California’s insurance exchange is threatening to cut hospitals from its networks for poor performance or high costs, a novel proposal that is drawing heavy fire from medical providers and insurers.The goal is to boost the overall quality of patient care and make coverage more affordable, said Peter Lee, executive director of the Covered California exchange.“The first few years were about getting people in the door for coverage,” said Lee, a key figure in the rollout of the federal health law. “We are now shifting our attention to changing the underlying delivery system to make it more cost effective and higher quality. We don’t want to throw anyone out, but we don’t want to pay for bad quality care either.”
“California is definitely ahead of the pack when it comes to taking an active purchasing role, and exclusion is a pretty big threat,” said Sabrina Corlette, a research professor at Georgetown University’s Center on Health Insurance Reforms. “There may be a dominant hospital system that’s charging through the nose, but without them you don’t have an adequate network. It will be interesting to see how Covered California threads that needle.”
State health benefit exchanges aggregate individual and small group health plans and purchasers in order to facilitate a more functional market and make health coverage more accessible and affordable. When they actively negotiate with health plan issuers on terms and conditions for exchange participation as Covered California does, they in effect become super payers relative to providers since they can leverage their market power to establish quality standards for medical care covered by participating plan issuers. Covered California now wants to exercise that power relative to hospitals. That dynamic disrupts the traditional contractual relationship between plan issuers and providers and both are initially reacting to the proposal by telling Covered California to butt out.
Hospitals operate in a market that tends to be oligopolistic in metro areas and monopolistic in less populous areas. In California’s expansive geography, it has a mix of both. Georgetown University’s Sabrina Corlette points up the tension between enforcing quality standards on hospitals and the realities of the hospital market relative to ensuring an adequate number of hospitals exist in exchange plan provider networks. The California exchange has a large degree of purchasing power. But in a market with few sellers and many buyers (plan members in a given rating region), sellers have a natural advantage relative to determining price and quality.
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