Hospital networks: Perspective from four years of the individual market exchanges McKinsey Center for U.S. Reform May 2017

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

The proportion of narrowed The trend toward managed Narrowed networks continue to 1 networks continues to rise 2 plan design also continues. In 3 offer price advantages to (53% in 2017, up from 48% in the 2017 silver tier, more than consumers. In the 2017 silver 2014). In the 2017 individual 80% of narrowed network plans, tier, plans with broad networks market, both incumbent carriers and over half of the broad were priced ~18% higher than and new entrants carriers network plans, had managed narrowed network plans offered narrow networks designs predominantly

Consumer choice is becoming Consumers who select narrowed In both 2014 and 2015 (most 4 more limited. In 2017, 29% of 5 networks in 2017 may have less 6 recent available data), narrowed QHP-eligible individuals had choice of specialty facilities network plans performed only narrowed network plans (e.g., children’s ) but, in better financially, on average, available to them in the silver the aggregate, have access to than broad network plans did tier (up from 10% in 2014) hospitals with quality ratings similar to those in broad networks

Definitions of "narrowed networks" and other specialized terms can be found in the glossary at the end of this document. McKinsey & Company 2 1 The proportion of narrowed networks continues to rise

Network breadth by carrier status Ultra-narrow Narrow Tiered Broad N = number of networks1,2

Incumbents are using more narrowed networks New entrants2 primarily used narrowed More than half of networks are narrowed networks in 2017

1,883 1,703 37 2,410 2,782 2,524 1,740

19 21 24 20 18 18 21

25 21 23 25 28 28 4 38 6 5 5 4 4 0 52 47 53 54 53 47 38

2016 2017 2017 2014 2015 2016 2017

Carriers that remained in the market New entrants National view in both years 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. 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 McKinsey & Company 3 The shift toward managed design is occurring 2 in both narrowed and broad network plans

1 Plan type by network breadth Managed Unmanaged N = number of networks2,3

954 1,123 1,061 845 1,144 1,548 1,301 798

44 42 57 59 65 69 77 82

56 58 43 41 35 31 23 18

2014 2015 2016 2017 2014 2015 2016 2017 Narrowed Broad

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. Definitions of "narrowed networks" and other specialized terms can be 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. found in the glossary at the end of this document. SOURCE: McKinsey Exchange Offering Database McKinsey & Company 4 3 Narrowed network plans remain more price competitive1

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

2014 11 16 16 17

2015 14 16 15 23

17 22 23 33 2016

18 18 19 35 2017

Bronze Silver Gold Platinum

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. Definitions of "narrowed networks" and other specialized terms can be 3 Difference between plans within the same rating area, carrier, and plan type. found in the glossary at the end of this document. SOURCE: McKinsey Exchange Offering Database McKinsey & Company 5 3 Increasingly, broad network plans are less likely to be price leaders

1 Networks by price category and breadth Broad Tiered Narrow Ultra-narrow % of networks in rating areas with at least 1 narrowed network2

Lowest 37 8 29 26 34 6 32 28 30 7 37 26 17 7 45 31 price

0–10% above 44 13 26 17 44 7 27 22 38 5 36 21 33 5 36 26 lowest

11–35% above 46 6 25 23 52 4 26 18 48 5 26 21 43 2 30 25 lowest

>35% 50 5 21 24 63 4 18 15 60 3 21 16 47 7 25 21 above lowest 2014 2015 2016 2017

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. Definitions of "narrowed networks" and other specialized terms can be 2 Networks were counted at a state rating area level. found in the glossary at the end of this document. SOURCE: McKinsey Exchange Offering Database McKinsey & Company 6 In the 2017 silver tier, 29% of QHP-eligible individuals had 4 only narrowed network plans available to them

Consumer access to network breadth among silver plans Broad only Narrowed only Both % of QHP-eligible consumers (N = 39 million)

10 10 12 16 5 10 15

29

80 85 74 55

2014 2015 2016 2017

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 McKinsey & Company 7 While over half of ultra-narrow networks include an AMC, 5 less than one-quarter include a children’s

1 Inclusion of academic medical centers (AMCs) No AMC AMC % of networks in rating areas that contain at least 1 AMC2,3

155 172 166 121 205 266 259 205 53 48 41 28 355 390 331 199 4 6 7 7 29 29 28 19 29 22 29 50 50 49 47 31

96 94 93 93 71 71 72 81 71 78 71 50 50 51 53 69

2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Ultra-narrow Narrow Tiered Broad

1 Inclusion of children’s hospitals (CHs) No CH CH % of networks in rating areas that contain at least 1 CH2,3

95 119 115 78 116 151 155 123 20 19 18 10 127 153 133 80 17 10 21 16 35 47 40 46 39 53 50 60 81 81 72 77 83 90 79 84 65 53 60 54 61 47 50 40 19 19 28 23 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Ultra-narrow Narrow Tiered Broad

1 Counting networks at a state rating area level. 2 Carriers in any given year. Definitions of "narrowed networks" and other specialized terms can be found in the 3 Only tier 1 hospitals assessed. glossary at the end of this document. SOURCE: McKinsey Exchange Offering Database McKinsey & Company 8 Ratings data suggest there is little difference in hospital quality between 5 narrowed and broad networks

