Why big comp networks won’t do the smart thing

Because they are more interested in their profits than their customer’s needs.
The big comp network companies (with “big” referring to the size of the network, not the company, as there’s only one BIG NETWORK COMPANY – Coventry) have a problem.
They’ve been selling their network based on the “thump” the directory makes when it hits the managed care execs desk (“wow, now THAT’s a big network”) followed closely by the price (“And if you act now, I’ll get my boss to commit to a rate below 20% of savings!!”). While this has made them lots of money, it hasn’t saved their payer clients much, if anything, in the way of medical costs. Now, some payers are wiping the sleep from their eyes and noticing that those whopping network-access fees have gone up just about as fast as their medical costs.
And that ain’t no small thing.
Payers have been hearing for years about the small network solutions the big boys are just about ready to launch. They’ve been a few months away for about four years now; four years and counting. So, why so late? Why aren’t the big networks innovating? Coventry et al have been selling essentially the same network model the same way to the same markets for fifteen years. The market has moved on, with the early risers amongst the payer community looking for very small networks of physicians who can not only spell w-o-r-k-e-r-s c-o-m-p-e-n-s-a-t-i-o-n but pronounce it as well.
That’s no small challenge, as the payers’ network “partners” haven’t exactly made their business thrive by identifying the docs who treat less, write fewer PT scripts, don’t admit claimants for lengthy hospital stays or order multiple epidural steroid injections. In fact, those are the docs the big networks want to stay far, far away from. Because the more bills there are, the more “savings’ are generated, and the more network access fees are collected.
Ka-Ching!
Therein lies the core reason the big networks haven’t done the right thing – it won’t make them near as much money as their current high-cost, low-benefit big-directory network.
The technical term for the problem faced by these companies is the “Innovator’s Dilemma”. This more-than-a-theory holds that companies that are very successful in their fields keep improving their products, believing that what their customers want is more and better versions of the same. What these companies don’t do is think up new ways of meeting their customers’ needs; ways that are cheaper/faster/easier. Instead, they work diligently on making their existing product a tiny bit better every year. And in the process, they don’t pay attention to what their customers actually need – the problem they are trying to solve.
The leading proponent of the theory, as well as the one who coined the term, is Clayton Christensen. Christensen’s research shows it is often entirely rational for existing companies to ignore new and disruptive innovations, because those new innovations don’t compare well with existing technologies or products. Even if a disruptive innovation is recognized, existing businesses are often reluctant to take advantage of it, since it would involve competing with their existing (and more profitable) technological approach. (in this instance, several large Coventry clients have asked them repeatedly when they are going to develop a physician-centric model. As of late last year, Coventry had nothing to show, or talk about, or demo…)
Here’s an example from Christensen’s book, the Innovator’s Dilemma. Back in the early- and mid-nineteen hundreds, the only way to dig big holes efficiently was to use a cable-actuated shovel driven by coal (initially) and later diesel. The cable shovel manufacturers got really good at making larger and larger shovels that could move yards and yards of dirt. Meanwhile, other companies began developing hydraulically-driven shovels. At the start, these were small, puny affairs, barely able to move a third of a yard of dirt. Not surprisingly, the big cable shovel companies (e.g. Bucyrus Erie) laughed at the upstarts, knowing their customers were not interested in the toy version of their behemoth shovels. But lots of residential contractors and utilities could use the smaller shovels; their only alternative was hand-powered shovels. The new market entrants gradually improved their hydraulic shovels, until they could effectively move as much dirt as the biggest of the big boys. And do it more efficiently, with far fewer breakdowns, and much more safely.

Of all the big steam shovel companies in the business mid-century, only a small handful survived the onslaught of hydraulics, and the survivors did so by adopting the new technology. They found that the smaller end of their market was gradually taken over by the “toy” manufacturers, which then moved relentlessly up-market, until the only market left for Bucyrus et al was the hundred-yard plus strip mining shovel. Most of Bycyrus’ competitors went out of business, including the Marion Power Shovel Company. Marion employed over 2500 workers at its peak, when it made the largest steam shovels in the world to build the Panama Canal. When it was finally sold off in 2003, Marion had fewer than 300 employees.
Back to our little world. The small, physician-only network doesn’t deliver big “savings” (in the form of discounts) and “penetration” (in the form of a really thick provider directory with most live and some dead docs listed therein) and therefore is not, in the view of the big network companies, something worth developing. Moreover, these big network companies believe the market for the small networks is quite small compared to the market for their established network offering. And they are right – today.
What the big network companies are missing is what their customers want to buy – not “savings” defined as discounts below fee schedule, but lower medical expenses. After a decade-and-a-half of more and more networks delivering higher and higher medical expenses, big payers need, and want, a different answer.
But the big network companies have an even bigger problem, one that did not affect the cable shovel manufacturers. At the height of their business, there were no fewer than twenty companies making shovels, all working as hard as humanly possible to develop better and better cable shovels. They were innovating, all right, but their innovations were designed to make their core product better at moving more and more dirt.
What’s different in the comp network business is the almost complete lack of competition. Coventry controls upwards of 60% of the generalist network business, with the rest spread thinly between CorVel, Wellpoint, Horizon, Prime, and a few others. By all accounts, Coventry is not even bothering to improve their current product offering. Instead, they are raising prices and ignoring customer complaints about data quality.
What does this mean for you?
It took the hydraulic shovel companies a good three decades to all but destroy the cable shovel business. I don’t expect Coventry’s work comp offering, nor those of its competitors, will have that long a horizon. Not by a long shot.