AHM Network Management: Analysis of Market and Health Plan Needs

Objectives
After completing this lesson you should be able to:
Explain how the presence of provider organizations and the level of market maturity
affect network strategies
Explain how a health plan can use a competitive analysis to determine the size of the
network
Describe some differences between network needs for large employers versus needs for
small employers
Describe some of the challenges that health plans face when developing networks in rural
areas
List several different areas for which a health plan should establish goals before
beginning to develop or revise a provider network

Introduction
To ensure that its members receive appropriate, high-quality care in a cost-effective manner, each
health plan tailors its networks according to the characteristics of the consumers, purchasers,
providers, and competitors in a particular market. Other considerations for planning the network
are the health plan's own goals for quality, accessibility, cost savings, health plan-provider
relationships, and member satisfaction. Strategic planning for networks is an ongoing process, so,
in addition to an initial evaluation of its markets and goals, a health plan must periodically
reevaluate its target markets and objectives, then modify its network strategies accordingly to
remain competitive in the rapidly changing healthcare industry.
In this lesson, we describe the ways in which health plans analyze the network management
aspects of potential and current markets. We also discuss the types of goals that a health plan
establishes for a network.

Market Analysis
The structure, composition, and size of the provider network depend in part on the characteristics
of the specific service area. When a health plan considers establishing a provider network, it
analyzes the market for that network. The factors typically included in a market analysis are listed
in Figure 2A-1.

Market Maturity
Even though the use of health plans is growing in virtually every area of the United States, health
plan market share and the rate of growth varies greatly among individual markets. For example,
as of January 1, 2003, more than 48% of California's population was enrolled in an HMO, while
Alaska had no HMO enrollment, and in six other states (Alabama, Idaho, Iowa, Mississippi,
North Dakota, and Wyoming), less than 5% of the population belonged to an HMO.1 To
determine appropriate strategies for a particular market, a health plan should assess the current
level of market share for health plans and how the market share is changing. The level of health
plan penetration in the market is often an indicator of how knowledgeable providers and
consumers are about health plans, how receptive providers and consumers will be to health plan
programs, and the level of competition among health plans in the area. Health plan market
maturity may also provide some indication of which products are most appropriate for a particular
region. For instance, consumers and purchasers in a market with relatively little health plan
market share are likely to be more receptive to loosely managed plans, such as PPOs, than to
HMOs.
One recent analysis views health plan market maturity as the result of a combination of 11 market
factors.2 These factors are listed in Figure 2A-2.
Mature markets will have providers who understand how health plans function, and the providers
will be organized to interact with health plans. For example, the first three factors in Figure 2A-2
relate to the formation of provider organizations, which are alliances among physicians or
between physicians and hospitals that contract with health plans on behalf of the providers.
Examples of such provider organizations are an independent practice association (IPA), a group
practice without walls (GPWW), a consolidated medical group, and a physician-hospital

organization (PHO). (These provider organizations are described in Healthcare Management: An

Introduction.) The presence of provider organizations may have a profound influence on
contracting strategies and the size and composition of the provider network. Members of these
provider organizations may be unwilling or unable to contract on an independent basis. Individual
providers may also have formal or informal commitments to refer only to other providers in the
same organization. In many cases, health plans construct their provider networks around existing
IPAs, PHOs, or multi-specialty groups.

From the health plan's perspective, contracting with provider organizations has both positive and
negative aspects. On the positive side, integrated organizations of hospitals, physicians, and other
providers are more likely to have established systems of communication that allow for better
coordination of care and quality improvement across providers. Wellness, disease management,
and case management programs are potentially more effective when implemented by a team of
providers who are used to working together and who understand the role of each provider in the
healthcare delivery system. In addition, provider organizations are often willing and able to
manage the risk of capitation or other performance-based compensation programs. Under a risksharing arrangement, an integrated delivery system (IDS) has greater control of its risk,
theoretically, and can make better matches between resources and patient needs than can
individual providers.
On the negative side, the presence of provider organizations can reduce the number of choices
that health plans have in a market. For instance, the Minneapolis provider community has now
consolidated into three major provider organizations. Health plans operating in Minneapolis must
choose from the three organizations for provider contracting. Employer purchasing coalitions in
Minneapolis have attempted to "unbundle" these organizations in order to reestablish the range of
choice they prefer. In addition to limiting health plan choices, the integration of providers into
networks also limits the ability of health plans to match resources with the needs of patients. The
plan may decide that it needs two of the three provider organizations in a community to have an

