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Hospital networks: Perspective from four years of the individual market exchangesMcKinsey Center for U.S. Health System Reform

May 2017

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

2McKinsey & Company

Key takeaways

The proportion of narrowed networks continues to rise (53% in 2017, up from 48% in 2014). In the 2017 individual market, both incumbent carriers and new entrants carriers offered narrow networks predominantly

The trend toward managed plan design also continues. In the 2017 silver tier, more than 80% of narrowed network plans, and over half of the broad network plans, had managed designs

Narrowed networks continue to offer price advantages to consumers. In the 2017 silver tier, plans with broad networks were priced ~18% higher than narrowed network plans

Consumer choice is becoming more limited. In 2017, 29% of QHP-eligible individuals had only narrowed network plans available to them in the silver tier (up from 10% in 2014)

Consumers who select narrowed networks in 2017 may have less choice of specialty facilities(e.g., children’s hospitals) but, in the aggregate, have access to hospitals with quality ratings similar to those in broad networks

In both 2014 and 2015 (most recent available data), narrowed network plans performed better financially, on average, than broad network plans did

1 2 3

4 5 6

Definitions of "narrowed networks" and other specialized terms can be found in the glossary at the end of this document.

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The proportion of narrowed networks continues to rise1

52 47

44

25 28

19 21

SOURCE: McKinsey Exchange Offering Database

Incumbents are using more narrowed networks

38

0

38

24

53 54 53 47

6 5 54

21 23 2528

20 18 18 21

Carriers that remained in the market

in both years

New entrants

New entrants2 primarily used narrowed networks

More than half of networks are narrowed in 2017

National view

TieredUltra-narrow BroadNarrowNetwork breadth by carrier statusN = number of networks1,2

1,883 1,703 37

2016 2017 2017 2014 2015 2016 2017

2,410 2,5242,782 1,740

Definitions of "narrowed networks" and other specialized terms can be found

in the glossary at the end of this document.

1 Networks were counted at a state rating area level.2 We counted a carrier that offers health insurance in two states as two carriers. A carrier was considered a new

entrant in a given state if previously it had offered individual insurance only in one or more other states.

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The shift toward managed design is occurring in both narrowed and broad network plans


1 Plans based on health maintenance organizations or exclusive provider organizations are considered managed. Those based on preferred

provider organizations or point of service are considered unmanaged.2 Networks were counted at a state rating area level. 3 When multiple silver plans were available on a single network, we used the plan type associated with the lowest-price silver plan in that network.

UnmanagedManagedPlan type by network breadth1

N = number of networks2,3

2

35 3123

18

65 6977

82

Narrowed

2014 20162015 2017

1,123 1,061 845954

56 58

43 41

44 42

57 59

Broad

2014 20162015 2017

1,548 1,301 7981,144

Definitions of "narrowed networks" and other specialized terms can be

found in the glossary at the end of this document.

5McKinsey & Company

Narrowed network plans remain more price competitive1


1 More consistent price differences across metals may indicate that payors are increasingly basing network price on experience.2 When a network has multiple plans, the lowest-price plan was used as the price of the network. If there were multiple networks available

for selection as “narrowed,” the narrowest was selected. If there were multiple networks available for selection as “broad,” the broadest

was selected. 3 Difference between plans within the same rating area, carrier, and plan type.

Difference in median premium for broad vs. narrowed networks2,3

%

3

2014

2016

2015

201718

22

16

16

Silver

18

17

14

11

Bronze

19

23

15

16

Gold

35

33

23

17

Platinum



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Increasingly, broad network plans are less likely to be price leaders

1 Price category was defined as the premium gap to the lowest-price product. This is the difference between a

network’s lowest-priced plan and the lowest-priced plan within the same metal tier in the same rating area. 2 Networks were counted at a state rating area level.

Tiered Ultra-narrowBroad NarrowNetworks by price category and breadth1

% of networks in rating areas with at least 1 narrowed network2

3

37

44

46

50

8

13

6

5

29

26

25

21

26

17

23

24

2014

Lowest

price

0–10%

above

lowest

>35%

above

lowest

11–35%

above

lowest

34

44

52

63

6

7

4

4

32

27

26

18

28

22

18

15

30

38

48

60

7

5

5

3

37

36

26

21

26

21

21

16

17

33

43

47

7

5

2

7

45

36

30

25

31

26

25

21

2015 2016 2017




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In the 2017 silver tier, 29% of QHP-eligible individuals had only narrowed network plans available to them


BothNarrowed onlyConsumer access to network breadth among silver plans% of QHP-eligible consumers (N = 39 million)

4

8085

74

55

105

15

29

10 10 12 16

2014 20162015 2017

Broad only

Definitions of "narrowed networks" and other specialized terms can be found

in the glossary at the end of this document.

