How Medical Provider Networks Work—HMOs and PPOs
Health insurance began in the United States during the Great Depression, when local hospitals began adopting Blue Cross plans—providing groups of individuals with hospital care in return for a fixed monthly fee. Around the same time, employers began contracting with individual doctors to provide care to their workers for a fixed monthly fee—these were called Blue Shield plans. Over the subsequent decades, thousands of these plans were merged and consolidated into the 70 independent Blue Cross Blue Shield health insurance companies that exist today. These companies, collectively known as “the Blues,” maintain their own networks of independent doctors and hospitals to provide benefits at discounted prices to their policyholders.
Hundreds of other health insurance companies and independent non-insurance companies also developed their own networks—contracting with medical providers in their local areas to provide service to their policyholders or members for either a flat monthly fee or a discounted rate.
As new medical providers entered the marketplace, from ordinary physicians to specialized blood testing laboratories, the only way for them to get patients was to offer great discounts to the largest purchasers of healthcare—the medical provider networks. As medical providers lowered their prices to these large purchasing networks, the same medical providers raised their prices to patients outside the network—sometimes just to show the networks that they were giving them increasing discounts off the prices they charged others.
Health insurance is different from all other types of insurance. When people buy life insurance, automobile insurance, or homeowner’s property and casualty insurance, they do not expect to have a claim in the near future. People purchase these types of insurance for financial protection against the occurrence of an unlikely event that they wish to avoid—like a death, an auto theft, or a fire. If such an event occurs, they generally receive money that they are free to spend any way they wish.
In contrast, with health insurance, they expect to have claims in the near future and they almost never receive money when they have one. Instead, their insurance carrier directly pays the medical providers that have taken care of them—typically paying them either a flat monthly fee or a small fraction of what they would charge them directly if they didn’t have health insurance.