1 Hospital quality by network breadth Ultra-narrow Narrow Tiered Broad National average2 Weighted-average 2017 CMS hospital performance scores

Clinical process Safety Efficiency N = 1,548 N = 1,462 N = 1,548

8.8 2.9 4.8 6.4 2.9 3.0 2.9 2.9 8.7 8.7 8.1 8.2 5.1 3.7 2.8

Patient experience Outcomes Total N = 1,548 N = 1,525 N = 1,548 10.1 8.1 33.3

8.6 10.1 10.4 10.1 8.0 8.2 9.5 34.8 32.3 33.7 7.5 30.2

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. Definitions of "narrowed networks" and other specialized terms can be 2 Reflects all AHA hospitals participating in exchange networks for which CMS hospital performance data was available. 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 McKinsey & Company 9 6 Carriers with narrowed networks performed better financially, on average

Post-3R, post-tax individual market financial metrics among exchange carriers Weighted-average by QHP membership1,2 2014 2015

Post-3R post-tax Risk adjustment, Reinsurance, Risk corridors, Claims margins, % %3 % % PMPM, $

Ultra- -2 -6 13 -0.6 301 4 narrow -9 -11 8 0 292 0 -7 -3 17 307 Narrow5 -11 -2 12 -0.2 339

-8 0 18 0.5 346 Broad6 -15 2 13 -0.1 393

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%).

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 McKinsey & Company 10 Glossary

Network types or facilities except in emergency or urgent care situations; however, it generally does not require members to use a primary care physician for in- ▪ Broad network: More than 70% of hospitals in a rating area participate in this network referrals. network. ▪ PPO (preferred provider organization): A plan that typically allows members ▪ Narrow network: More than 30% and no more than 70% of hospitals to see physicians and get services that are not part of a network, but out-of- participate. network services often require a higher copayment. ▪ Ultra-narrow network: No more than 30% of hospitals participate. ▪ POS (point-of-service plan): A hybrid of an HMO and a PPO; it offers an ▪ Tiered network: Any network with multiple levels of in-network cost-sharing open-access model that may assign members to a primary care physician for hospital services. and usually provides partial coverage for out-of-network services. ▪ Narrowed networks: Narrow, ultra-narrow, and tiered networks, unless otherwise noted. Abbreviations used 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 . AMC: Academic medical center analysis. . CMS: Centers for Medicare and Medicaid Services . DMHC: Department of Managed Healthcare () Plan types (which typically vary in their gatekeeping arrangements and out- . HIOS: Health Insurance Oversight System of-network cost sharing) . MLR: Medical loss ratio . NAIC: National Association of Insurance Commissioners ▪ HMO (health maintenance organization): A plan that typically offers a primary . QHP: Qualified health plan care physician who acts as a gatekeeper to other services and referrals; it . PMPM: Per member per month usually provides no coverage for out-of-network services, except in . SHCE: Supplemental Health Care Exhibit emergency or urgent care situations. . 3R: Risk adjustment, reinsurance, and risk corridors ▪ EPO (exclusive provider organization): A plan similar to an HMO that usually provides no coverage for any services delivered by out-of-network providers

McKinsey & Company 11 Methodology and sources

The findings described in this document are based on publicly available data. Financials: All our financial findings are based on publicly available sources. Individual performance and financials were obtained from MLR reports, SHCE filings, DMHC Pricing: Individual exchange premiums were obtained from state-based exchange filings, and CMS 2014 and 2015 3R reports. We analyzed all available data for 2014 websites and CMS/healthcare.gov public use files. For analyses involving comparisons and 2015 carriers with more than 1,000 individual lives. Profitability is based on of network premiums, unless otherwise noted, if a network is associated with multiple reported post-tax, post-3R (reinsurance, risk corridor, and risk adjustment) operating plans we consider only the lowest-price plan in each metal tier when comparing that margin. Risk adjustment and reinsurance were obtained directly from the CMS network with other networks. Premiums are based on a 40-year-old single non-smoker. 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 Hospitals: All hospital data was obtained, as is, from carrier website provider search in the quarterly reports was occasionally found to be outdated with regard to CMS’s tools available to consumers. data between 2014 and 2017 was most recent risk corridor announcement. We independently calculated to verify and collected from carrier websites. Our analysis focused only on acute care facilities that update the amounts at the carrier level. 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 Plan types: Plan types reported were taken directly from exchange websites and general hospitals. In order to effectively compare hospital inclusion in networks, we Summary of Benefits and Coverage (SBC) documents. Plan type definitions are also identified each hospital’s unique AHA ID through a combination of geospatial outlined in the glossary distance matching, approximate string matching, and manual verification. Previous publications 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 . Hospital networks: Perspective from three years of exchanges cost-sharing network tier (only applicable for tiered networks) in a given rating area, . Hospital networks: Evolution of the configurations on the 2015 exchanges divided by the total number of hospitals that are in the rating area. Network breadth . Hospital networks: Updated national view of configurations on the 2014 definitions are outlined in the glossary. Adjustments were made to CMS rating area exchanges 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.

McKinsey & Company 12