Rx: Pay Less and Get Less
Narrow-network HMOs are the new cost-cutting tool.
One rapidly emerging tool for cost-cutting employers is the narrow-network HMO, which can reduce employers' medical insurance premiums by as much as 25 percent. These plans offer participants fewer choices, which enables the network to reduce its premiums for both employers and employees. High-cost doctors and diagnostic facilities are simply removed from the insurance roster and become inaccessible for the average subscriber.
In California, the giant statewide CalPERS health care system and the University of California have both begun offering these options — and participation has reportedly grown rapidly. Employees pay lower premiums, which saves them money with lower paycheck deductions. But they must then work with fewer doctors and cannot access certain physicians outside the network unless they pay much steeper fees for out-of-network services.
The narrow-network benefits plans will likely become one of the tools that public employers use to curb their retiree medical costs, forcing those receiving "unlimited" benefits to stay inside the narrow network. That seems like a reasonable measure, on the theory that most retirees have more time to shop for and drive to in-network providers. By making these narrow networks the standard for active employees, the employer can argue that benefits are equivalent for the retirees. By cutting their active employee benefits costs, employers can reduce their OPEB ("other post-employment benefits") liabilities and thus their required actuarial contributions. That leverages their budgetary savings in many cases.
I predict we'll see a lot more of this in the next year or two, as public employers have fewer and fewer options to curb their costs, and employees seek lower premiums in their payroll withholding. We will also see more public employers insisting that these narrow networks become the standard benefit in their collective bargaining agreements, with employees required to pay up for broader-access networks.
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