adequate supply of primary care physicians (PCPs), but those two provider organizations may
carry with them more specialists than the health plan needs to serve its members.
In addition, the collective bargaining leverage possessed by provider organizations may reduce a
health plan's ability to obtain favorable or even competitive reimbursement arrangements. This is
particularly true in smaller markets with limited competition among provider organizations. In
some cases, provider organizations have higher average service costs than might be expected due
to the expense of developing and maintaining the organization. Finally, integrated provider
organizations that span urban and rural areas may reduce competition among referral centers for
the patients coming from rural communities, as we will discuss in the section on urban and rural
markets.

The Provider Community

A thorough assessment of the provider community is a critical component of the market analysis.
The health plan needs an accurate estimate of the supply and location of physicians, hospital
beds, pharmacies, and other ancillary services. When evaluating a provider's location for
accessibility, a health plan considers the distance between the provider's location and members, as
well as geographical barriers, such as mountains and road patterns, that may affect access. For
each type of provider, the health plan also examines typical patterns of utilization and average
costs for selected services. In most cases, physician data is reported by specialty, or at least
divided into PCP and specialist categories. Because inpatient care is typically more costly than
the same services delivered on an outpatient basis, a health plan gives special attention to the ratio
of inpatient to outpatient utilization.
To research the provider community, health plans may use any or all of the data sources listed in
Figure 2A-3.
While aggregate utilization data is usually available, a health plan often experiences difficulty in
obtaining reliable utilization information about individual practitioners who have not previously
participated in one of the health plan's networks. Utilization data received directly from
practitioners may be inaccurate if the providers have not developed adequate systems for
monitoring utilization.
In addition to determining the number, types, locations, and utilization patterns of providers, the
health plan needs to understand the existing referral patterns or other relationships in the provider
community. Even in markets without provider organizations, most PCPs have established
relationships with particular specialists and ancillary care providers. The PCPs may be reluctant
to refer members to unfamiliar providers, even if those providers happen to be in the same health
plan network. To make sure that their members have access to inpatient care and other hospitalbased services, the health plan must also consider which physicians have privileges at the
different hospitals in the area. Health plans often lack the time or resources necessary to
thoroughly investigate referral patterns, so the extent of research into referral patterns varies
among health plans.

Competitive Analysis
Besides considering the condition of the provider community, the health plan also analyzes its
competition in the market. It identifies the other health plans operating in the market, the level of
their market penetration, and the characteristics of successful and unsuccessful health plans, such
as panel sizes and premium levels. This information helps the health plan decide what strategies it
should use in developing its provider network. For example, one way for a health plan to
determine the optimal size for its provider panel is to examine the provider networks of the
market's other health plans. This analysis should answer the following questions:
What are the provider panel sizes, premium levels, and cost-containment strategies of the

health plans with large or increasing market shares?

What are the physician-to-enrollee ratios of the successful health plans?

What are the characteristics of health plans that are losing market share?
How satisfied are providers with the competitive plans, and what are the reasons for their

satisfaction or dissatisfaction?
By correlating the current market share and the growth of market share of competitive health
plans with provider panel size, premium prices, and other competitive factors, the health plan can
understand the competitive dynamics in the market. The health plan needs to know:

Are customers willing to accept a smaller provider panel in exchange for lower prices?
What price reduction appears to be required for acceptance of narrower panels?
How important are out-of-network benefit features?
Are PPO or POS products more successful than HMO products of the same panel size?

Given the competitive characteristics of the market, the health plan can determine how many
PCPs, specialists, facilities, and ancillary providers to include in the network in order to meet
members' healthcare needs and the expectations of both members and purchasers.