8McKinsey & Company

While over half of ultra-narrow networks include an AMC, less than one-quarter include a children’s hospital


1 Counting networks at a state rating area level.2 Carriers in any given year.3 Only tier 1 hospitals assessed.

No AMC AMCInclusion of academic medical centers (AMCs)1

% of networks in rating areas that contain at least 1 AMC2,3

5

No CH CHInclusion of children’s hospitals (CHs)1

% of networks in rating areas that contain at least 1 CH2,3

50 50 51 53

50 50 49 47

Ultra-narrow

155 166172 121

2014 2015 2016 2017

71 71 69 72

29 29 31 28

Narrow

205 259266 205

2014 2015 2016 2017

81 71 78 71

19 29 22 29

Tiered

53 4148 28

2014 2015 2016 2017

96 94 93 93

4 6 7 7

Broad

355 331390 199

2014 2015 2016 2017

19 19 28 23

81 81 72 77

Ultra-narrow

95 115119 78

2014 2015 2016 2017

53 60 54 61

47 40 46 39

Narrow

116 155151 123

2014 2015 2016 2017

6547 50 40

3553 50 60

Tiered

20 1819 10

2014 2015 2016 2017

83 90 79 84

17 10 21 16

Broad

127 133153 80

2014 2015 2016 2017

Definitions of "narrowed networks" and other specialized terms can be found in the

glossary at the end of this document.

9McKinsey & Company

Ratings data suggest there is little difference in hospital quality between narrowed and broad networks

SOURCE: McKinsey Exchange Offering Database, CMS Hospital Compare Data 2017, 2016 American Hospital Association (AHA) Database

1 Total number (N) of networks varies across the metrics based on CMS data availability. The “Total” score is a weighted

average based on the number of inpatient admissions for each in-network hospital in a given network breadth. In 2017,

CMS reduced the weights for “Clinical process” an “Outcomes” and added the “Safety” score. 2 Reflects all AHA hospitals participating in exchange networks for which CMS hospital performance data was available.

Hospital quality by network breadth1

Weighted-average 2017 CMS hospital performance scores

5

TieredUltra-narrow BroadNarrow

2.93.0

2.9 2.9

Clinical processN = 1,548

2.9

8.7 8.1 8.2 8.7

SafetyN = 1,462

8.8

34.8 32.3 30.233.7

TotalN = 1,548

33.3

8.68.0

7.58.2

Patient experienceN = 1,548

8.1

10.1 10.49.5 10.1

OutcomesN = 1,525

10.1

6.4

3.72.8

5.1

EfficiencyN = 1,548

4.8

National average2



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Carriers with narrowed networks performed better financially, on average 6

Post-3R, post-tax individual market financial metrics among exchange carriersWeighted-average by QHP membership1,2

-2

-7

-8

-9

-11

-15

Post-3R post-tax

margins, %

Risk adjustment,

%3

Reinsurance,

%

Risk corridors,

%

Claims

PMPM, $

-6

-3

0

-2

1 Carrier performance was determined at the NAIC/HIOS (plan ID) state and entity level. Analysis includes only entities HIOS ID’s associated with on-exchange plans in given year, with >1K 2014 QHP members.

2 Network breadth for each entity was rolled up to the state level (from county) using the QHP-eligible population and network associated with the lowest-price silver plan. Each state-level entity is then associated with

their respective breadth category (broad, narrow, ultra-narrow). The financial metrics for all entities in each breadth category are weighted by their 2014 QHP lives, obtained from CMS MLR reports.

3 Risk adjustment does not total to 0 as data reflects only those entities with on-exchange presence in 2014. Negative values indicate payment into the program.

4 The ultra-narrow category includes 48 entities (18 with positive margins), 12% of the premiums among exchange entities (post-3R, post-tax margin as percentage of premium ranged from -81% to 17%).

5 The narrow category includes 127 entities (37 with positive margins), 55% of the premiums among exchange entities (post-3R, post-tax margin as percentage of premium ranged from -157% to 31%).

6 The broad category includes 132 entities (28 with positive margins), 32% of the premiums among exchange entities (post-3R, post-tax margin as percentage of premium ranged from -99% to 27%).

13

17

18

8

12

13

Ultra-

narrow4

Narrow5

Broad6

20152014

2

-11

301

307

346

292

339

393

0.5

-0.6

0

0

-0.2

-0.1

Definitions of "narrowed networks" and other specialized terms can be found in the glossary at the end of this document.

SOURCE: McKinsey Exchange Offering Database, CMS Hospital Compare Data 2017, 2016 American Hospital Association (AHA) Database


Glossary

Network types

▪ Broad network: More than 70% of hospitals in a rating area participate in this

network.

