A New Level for Tiered Health Care

Like giving breaks for generic drugs, some insurers are now offering lower co-pays for patients who use certain hospitals or doctors

By Amy Tsao

In the battle to trim health-care spending over the last several years, so-called tiering of prescription drug benefits has become a standard strategy. According to a Kaiser Family Foundation survey, adoption by employers of three-tier drug-benefit plans jumped from 27% to 63% between 2000 and 2003. Under the system, a patient is charged a co-payment of, say, $10 for a generic drug, vs. around $20 for a brand-name drug on the insurer's approved list and $30 or more for a drug not on the list. Tiered-drug benefits can save 11% or more on health-insurance costs for employers compared to plans without tiering, according to the 2004 Medco Drug Trend Report.

The cost savings are pushing insurers and employers to expand the tiering concept to include doctors and hospitals. The idea is to direct patients -- by charging lower co-pays -- to the most efficient providers. For example, a patient who belongs to a tiered plan and needs to select a hospital for colon surgery would have a report card of hospitals. The patient is charged a substantially lower co-payment at a hospital that scores well on cost and performance measures.


  Insurers and employers see tiering as a way to control costs while at the same time encouraging doctors and hospitals to improve quality. Leapfrog, a coalition of large health-care buyers, counts nine insurers that offer tiered plans, and CEO Suzanne Delbanco says as many as 20 plans are in the works. Rick Siegrist, CEO of Healthshare, a software consulting company that specializes in health care and helps insurers and hospitals develop benchmarks for medical quality, says he knows of two major national insurers that plan to offer tiered plans in 2005, though he won't disclose which ones.

One insurer that already has adopted the system is Healthshare client Tufts Associated Health Plans, a regional insurer in New England. Its Navigator plan for Massachusetts state employees places hospitals in one of two tiers for services in three broad areas -- adult care, pediatric care, and adult surgery. Under the plan, patients are charged co-payments of $200 per hospital admission if the hospital ranks in the top tier in quality of care and cost-efficiency for the particular service -- and $400 if the hospital is in the lower tier.

Some 70,000 of the state's 250,000 employees have already opted for Navigator. And John Freedman, Tufts' medical director, says the company will begin offering Navigator to other employers next year. It will add a similar tiering system for rating individual physicians by July, 2005. "We've been actively working with the physician community to develop that," says Freedman.


  Pacificare Health (PHS ) has been offering a tiered system called Value Network Plan in Southern California since 2003. Currently, 19 of its employer clients in the region offer the plans to their employees, and about 10% of the employees offered the option have opted for it. Pacificare Chief Medical Officer Sam Ho says members who choose the plan save between 5% and 15% compared to a standard plan.

The quality of care under the tiered plan, according to Ho, is better, too. The amount of preventive medicine performed -- from cancer screening to childhood immunizations -- is higher by 15% to 20% than in standard plans. "This represents an extremely viable approach to addressing concerns of health-care inflation and quality," says Ho.

Perhaps not surprisingly, physicians and hospitals have serious misgivings about such initiatives. "We're in favor of diminishing costs, but we think this is the wrong approach," says Dr. John C. Nelson, a Salt Lake City obstetrician-gynecologist who's president of the American Medical Assn. "There's no way to accurately delineate [quality]." The methodologies by which tiers are set and the data that are used to rank doctors are unreliable, Nelson argues.


  Measuring the quality of medical services is much less black-and-white than choosing a generic over a brand-name drug. When deciding between a hospital that has an average of 25 medical errors per day vs. one with two or three per week, the choice may seem obvious. However, the hospital with more errors may simply lack the technology to detect them all. Patient population, too, is a major factor that could affect how doctors and physicians are rated. Wealthier patients tend to be healthier, Nelson notes. "That needs to be factored in," he says.

If it shifts too many patients to too few hospitals and doctors, tiering also could make it harder for some patients to get care in a timely fashion, worries Jim Bentley, senior vice-president for strategic policy planning at the American Hospital Assn.

To date, AHA member hospitals have had "O.K." experiences with insurers that have instituted tiers, Bentley says. But while most insurers say they're measuring quality of medical care, there isn't much "public transparency on how tiering works," says Bentley.


  Another skeptic is Charlie Cosovich, a strategist with the health-care consulting division of Kurt Salmon Associates. "Controlling cost is the wave of future, but tiering is not the way to do it," Cosovich says. So far, the new efforts in tiering appear to be another "way for insurance companies to differentiate their products," he says, rather than providing a useful measure of quality and efficiency.

Siegrist vigorously defends tiering. He says Healthshare uses Medicare data from all 50 states and information from private insurers in 22 states to help clients set up credible quality-ranking systems. He admits that the methodologies aren't perfect, but says these are the "best data available, and it's also good data." Healthshare also factors in patients' severity of illness into its equations. So a patient who has congestive heart failure and who also has diabetes is counted differently than a patient with only congestive heart failure.

Some managed health-care services providers, like Louisville (Ky.)-based Humana (HUM ), are taking steps toward adopting the concept. Humana uses Healthshare data as the basis of Web-site tools that consumers can use to choose doctors and hospitals. Humana's tool at allows patients to calculate their out-of-pocket costs in using different health-care providers while considering factors such as average length of hospital stay and complication rates of various procedures.

"We are seeing a decrease in premium trends," says Beth Bierbower, Humana's vice-president for product innovations. "Patients are choosing options that are right for them."


  At their best, tiered plans offer some hope of improving health-care quality while lowering costs at the same time. Leopfrog's Delbanco is optimistic, but she cautions that insurers and employers have to be careful about how quality measures are gauged. "We could be artificially changing where patients seek care in ways that have nothing to do with what benefits them," Delbanco says.

Insurers are determined to rein in soaring health-care costs, however, and tiering is one of the more proactive -- though controversial -- concepts they've devised.

Tsao is a reporter for BusinessWeek Online in New York

Edited by Thane Peterson

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