Network Design as a Lever

An individual employer usually cannot move a hospital system’s rates. What it can move is where its members go, and because commercial prices vary so widely for identical services, steering volume is often worth more than negotiating.

The forms this takes

Narrow networks exclude higher-priced or lower-performing providers entirely, trading member choice for price. The exclusion threat only works where a credible alternative exists, so this is a strategy for competitive markets.

Tiered networks keep everyone in but assign providers to tiers with different member cost sharing. This preserves access while creating a financial nudge, and it is more politically survivable than exclusion.

Centers of excellence, covered in the next module, concentrate specific procedures at selected high-performing facilities, often with travel benefits and waived cost sharing.

Site-of-service steering moves appropriate procedures and imaging out of hospital outpatient departments. The price evidence makes the case directly: outpatient facility services averaged 279 percent of Medicare, while ambulatory surgery centers averaged 170 percent and professional services 184 percent. For a clinically appropriate procedure, the setting can change the price more than any negotiation the employer could win.

What makes steering work or fail

Steering only produces savings under three conditions, and failure on any one of them is enough to sink it:

1. A real price difference exists between the preferred and non-preferred option for the same service. Transparency data is what establishes this.
2. The alternative is clinically appropriate for the specific patient. A steering program that pushes complex cases to lower-acuity settings converts a savings program into a safety problem.
3. Members actually respond. Cost sharing differences must be large enough to notice, and the information must reach people at the moment of the referral decision, which usually means engaging the referring physician rather than only the member.

The third condition is where most programs fail. The data course made the general point that insight delivered outside the workflow does not change behavior, and a tiering scheme that lives in a benefits portal nobody opens is a clean example.

Worth remembering: network design is the commercial market’s substitute for the pricing authority it does not have. It is genuinely effective, and it has a distributional consequence worth naming honestly. Steering concentrates volume at lower-priced providers, which improves the employer’s spending and can leave safety-net and rural facilities, which are often higher-cost for structural reasons, with less commercial volume to offset public payer shortfalls. That is not an argument against steering. It is an argument for knowing what the strategy does beyond the employer’s own ledger.

Key takeaways

• Employers without pricing power can still direct volume through network and benefit design.
• Narrow networks exclude, tiered networks apply differential cost sharing, and site-of-service steering moves care to lower-priced settings.
• Outpatient hospital facility prices averaged 279 percent of Medicare against 170 percent at ambulatory surgery centers.
• Steering requires a real price gap, clinical appropriateness, and information delivered where referral decisions are made.

Sources

• Prices Paid to Hospitals by Private Health Plans: Findings from Round 5.1 of an Employer-Led Transparency Initiative (RAND) (opens in a new tab)
• CMS, Transparency in Coverage Final Rule Fact Sheet (CMS-9915-F) (opens in a new tab)