General Economic Conditions in the Market

The economy of the target market can influence a health plan's approach to network development
in several important ways. The health plan must consider the level of growth or decline in the
economy, the size of employers, and the types of industry in the market.

Economic Growth
Many times, economic growth in a market indicates an influx of new, often young, workers
attracted by employment opportunities. The addition of many young people lowers the average
age of the population. A lower average age influences the healthcare services that will be needed.
We discuss the effect of age on the composition of the network later in this lesson. In a tight labor
market, companies tend to increase employee benefit levels as employers compete with each
other for workers. Broader ranges of benefits often mean that health plans will need to increase
the number and types of providers in the network. A growing economy often signals growth in
the medical community as well, with expanded hospital facilities, higher-level diagnostic and
procedure facilities, and more physicians.
A sluggish or declining economy can have the opposite effect on healthcare needs in an area.
Young workers may leave the area in search of jobs. The remaining population is likely to be
older and more subject to chronic health problems. As the average age of employees goes up,
healthcare premiums will rise to account for the increased healthcare needs of older workers.
Employers have turned to health plan programs to respond to rising healthcare costs. Other
employer strategies designed to address rising costs include increasing employee contributions
for health plan coverage, especially for traditional indemnity programs.
Depending on the current supply of providers, a declining economy can either stimulate or stifle
competition for health plan contracts among providers. In a market with a large supply of
physicians, for example, physicians may be more willing to negotiate with health plan programs
to avoid losing patients in a declining economy. On the other hand, a declining economy often
discourages new physicians from entering that market. The current supply of physicians may
resist price negotiations in the knowledge that health plans have no alternative providers to
include in the network.

Size of Employers
The composition of the local economy also influences the provider contracting process. For
example, the sizes of the businesses in the market affect the types of health programs that will be
purchased. In general, larger companies (those with more than 1,000 employees) have adopted
health plans more quickly than smaller companies (those with fewer than 100 employees).
Although health plan coverage is less costly than indemnity coverage, small companies have been
slower to contract with health plans. The decision makers in small companies typically have less
knowledge of health plan products. Small companies often lack the administrative or financial
capability to offer multiple health options.
In a market with predominantly small employers, health plans may want to develop broad
provider panels so that small groups will be more attracted to a health plan as the sole health
benefit program. Products with out-of-network benefits, such as PPO and POS products, are more
likely to be successful in these markets, than an HMO that offers no out-of-network benefits.

A market dominated by larger employers has a different contracting complexion. Although fewer
firms of all sizes are offering employees a choice of health plans, choices among healthcare
benefit plans are still more common in larger firms. In markets where employees have health plan
choices, products with relatively small panels may have better growth opportunities. While the
general trend in consumer preferences is toward larger provider panels, some consumers are
comfortable staying within a limited provider network and will choose a narrow panel plan if it is
less expensive. Employee choice among different health plans allows health plans to reach this
niche market. Narrow panels can have several advantages for health plans, as listed in Figure 2A4.
In order to make the narrow panels more appealing, health plans serving a market dominated by
large employers need to ensure the quality of their networks by including quality and member
satisfaction measures in the provider selection process and in provider incentives.

Types of Industries
The industry mix of the target market also has implications for the provider network.
Manufacturing companies are more likely than professional or service organizations to negotiate
employee benefit packages with unions. Frequently, union negotiations for healthcare benefits
emphasize preserving the worker's choice among providers. High-wage professionals such as
lawyers, accountants, and physicians generally prefer high levels of benefits and unrestricted
access to any provider. Service industries such as restaurants, hotels, and laundries typically favor
low-cost, minimal-benefit healthcare plans, if health benefits are offered at all. Health plans
selling to the service industry often develop narrow panels and manage access closely in order to
control costs.
The type of industry in a market also affects the composition of a network. Manufacturing and
heavy industry jobs have more back injuries, while carpal tunnel injuries are more common in
computer-oriented businesses. The differences in the types of injury seen most often influence the
mix of providers needed for a workers' compensation network.

