Insurer Takes a Shot at Capping Cost and Choices

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Insurer Takes a Shot at Capping Cost and Choices
Health Net Chief Executive Jay Gellert

Less apparently is more in health insurance these days.

So-called skinny HMOs – which promise lower health premiums through networks with fewer, busier physicians – were a trend that didn’t work out a decade ago after many patients balked at abandoning the family doctor.

But after several years of employers passing on hefty premium increases to their workers, the narrow networks are making a comeback. And that helped fuel impressive first quarter gains in operating income announced last week by Woodland Hills-based Health Net Inc.

“It’s really a back-to-the-future approach that the market appears to be ready for now because the pain has gotten so high,” said Jefferies Group analyst David Windley after Health Net executives highlighted growth in the segment during a conference call last week. “Back in the ’90s, employees revolted, but people now are more willing to consider changing docs if it means they can save some money.”

Health Net doesn’t call its product by its former name, instead calling it a “tailored” network product. Health Net currently offers tailored networks as an option only to commercial group clients, which range in size from mom-and-pop firms to some of the state’s largest employers, such as the University of California system. Individuals cannot sign up.

Health Net’s commercial enrollment totaled about 1.4 million members at the end of the quarter, a decrease of 0.7 percent compared with a year ago, but up a fraction of a percent since the end of last year. Without the tailored plans it could have been ugly. Enrollment in tailored plans rose 48 percent year over year to 420,000 members at the end of the quarter.

“Our tailored network products are working by providing lower-cost products with comprehensive benefits,” said Chief Executive Jay Gellert during the conference call.

Analysts noted that the tailored programs allow Health Net to better compete with lower-cost HMOs such as Kaiser Permanente, which has its own hospitals and clinics, and directly employs doctors and nurses

Excluding one-time items, Health Net’s operating income rose 20 percent to $57.4 million (61 cents per share) compared with a year earlier. Analysts surveyed by Thomson Reuters on average expected an adjusted per-share profit of 57 cents.

The company lost money on a net income basis, but most of the loss was due to a $177 million charge related to a legal judgment in Louisiana that the company may appeal

Higher retention rates

The tailored plans offer the same range of benefits and hospitals as a regular HMO plan, but significantly fewer primary care physician and specialists to choose from.

Health Net has about 47,000 physicians in its statewide provider network, but only 7,000 participating in its silver network, which serves a 10-county area including Los Angeles. An even narrower bronze network offers even more savings to members, who get to choose from just 1,700 doctors in a three-county area that includes Los Angeles.

In setting up the networks, Health Net solicited doctors with a history of being the most efficient and cost-effective to work with, said Larry Tallman, chief sales officer for large group accounts in Health Net’s western region.

Those physicians often belong to groups that have embraced electronic medical records, computerized billing and the latest health care practices to keep costs down.

“The smaller employers have embraced it, our retention rates are high after they have gotten into it,” Tallman said. “When larger employers first try it, a small proportion of their workers go into it, but at renewal time larger percentages join it.”

More than 27,600 UC system employees, plus their dependents, have opted for Health Net’s Blue & Gold tailored network plan. During last fall’s open enrollment, UC system spokesman Steve Montiel said that more than 60 percent of the university’s Health Net full-network HMO members changed plans and 90 percent of them opted for the tailored plan, which enabled them to avoid a premium increase this year.

“Health Net is the most popular provider in the system, and the university did not want to mandate that everyone in Health Net had to go into Blue and Gold, although that would have saved the university more money,” Montiel said. “The university decided to put the decision more squarely in the hands of employees and let them decide what was more important – cost or loyalty to the provider.”

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