexity of services.

It is possible to have a suburban medical network that is sufficient to serve the needs of suburbanresidents without including the inner-city providers on the panel. Large employers may see theurban area as a unified whole if they have work locations and employees living across themetropolitan area, but they may be willing to offer a health plan with a suburban-based networkas one of several employee choices. Smaller employers often view the healthcare market in morelocalized terms and may choose a suburban plan as the only healthcare benefit option. When ahealth plan creates a suburban-based network, the dynamics of contracting are similar to those insmall cities.

Consumer Demographics

The primary demographic factors that a health plan considers when developing network strategiesare the following:

Number and location of plan members and potential members Income levels Age and gender mix Ethnicity, race, and religion

Number and Location of Members

The actual and potential membership of a health plan is a primary consideration for determiningthe number of providers on the panel. The size of the network must be sufficient to meetmembers' healthcare needs, while providers' geographic locations must be reasonably convenientto members' homes and workplaces.

Income Levels

Health plan products often fit well with the financial needs of low-income consumers. Low-income, working consumers cannot afford high premium contributions, high coinsurance rates, orhigh out-of-pocket maximums. In other words, they need a health plan that provides fairly richbenefits for nondiscretionary services at a low premium cost. While all consumers share some ofthe same concerns about healthcare, low-income consumers are more sensitive to the financialconsequences of receiving healthcare. Low-income consumers, in particular, need the following:

Preventive care that pays for itself Healthcare delivered in the most efficient and effective setting Healthcare delivered at the most effective point in the disease process Healthcare delivered at the most reasonable price

A health plan serving low-income populations has a special obligation to work closely withproviders to meet the goals listed above. Effective working relationships between the health planand its providers are critical in order to serve low-income populations well. The size of the plan'snetwork will be influenced by the plan's ability to provide performance feedback to providers andto maintain local contact with providers. Not surprisingly, low-income consumers want a broadchoice of providers. A health plan must ensure that it has the ability to manage quality,utilization, and costs effectively in a large provider panel. The same financial pressures exist forhealth plans delivering Medicaid managed care products. In the Medicaid segment, however, thepressure to control consumer out-of-pocket costs is replaced by pressure from strained stategovernment budgets.

The specific healthcare needs of consumers also vary with income. Several studies havedemonstrated that low-income groups have a higher incidence of chronic illnesses than higher-income populations. The increased incidence of illness appears to be partially related to lifestyle,since higher smoking, alcohol, and fat intake rates are associated with low-income levels, andpartially due to the stress of low-income life. In any case, low-income populations are more likelyto need more services for cardiac disease, high-risk pregnancy, diabetes, and asthma than higher-income populations.

The health plan should also consider the structure of the local health delivery system for low-income populations. Figure 2A-5 lists questions that health plans often ask about the deliverysystem.

Finally, low-income populations also tend to have lower education levels. Rules and procedureson how to access providers need to be clearly defined and written at an appropriate reading level.Complicated copayment structures and authorization procedures are likely to reduce access tocare rather than achieve the intended goals with this population.

As income levels rise, financial concerns are not eliminated, but other issues assume a moreprominent position. Upper- and middle-income consumers are often less sensitive to out-of-pocket costs and more sensitive to perceived quality and access. The inclusion of prestigiousinstitutions and specialists in provider panels becomes more important as income increases. Themix of services offered may change as well. Higher-income consumers may be willing to pay forsports medicine services and wellness activities that do not have an apparent short-term financialbenefit. Higher-income consumers, like low-income consumers, dislike restrictions on providerchoices and bureaucratic procedures. However, high-income consumers have the economic powerto voice these preferences through purchase decisions. Broad provider networks that includehighly respected providers and fewer restrictions on access are likely to be successful in higher-

income segments. Many health plans offer PPOs and POS options in markets with a significanthigher-income population.

Age and Gender Mix

The age and gender mix of the population affects the development of provider networks inseveral ways. The most obvious differences based on age relate to the mix of services provided.The incidence of many diseases, including cancer, heart disease, asthma, diabetes, and arthritis,varies with age. Typically, younger populations need more pediatrics and obstetrics/gynecology(OB-GYN), while older populations need rheumatology, cardiology, geriatric medicine, homehealthcare, skilled nursing care, and vision care.

The age mix can influence provider networks in other ways. Young adults, particularly men, haveless contact with the health system than other age groups and are less attached to particularproviders. Because they often do not have established relationships with any physician and do notanticipate needing out-of-network specialists, young men may be more willing to join an HMOwith a narrow panel. Young families are also attracted to HMOs because HMOs typically havebenefits for maternity care and well-child care with low out-of-pocket costs. However, healthcarefor young, growing families can be expensive, so a health plan serving young families needscareful management of obstetrical and pediatric costs. Young families usually need providerswith flexible office hours in order to access healthcare.

Because their healthcare needs are increasing, middle-aged consumers are usually very consciousof the scope of specialty services within a provider panel. The attitudes of older workers, retirees,and Medicare recipients toward health plans vary widely depending on past experiences. If healthplans have been recently introduced to a market, older workers may be less inclined to switch tounfamiliar POS and HMO products. In mature health plan markets, older workers may have had adecade of experience with health plans and may be as receptive as younger workers. Even withhealth plan experience, older workers are typically more sensitive than younger workers to thechoice of providers included in the panel, since the older workers are more likely to have anongoing relationship with one or more providers. Comfort and familiarity with health plans varyby age in the Medicare population. The "younger elderly" (under 70 years of age) are more likelyto have had contact with health plans in their work lives, while the "older elderly" are less likelyto have had this experience, and thus are less comfortable with health plans.