Rural, Urban, and Suburban Markets

Health plans often adopt different approaches to developing networks in rural, urban, and
suburban markets. The most obvious reason for using different approaches is that the number and

types of providers vary greatly among these markets. Less obviously, the expectations of
consumers and providers also vary according to the type of community involved. Health plans
must factor in these variables as they develop their provider networks.

Rural Markets
The greatest challenge for the development of health plan networks comes in low- population
rural areas where the number and types of providers are limited. In general, when provider
supplies are limited, providers are not likely to offer discounts to health plans in exchange for
directed patient volume. Further, when there is a small supply of providers, the consumer demand
for broader provider panels usually outweighs the value of any additional discounts that the health
plan could obtain through directing volume to a smaller panel.
A small supply of PCPs can make it difficult for a health plan to fulfill its obligation to provide
complete healthcare services for its members. If the number of PCPs is low in relation to the area
population, many PCPs may be unable or unwilling to accept new patients from the health plan.
In addition, the PCPs may not be able to provide 24-hours-per-day, 7-days-per-week care, so a
health plan may need to arrange for after-hours services from local urgent care centers or hospital
emergency departments.
Towns with a population of 30,000 or less are likely to have only one hospital or no hospital at
all. In smaller towns, the population typically has a large proportion of Medicare beneficiaries
due to the migration of younger people to urban areas. As a result, small-town hospitals are
usually heavily dependent on Medicare revenue and may receive county or city tax support. Such
hospitals typically have low occupancy and most have low operating margins. Consequently,
rural hospitals are generally reluctant to give price discounts to health plan companies.
Older physicians are less likely to be board-certified and physicians in towns of 30,000 or less
tend to be older than the average physician population. As a result, many family and general
practitioners in rural areas are not board-certified, so a health plan may need to modify its
credentialing criteria.
Physicians in rural towns generally function as solo practitioners or in small groups. Specialty
services are frequently provided by a single small group of doctors in a particular specialty or by
physicians from larger cities who periodically travel to the smaller towns. Few effectively
organized PHOs or IPAs exist in rural areas, and rural physicians often lack familiarity with
capitation or other risk-sharing arrangements. As a result, rural practitioners often have difficulty
managing financial risk. In addition, the health plan may not immediately be able to direct
enough patients to the physician to support risk-sharing. Health plans will often need to make feefor-service (FFS) payments, even in HMOs, until a physician's HMO patient load is sufficient for
risk-sharing. Physicians in rural areas, particularly PCPs, generally charge lower fees than
physicians in urban areas, so rural physicians tend to resist price discounts. Both hospitals and
physicians in rural areas have fewer resources and less organizational structure for the
development of quality improvement activities. Therefore, health plans should be more involved
in developing and implementing quality improvement initiatives for their rural provider networks.
Creating a competitive advantage through provider contracting in a rural environment is
challenging. Since a rural area may have only a single provider for certain services (one
pediatrician, for example), all the health plans competing in this market share the same resources
for care received locally; thus reducing each health plan's ability to negotiate for discounted fees.

The low supply of providers makes it very difficult to selectively contract among rural providers.
Many rural referral hospitals command substantial monopoly power because consumers in a 100mile radius may view these hospitals as the only reasonably available source of specialty care.
The specialists associated with such rural referral hospitals often share in this negotiating
leverage
Consumers in rural areas often travel to another community for healthcare. Many rural residents
obtain a significant proportion of their healthcare services in another, usually larger, town or city.
However, rural consumers usually travel to obtain services not available near their homes or for
care perceived to be better than local services. Even though a health plan may be able to negotiate
better prices for primary care in a larger town, asking consumers to travel 20 miles for services
similar to those available in the consumers' own communities is generally not an effective
strategy. Federal access requirements for federally qualified HMOs and Medicare health plans
limit this practice as well. In addition, rural employers generally feel a community obligation to
offer health benefits programs that include the local hospital and physicians.
Since a significant proportion of healthcare dollars is spent for specialty care received outside the
rural community, the greatest opportunity to create competition in rural areas is among the
specialty care providers in other nearby communities. Frequently, rural doctors have their choice
among several larger medical centers when they make patient referrals. If rural doctors have
enough information to choose efficiently, competition among the larger medical centers can be
encouraged. Health plans can facilitate this competition by providing information about referral
hospitals to the rural PCPs and by negotiating discounts with the nearby specialists and larger
medical centers. Health plans should monitor the market for development of urban-rural
integrated provider organizations that funnel the majority of rural patient referrals to a single
urban center. The development of urban-rural provider networks may minimize opportunities for
the health plan to reduce costs and improve quality through selective contracting. Another option
that health plans may consider when designing networks for rural areas is telemedicine. Insight
2A-1 provides describes telemedicine and how it may be used to enhance rural provider
networks.

