Networks

In the U.S. health care industry, the term networks can refer to groups of providers (such as physicians, hospitals, or cancer centers) that voluntarily coalesce in strategic alliances for some joint contracting purpose. These networks do not possess a common asset base, and there is no joint ownership.

To illustrate, managed care plans (such as health maintenance organizations and preferred provider organizations, or HMOs and PPOs) typically assemble networks of both doctors and hospitals for their enrollees to use. Here, each physician or hospital individually negotiates with the managed care plan for reimbursement in exchange for a defined set of services to be provided to enrollees. Physicians can themselves form their own networks to collectively negotiate with managed care plans—typically in the form of an independent practitioner association (IPA), the most popular form of HMO. Here, physicians voluntarily join the IPA, which then contracts with the HMO. Hospitals can likewise form networks of hospitals to share some services, cooperate on some endeavors, or to jointly contract with managed care plans. These hospital networks are much looser in organization and more nebulous in structure than are ownership-based hospital systems. Recent data collected by the American Hospital Association reveals that only 1% of hospital networks operated in a centralized fashion, whereas 61% were “moderately centralized,” 4% were decentralized, and 34% acted autonomously.

Because networks are so loosely structured, there is little direct control over the members of a network. There is also a lot of variation in network arrangements, making it difficult for researchers to accurately describe them (other than just a snapshot in time). Because there is no common asset base to networks, networks are easy and relatively inexpensive to form. This explains much of their popularity in the HMO industry. Not surprisingly, they are also fairly easy and inexpensive to disband. This explains why there are a lot of market exits among these types of firms. Given these considerations, it is plausible to expect that networks may not perform as well as more organized systems. This hypothesis is true for hospitals: Networks exhibit lower levels of financial performance than ownership-based systems. The hypothesis also used to be true for IPA HMOs, in terms of their managing utilization (such as inpatient days per thousand enrollees). In recent years, however, IPAs have made considerable investments in information systems to improve their medical management and now exhibit utilization performance levels comparable to more organized HMOs such as group and staff models.