Providers nationwide are feeling the heat of healthcare reform as a growing number of insurers drop hospitals and physician groups from their networks in an effort to drive down costs.

The trend toward narrow networks and the ensuing loss of business for some provider organizations is triggering widespread concern among medical societies, hospitals and regulators nationwide. Several legislative remedies have been proposed to address the issue, but McKesson experts suspect cost-driven provider networks are here to stay.

As a result, they say, physicians must redouble their efforts to reduce both operational and patient care costs while improving quality in order to minimize the risk of cancellation.

“The days of practices simply asking for higher rates of reimbursement during contract negotiations are coming to an end,” said Rob Saunders, a senior strategic consultant with McKesson Business Performance Services. “Unless you can demonstrate that your organization is high-quality, efficient and committed to reducing overhead as well as the cost of care, you’ll be in danger of being excluded from specific payer networks.”

Reform-Driven Change

Payers say cost pressures exerted by consumers and health purchasers are driving the need to reduce network size. Smaller networks made up of lower-cost, high-quality providers are essential to making the state exchange health plans developed under the Patient Protection and Affordable Care Act (ACA) affordable, according to payers.

Accountable Care Organizations (ACOs), the primary care-focused delivery vehicles also created as part of the ACA, are likewise using narrow, “high-value” networks to keep costs down. Finally, some providers that have long participated in Medicare Advantage managed care plans are being cut from the networks as Medicare reimbursements continue to fall.

Two medical societies in Connecticut filed suit last October against UnitedHealthcare after the insurer dropped thousands of doctors from its Medicare Advantage plans in Connecticut and at least nine other states. An injunction blocking the cancellations was issued in December and the case is now in arbitration. 1

Regulatory Remedies

The Centers for Medicare & Medicaid Services (CMS) have proposed two new rules that could limit payers’ ability to reduce network size in response to a growing outcry from providers and patients. In February, the agency announced a proposal that would require insurers planning to sell products through the ACA exchanges in 2015 to submit a list of all in-network providers to CMS. The list would then be reviewed with state regulators to ensure that patients have reasonable access to providers of all types. 2

CMS also has proposed that Medicare Advantage providers be given at least 60 days advanced notice of contract termination, and that insurers inform patients during open enrollment about the providers they expect to drop.3

Cost Control

One common complaint among practices that have been terminated is that the cost-quality calculations health plans use to determine which groups will remain in network aren’t available to providers.

Be that as it may, all physician organizations -- whether facility-based or independent – must be continually looking for opportunities to reduce patient care expenses and operational costs while improving quality of care, Saunders said. Physicians groups should work closely with their facilities to jointly identify areas where the cost of care can be reduced and efficiencies enhanced so that the facilities appear attractive to payers for network inclusion.

Additionally, practices should find new ways to minimize operating overhead. Outsourcing revenue cycle management, for example, may represent an opportunity for significant savings. Sustaining an appropriate balance between clinician staffing and volume is also important, Saunders said.

“You’ve got to be able to demonstrate that you’re cost-effective in order to enhance your chances of staying in network with various payers,” Saunders said. “So instead of telling them during contract negotiations that you need a 10% increase, maybe you can say instead that `we’ve reduced our costs and we only require a 2% increase this year, and furthermore, we’ll tie future increases to cost and quality performance.’”

A Commitment to Quality

Most facilities typically report a range of key quality indicators to payers -- including adverse events, length of stay, service appropriateness, readmissions and customer satisfaction. But while the quality reporting environment for physicians is not yet as evolved, both independent and facility-based doctors should nonetheless take advantage of available opportunities to collect and report quality data, according to Keith Chew, also a senior strategic consultant with McKesson.

Reporting mechanisms can include the CMS-sponsored Physician Quality Reporting System (PQRS) and Meaningful Use, as well as other initiatives developed by medical societies and specialty organizations. Physicians should work with their hospitals to determine how best to incorporate quality data into enterprise reporting systems.

A physician commitment to adopting quality metrics that are reportable and comparable will not only win goodwill with payers and the facilities the physicians serve, but also help reduce costs by enabling more efficient and medically appropriate care, Chew said.

It may also be beneficial for physician groups to reach out to payers directly, Saunders added.

“It doesn’t hurt to be pro-active and to establish a solid communications channel,” he said. “You’ll get a better sense for where the insurer stands in terms of when and how they plan to use physician quality reporting and performance information.”

Preparing for the Worst

The mercurial nature of today’s healthcare environment means that despite a group’s best efforts, they may still find themselves suddenly on the outs with a payer. If that occurs, groups must be ready to respond quickly, according to Chew.

“They should prepare for a decrease in volume and revenue by whatever means they deem appropriate,” Chew said. “This can include developing greater flexibility in staffing, pursuing market expansion initiatives and even positioning the practice for sale or wind-down, if it comes to that. These days, practices need to be ready for anything and everything.”

1 Robert Lowes, “Medicare Advantage Cuts May Shrink Physician Networks,” Medscape Medical News, March 3, 2014, 

2 “HHS To Insurers: You May Have to Add More Doctors, Hospitals in Obamacare Plans,” Feb. 5, 2014, 

3 Susan Jaffe, “Draft Rules Would Help Protect Seniors When Medicare Advantage Plans Drop Doctors,” Kaiser Health News, March 24, 2014, 


About the author

McKesson Business Performance Services offers services and consulting to help hospitals, health systems, and physician practices improve business performance, boost margins and transition successfully to value-based care.