Small Cities
Small cities (for the purposes of this course, cities with populations under 500,000) share some of
the characteristics of rural areas. Employers in a city with two hospitals may be reluctant to
purchase a health plan that includes just one of the hospitals because consumer loyalty may be
split between the two facilities. Another frequently cited concern is that channeling patient
volume to one of the hospitals will drive the other out of business and thus reduce local choices.
The concern about fewer choices effectively reduces the negotiating power of health plans.
Although small cities may have multiple groups of physicians in each specialty, selective
contracting is still more difficult in small cities than in urban areas. Consumers are more likely to
be aware of the 3 cardiology groups in a city of 250,000 than they would be aware of all 20
cardiology groups in a larger city. A health plan may successfully market a network made up of
one-half of the specialists in a large city, while it will encounter market resistance to the same
ratio in a small city. However, the health plan's ability to negotiate prices and transfer financial
risk to physicians, hospitals, and other providers increases significantly in cities with populations
above 150,000.

Large Cities
Larger cities (with populations above 500,000) typically afford significantly more flexibility in
provider contracting. However, even in large cities, health plans must be sensitive to the size of
physician panels, particularly in primary care networks. Consumers, whether urban or rural, are
more likely to choose a health plan or to be satisfied with the health plan they have, if their
regular physician is included in the panel.
As health plans grow and consolidate, they must serve the needs of larger segments of the
population. Having a larger membership inevitably puts pressure on health plans to broaden
primary care networks. The pressure for larger panels, in turn, places greater emphasis on health
plan methods for working with providers to achieve the desired cost, quality, and satisfaction
goals. Geographic access to providers also reemerges as a significant factor in urban areas. While
nearly every provider is within 30 miles or 30 minutes of most consumers in a city of less than
300,000, this is certainly not true in larger urban areas.
Health plans typically have more alternatives when contracting with specialty physicians and
other healthcare professionals in urban areas. While patients with significant chronic or acute
health problems may already have relationships with particular specialists, most consumers do
not. Health plans can selectively contract with specialists and other providers who fit the desired
quality and cost-effectiveness profiles, or health plans can contract with integrated provider
organizations that include specialty as well as primary care services. In an urban area, limiting the
number of specialists on the panel affects the network's market appeal less than limiting the
number of PCPs, because the majority of consumers are not familiar with the reputations of
specific specialists.
Hospital contracting is also easier in large urban areas. Overcapacity of inpatient hospital
resources exists in nearly every size market. However, cultural and political factors affect the
ability of health plans to use this overcapacity to their advantage when contracting with hospitals
in rural and small city markets. In urban centers, the combination of overcapacity and the large
number of healthcare facilities allows health plans to readily negotiate discounted prices and, in
some cases, risk-sharing arrangements with hospitals. In a market with 50 hospitals, a health plan
can promote as a broad panel a network that includes two-thirds of the hospitals. In a market with
three hospitals, a two-hospital network may be inadequate for many purchasers. When planning
to negotiate with hospitals, health plans must keep in mind that some states have regulations that
mandate hospital reimbursement rates.
The health plan's freedom to negotiate rates does not remove market pressure to include a highly
prominent hospital, health system, or provider organization in the network. Many employers and
consumers evaluate the quality of health plans based on the inclusion of prestigious institutions,
such as teaching hospitals or hospitals that serve as regional referral centers. The growing
consolidation of provider organizations can limit a health plan's ability to develop broad-based
hospital networks. In a community in which the healthcare provider market has consolidated into
two or three large provider organizations, a health plan that wants to have the majority of area
hospitals on its provider panel needs to contract with every provider organization. The health plan
may have to make price concessions to secure contracts with all three groups since the health plan
cannot promise directed patient volume in exchange for discounted prices.