▪ Narrow network: More than 30% and no more than 70% of hospitals

participate.

▪ Ultra-narrow network: No more than 30% of hospitals participate.

▪ Tiered network: Any network with multiple levels of in-network cost-sharing

for hospital services.

▪ Narrowed networks: Narrow, ultra-narrow, and tiered networks, unless

otherwise noted.

Note: Only hospital networks are considered in these analyses. (Physician networks

are not covered.) If a network is tiered, only tier 1 hospitals were included in an

analysis.

Plan types (which typically vary in their gatekeeping arrangements and out-

of-network cost sharing)

▪ HMO (health maintenance organization): A plan that typically offers a primary

care physician who acts as a gatekeeper to other services and referrals; it

usually provides no coverage for out-of-network services, except in

emergency or urgent care situations.

▪ EPO (exclusive provider organization): A plan similar to an HMO that usually

provides no coverage for any services delivered by out-of-network providers

or facilities except in emergency or urgent care situations; however, it

generally does not require members to use a primary care physician for in-

network referrals.

▪ PPO (preferred provider organization): A plan that typically allows members

to see physicians and get services that are not part of a network, but out-of-

network services often require a higher copayment.

▪ POS (point-of-service plan): A hybrid of an HMO and a PPO; it offers an

open-access model that may assign members to a primary care physician

and usually provides partial coverage for out-of-network services.

Abbreviations used

AMC: Academic medical center

CMS: Centers for Medicare and Medicaid Services

DMHC: Department of Managed Healthcare

(California)

HIOS: Health Insurance Oversight System

MLR: Medical loss ratio

NAIC: National Association of Insurance Commissioners

QHP: Qualified health plan

PMPM: Per member per month

SHCE: Supplemental Health Care Exhibit

3R: Risk adjustment, reinsurance, and risk corridors


Methodology and sources

The findings described in this document are based on publicly available data.

Pricing: Individual exchange premiums were obtained from state-based exchange

websites and CMS/healthcare.gov public use files. For analyses involving comparisons

of network premiums, unless otherwise noted, if a network is associated with multiple

plans we consider only the lowest-price plan in each metal tier when comparing that

network with other networks. Premiums are based on a 40-year-old single non-smoker.

Hospitals: All hospital data was obtained, as is, from carrier website provider search

tools available to consumers. Hospital network data between 2014 and 2017 was

collected from carrier websites. Our analysis focused only on acute care facilities that

are defined by the American Hospital Association (AHA) as general medical and

surgical; surgical; cancer; heart; eye, ear, nose, and throat; orthopedic; or children’s

general hospitals. In order to effectively compare hospital inclusion in networks, we

also identified each hospital’s unique AHA ID through a combination of geospatial

distance matching, approximate string matching, and manual verification.

Networks: Network breadth is calculated for each CMS rating area, where available,

by taking the number of hospitals that are in-network for the lowest-actuarial-value

cost-sharing network tier (only applicable for tiered networks) in a given rating area,

divided by the total number of hospitals that are in the rating area. Network breadth

definitions are outlined in the glossary. Adjustments were made to CMS rating area

definitions for Arkansas, Idaho, Massachusetts, and Nebraska to convert their 3-digit

zip rating area definitions to a county-based definition. These rating area adjustments

were made to be identical to (for Arkansas, Idaho, and Nebraska), or as close as

possible to (for Massachusetts), the adjustments made in the healthcare.gov exchange

database files. In general, counties were assigned to the rating area in which a plurality

of the county’s population reside.

Financials: All our financial findings are based on publicly available sources. Individual

performance and financials were obtained from MLR reports, SHCE filings, DMHC

filings, and CMS 2014 and 2015 3R reports. We analyzed all available data for 2014

and 2015 carriers with more than 1,000 individual lives. Profitability is based on

reported post-tax, post-3R (reinsurance, risk corridor, and risk adjustment) operating

margin. Risk adjustment and reinsurance were obtained directly from the CMS

September 17, 2015, reports titled “Summary Report on Transitional Reinsurance

Payments and Permanent Risk Adjustment Transfers for the 2014 Benefit Year.” Risk

corridor details were obtained from carrier reports. Carrier-level risk corridor information

in the quarterly reports was occasionally found to be outdated with regard to CMS’s

most recent risk corridor announcement. We independently calculated to verify and

update the amounts at the carrier level.

Plan types: Plan types reported were taken directly from exchange websites and

Summary of Benefits and Coverage (SBC) documents. Plan type definitions are

outlined in the glossary

Previous publications Hospital networks: Perspective from three years of exchanges

Hospital networks: Evolution of the configurations on the 2015 exchanges

Hospital networks: Updated national view of configurations on the 2014

exchanges

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