The gender mix of the member population affects both the size and composition of the network.Morbidity, the incidence of illness and injury in a population, is higher for females than formales. Therefore, a population with a high proportion of females requires more providers than amembership that is predominately male or a membership with an equal distribution of males andfemales. The proportion of females also determines the need for obstetrical and gynecological(OB-GYN) care and for other women's health programs.

Diversity of the Population: Ethnicity, Race, and Religion

Ethnicity, race, and religion often play important roles in the acceptance of a provider network byconsumers. Some ethnic influences are obvious. A provider network with Spanish-speakingproviders is essential in parts of Florida, Texas, California, and many major metropolitan areas.Immigration from Asia, Eastern Europe, the Middle East, and Africa has created languagechallenges for health plans throughout the United States. Aside from language barriers that hinderunderstanding of conditions and treatment plans, patients are sometimes more comfortable with

providers of their same cultural and ethnic background, particularly if the patient is a recentimmigrant. The comfort issue sometimes applies in reverse as well. Many multigenerationAmericans are uncomfortable receiving care from foreign medical graduates because of languagebarriers (including accents), a lack of cultural affinity, or prejudice. Health plans must becognizant of ethnic, racial, and religious issues in network development, and must work withproviders to accommodate and increase the comfort levels of patients.

Sometimes ethnic, racial, and religious differences extend beyond language or simple comfortlevels. Different cultures and religions often encompass alternative views of disease and healingprocesses. For example, some religious sects resist the use of certain treatments, such as bloodtransfusions. Some ethnic groups believe in traditional treatments that are not recognized bymedical science. In order to serve these populations, providers need to be sensitive to andaccommodate, within the limits of safe practice, folk cures and non-traditional providers of care.The religious beliefs of providers must be respected as well. Provider contracts shouldacknowledge that providers will not be obligated to perform procedures that violate their religiousbeliefs. For example, Catholic physicians and hospitals do not perform abortions or sterilizations.

Finally, racial and ethnic differences can influence the mix of services needed. AfricanAmericans have a higher incidence of low-birth-weight babies regardless of their economicstatus. Plan members of Asian descent have a relatively high incidence of osteoporosis, anddiabetes is more common among Native Americans than in the general population. Health plansshould recognize racial and ethnic differences both in the design of networks and the evaluationof provider performance. For example, if financial incentives are designed around outcomes,physicians serving African American populations should not be penalized for a higher rate oflow-birth-weight babies. However, neither should these providers be exempted from showingoutcome improvements.

We have discussed the impact of the characteristics of the target market on network structure,size, and composition. Next, we will explore how the health plan's goals can affect networkdesign.

Setting Goals for the Provider Network

After analyzing the market and identifying opportunities for developing a provider network, thehealth plan chooses the goals for its network. These goals can be highly specific if the health planis focused on a specific healthcare market, or they can be more general if the development effortis expected to cover a variety of markets and market conditions. Network goals are usuallyestablished for the following areas:

Perceived and measurable quality of care delivered by the network.Health plans typically base quality expectations on five criteria:

1. Credentials the health plan expects its practitioners and institutional providers tohave

2. Types of service capabilities, facilities, and equipment the health plan wants inthe network

3. Standards of care and protocols the health plan expects network providers tofollow

4. Measurable outcomes the health plan expects the network to produce5. Member satisfaction results

Accessibility of the network to consumers.The time and distance members must travel for healthcare, provider hours of operation,and ease of obtaining appointments. These goals also consider the proportion of providerswho already treat plan members that the health plan is able to include in the network.Accessibility goals may be mandated by regulatory bodies or purchasers.

Cost savings produced by the design of the network.

Cost-savings goals are generally based on three benchmarks:

1. The relative cost of healthcare in the area where a network is to be developed.For example, in a market with below-average healthcare costs, an undersupply ofproviders, and low health plan penetration (characteristics of some ruralmarkets), cost-savings goals should be lower than for a market with above-average costs, an oversupply of providers, and some level of health plancompetition.

2. The strength of the current health plan competitors in the market and the level ofcost savings that these health plans are achieving. Most state insurancedepartments require periodic filings of financial information that can give ahealth plan some indicators for the competitive environment and economics.Trade publications also contain some utilization and price benchmarks for thehealth plan industry. Anecdotal information from local employers and providerscan also be a valuable source of information about utilization levels and costsunder competitors' plans.

3. The cost-effectiveness of the health plan's own existing networks. Using theresults achieved by its current networks, the health plan can set goals for anynetworks that it plans to develop.

Style of the health plan's relationship with network providers.These goals usually determine whether the health plan chooses to have tight managementcontrol over its network providers or allows them more autonomy. Goals for relationshipswith providers also influence the nature of incentive programs included in providercontracts.

Patient satisfaction with network providers.Patient satisfaction is usually measured with surveys that ask plan members how they feelabout their interactions with their providers.

Endnotes

1. The InterStudy Competitive Edge, 8.2 (Minneapolis, MN, 1998), 34.2. Peter Kongstvedt and Jean Stanford, Health Plan Market Maturity: A New

Multidimensional Model (Washington, D.C.: Ernst & Young, LLP, 1997), 8-17.3. Health Benefits in 1997 (New York: KPMG Peat Marwick, 1997), 22.4. Health Benefits in 1997, 17.