Suburbs
The effect of suburban areas surrounding a city on network development depends on the size of
the urban area. In a mid-sized urban area such as Kansas City, healthcare providers in the
surrounding suburbs and providers in the city itself are viewed as one system by consumers and
employers. Frequently, suburban providers can deliver primary and secondary care, but tertiary
providers in the core city are necessary to round out the network. In contrast, larger urban markets
like Chicago have suburban areas with medical complexes that rival those in the inner city for
scope and complexity of services.
It is possible to have a suburban medical network that is sufficient to serve the needs of suburban
residents without including the inner-city providers on the panel. Large employers may see the
urban area as a unified whole if they have work locations and employees living across the
metropolitan area, but they may be willing to offer a health plan with a suburban-based network
as one of several employee choices. Smaller employers often view the healthcare market in more
localized terms and may choose a suburban plan as the only healthcare benefit option. When a
health plan creates a suburban-based network, the dynamics of contracting are similar to those in
small cities.

Consumer Demographics
The primary demographic factors that a health plan considers when developing network strategies
are the following:

Number and location of plan members and potential members

Income levels
Age and gender mix
Ethnicity, race, and religion

Number and Location of Members

The actual and potential membership of a health plan is a primary consideration for determining
the number of providers on the panel. The size of the network must be sufficient to meet
members' healthcare needs, while providers' geographic locations must be reasonably convenient
to members' homes and workplaces.

Income Levels
Health plan products often fit well with the financial needs of low-income consumers. Lowincome, working consumers cannot afford high premium contributions, high coinsurance rates, or
high out-of-pocket maximums. In other words, they need a health plan that provides fairly rich
benefits for nondiscretionary services at a low premium cost. While all consumers share some of
the same concerns about healthcare, low-income consumers are more sensitive to the financial
consequences of receiving healthcare. Low-income consumers, in particular, need the following:

Preventive care that pays for itself

Healthcare delivered in the most efficient and effective setting
Healthcare delivered at the most effective point in the disease process
Healthcare delivered at the most reasonable price

A health plan serving low-income populations has a special obligation to work closely with
providers to meet the goals listed above. Effective working relationships between the health plan
and its providers are critical in order to serve low-income populations well. The size of the plan's
network will be influenced by the plan's ability to provide performance feedback to providers and
to maintain local contact with providers. Not surprisingly, low-income consumers want a broad
choice of providers. A health plan must ensure that it has the ability to manage quality,
utilization, and costs effectively in a large provider panel. The same financial pressures exist for
health plans delivering Medicaid managed care products. In the Medicaid segment, however, the
pressure to control consumer out-of-pocket costs is replaced by pressure from strained state
government budgets.
The specific healthcare needs of consumers also vary with income. Several studies have
demonstrated that low-income groups have a higher incidence of chronic illnesses than higherincome populations. The increased incidence of illness appears to be partially related to lifestyle,
since higher smoking, alcohol, and fat intake rates are associated with low-income levels, and
partially due to the stress of low-income life. In any case, low-income populations are more likely
to need more services for cardiac disease, high-risk pregnancy, diabetes, and asthma than higherincome populations.
The health plan should also consider the structure of the local health delivery system for lowincome populations. Figure 2A-5 lists questions that health plans often ask about the delivery
system.

Finally, low-income populations also tend to have lower education levels. Rules and procedures
on how to access providers need to be clearly defined and written at an appropriate reading level.
Complicated copayment structures and authorization procedures are likely to reduce access to
care rather than achieve the intended goals with this population.
As income levels rise, financial concerns are not eliminated, but other issues assume a more
prominent position. Upper- and middle-income consumers are often less sensitive to out-ofpocket costs and more sensitive to perceived quality and access. The inclusion of prestigious
institutions and specialists in provider panels becomes more important as income increases. The
mix of services offered may change as well. Higher-income consumers may be willing to pay for
sports medicine services and wellness activities that do not have an apparent short-term financial
benefit. Higher-income consumers, like low-income consumers, dislike restrictions on provider
choices and bureaucratic procedures. However, high-income consumers have the economic power
to voice these preferences through purchase decisions. Broad provider networks that include
highly respected providers and fewer restrictions on access are likely to be successful in higher-

income segments. Many health plans offer PPOs and POS options in markets with a significant
higher-income population.

Age and Gender Mix

The age and gender mix of the population affects the development of provider networks in
several ways. The most obvious differences based on age relate to the mix of services provided.
The incidence of many diseases, including cancer, heart disease, asthma, diabetes, and arthritis,
varies with age. Typically, younger populations need more pediatrics and obstetrics/gynecology
(OB-GYN), while older populations need rheumatology, cardiology, geriatric medicine, home
healthcare, skilled nursing care, and vision care.
The age mix can influence provider networks in other ways. Young adults, particularly men, have
less contact with the health system than other age groups and are less attached to particular
providers. Because they often do not have established relationships with any physician and do not
anticipate needing out-of-network specialists, young men may be more willing to join an HMO
with a narrow panel. Young families are also attracted to HMOs because HMOs typically have
benefits for maternity care and well-child care with low out-of-pocket costs. However, healthcare
for young, growing families can be expensive, so a health plan serving young families needs
careful management of obstetrical and pediatric costs. Young families usually need providers
with flexible office hours in order to access healthcare.
Because their healthcare needs are increasing, middle-aged consumers are usually very conscious
of the scope of specialty services within a provider panel. The attitudes of older workers, retirees,
and Medicare recipients toward health plans vary widely depending on past experiences. If health
plans have been recently introduced to a market, older workers may be less inclined to switch to
unfamiliar POS and HMO products. In mature health plan markets, older workers may have had a
decade of experience with health plans and may be as receptive as younger workers. Even with
health plan experience, older workers are typically more sensitive than younger workers to the
choice of providers included in the panel, since the older workers are more likely to have an
ongoing relationship with one or more providers. Comfort and familiarity with health plans vary
by age in the Medicare population. The "younger elderly" (under 70 years of age) are more likely
to have had contact with health plans in their work lives, while the "older elderly" are less likely
to have had this experience, and thus are less comfortable with health plans.
The gender mix of the member population affects both the size and composition of the network.
Morbidity, the incidence of illness and injury in a population, is higher for females than for
males. Therefore, a population with a high proportion of females requires more providers than a
membership that is predominately male or a membership with an equal distribution of males and
females. The proportion of females also determines the need for obstetrical and gynecological
(OB-GYN) care and for other women's health programs.

Diversity of the Population: Ethnicity, Race, and Religion

Ethnicity, race, and religion often play important roles in the acceptance of a provider network by
consumers. Some ethnic influences are obvious. A provider network with Spanish-speaking
providers is essential in parts of Florida, Texas, California, and many major metropolitan areas.
Immigration from Asia, Eastern Europe, the Middle East, and Africa has created language
challenges for health plans throughout the United States. Aside from language barriers that hinder
understanding of conditions and treatment plans, patients are sometimes more comfortable with

providers of their same cultural and ethnic background, particularly if the patient is a recent
immigrant. The comfort issue sometimes applies in reverse as well. Many multigeneration
Americans are uncomfortable receiving care from foreign medical graduates because of language
barriers (including accents), a lack of cultural affinity, or prejudice. Health plans must be
cognizant of ethnic, racial, and religious issues in network development, and must work with
providers to accommodate and increase the comfort levels of patients.
Sometimes ethnic, racial, and religious differences extend beyond language or simple comfort
levels. Different cultures and religions often encompass alternative views of disease and healing
processes. For example, some religious sects resist the use of certain treatments, such as blood
transfusions. Some ethnic groups believe in traditional treatments that are not recognized by
medical science. In order to serve these populations, providers need to be sensitive to and
accommodate, within the limits of safe practice, folk cures and non-traditional providers of care.
The religious beliefs of providers must be respected as well. Provider contracts should
acknowledge that providers will not be obligated to perform procedures that violate their religious
beliefs. For example, Catholic physicians and hospitals do not perform abortions or sterilizations.
Finally, racial and ethnic differences can influence the mix of services needed. African
Americans have a higher incidence of low-birth-weight babies regardless of their economic
status. Plan members of Asian descent have a relatively high incidence of osteoporosis, and
diabetes is more common among Native Americans than in the general population. Health plans
should recognize racial and ethnic differences both in the design of networks and the evaluation
of provider performance. For example, if financial incentives are designed around outcomes,
physicians serving African American populations should not be penalized for a higher rate of
low-birth-weight babies. However, neither should these providers be exempted from showing
outcome improvements.
We have discussed the impact of the characteristics of the target market on network structure,
size, and composition. Next, we will explore how the health plan's goals can affect network
design.

Setting Goals for the Provider Network

After analyzing the market and identifying opportunities for developing a provider network, the
health plan chooses the goals for its network. These goals can be highly specific if the health plan
is focused on a specific healthcare market, or they can be more general if the development effort
is expected to cover a variety of markets and market conditions. Network goals are usually
established for the following areas:
Perceived and measurable quality of care delivered by the network.

Health plans typically base quality expectations on five criteria:

1. Credentials the health plan expects its practitioners and institutional providers to
have
2. Types of service capabilities, facilities, and equipment the health plan wants in
the network
3. Standards of care and protocols the health plan expects network providers to
follow
4. Measurable outcomes the health plan expects the network to produce
5. Member satisfaction results

 Accessibility of the network to consumers.

The time and distance members must travel for healthcare, provider hours of operation,
and ease of obtaining appointments. These goals also consider the proportion of providers
who already treat plan members that the health plan is able to include in the network.
Accessibility goals may be mandated by regulatory bodies or purchasers.
Cost savings produced by the design of the network.

Cost-savings goals are generally based on three benchmarks:

1. The relative cost of healthcare in the area where a network is to be developed.
For example, in a market with below-average healthcare costs, an undersupply of
providers, and low health plan penetration (characteristics of some rural
markets), cost-savings goals should be lower than for a market with aboveaverage costs, an oversupply of providers, and some level of health plan
competition.
2. The strength of the current health plan competitors in the market and the level of
cost savings that these health plans are achieving. Most state insurance
departments require periodic filings of financial information that can give a
health plan some indicators for the competitive environment and economics.
Trade publications also contain some utilization and price benchmarks for the
health plan industry. Anecdotal information from local employers and providers
can also be a valuable source of information about utilization levels and costs
under competitors' plans.
3. The cost-effectiveness of the health plan's own existing networks. Using the
results achieved by its current networks, the health plan can set goals for any
networks that it plans to develop.
Style of the health plan's relationship with network providers.
These goals usually determine whether the health plan chooses to have tight management
control over its network providers or allows them more autonomy. Goals for relationships
with providers also influence the nature of incentive programs included in provider
contracts.
Patient satisfaction with network providers.

Patient satisfaction is usually measured with surveys that ask plan members how they feel
about their interactions with their providers.
Endnotes
1. The InterStudy Competitive Edge, 8.2 (Minneapolis, MN, 1998), 34.
2. Peter Kongstvedt and Jean Stanford, Health Plan Market Maturity: A New
Multidimensional Model (Washington, D.C.: Ernst & Young, LLP, 1997), 8-17.
3. Health Benefits in 1997 (New York: KPMG Peat Marwick, 1997), 22.
4. Health Benefits in 1997, 17.