Cost containment vendors exist to reduce medical costs on behalf of primary payers in the health insurance, workers’ compensation, disability, and auto insurance markets.  They serve as ‘subcontractors’ to insurance companies, HMOs, self-insured employers, and other payers. 

Cost containment services include:

• Utilization management (aka “utilization review”):  Teams of nurses and doctors who review anticipated high-cost procedures, analyze their ‘medical appropriateness’ and consistency with plan benefits, and either approve or deny them accordingly.  Some insurers and HMOs perform this service internally, but vendors exist to provide this service.
• Provider networks:  Independent network companies enter into contracts with doctors, hospitals, and other health providers that provide price discounts and other benefits in return for anticipation of increased patient volume.  Subspecialty networks also exist for certain types of providers (e.g. diagnostic networks.)
• Pharmacy benefit managers:  These firms generally manage pharmaceutical costs for payers.  They typically contract with pharmacies, issue pharmacy benefit cards, electronically process claims, and answer patient inquiries.  They also sometimes search for potential adverse drug interactions.  This industry has had several scandals regarding conflict of interest (being paid by pharmacies as well as payers).
• Nurse case management:  Case management services are more common in workers’ compensation and disability insurance than in health insurance.  These firms provide nurses who oversee the medical aspects of a case, stay in contact with doctors/employers/patients to facilitated medical treatment and return to work, and coordinate with insurance claims staff to handle the claim.
• Bill review and payment:  Bill review companies pay medical bills on behalf of payers.  They evaluate these bills for ‘medical appropriateness,’ relationship to ‘usual and customary charges,’ consistency with plan design and network contracts, and other factors.
• “Carve outs”:  Some cost containment vendors provide the full array of services described above for one type of medical treatment only – most commonly, mental health and substance abuse.  These programs are described as “carve outs” from the total benefit package, as in “behavioral health carve-out.”

This is not a complete list of cost containment vendors, but addresses the primary types.

Intracorp is a wholly owned subsidiary of CIGNA, the insurance company, and provides health utilization management, bill review, and nurse case management services.  Intracorp provides its services to competing insurers, as well as to CIGNA and its clients, and also serves self-insured employers.  It provides these services in the group health, disability, and workers’ compensation marketplaces.

Rockport is representative of a regionally based provider network serving one or two states, reselling its contractual relationships to payers.

United Behavioral Health administers mental health and substance abuse benefits on behalf of health insurance payers.  They provide utilization management, patient/member relations, network development, and related services (such as employee assistance and disease management programs).

United Behavioral Health is a subsidiary of HMO United Health, and developed in large part as the result of United’s acquisition of U.S. Behavioral Health, one of the first and most successful “carve out” mental health companies.

MEDCO is a pharmacy benefit manager that provides network services, plan design, drug utilization management, mail-order pharmacy, and other associated services.

Approximately $42 billion in reported income (but that includes the pass-through costs of pharmacy sales it administers; income is approximately $630 million.)   For a sense of scale, MEDCO processed 95 million prescriptions through its mail-order unit in 2007 alone – and the mail-order program is a small percentage of the entire operation.

Cost containment vendors are all designed around several core assumptions:

1. The intervention/intermediation services they provide save money.
2. They save money in a way that does not alienate patients so much that they provide either a business or political threat to the payers that contract with cost containment vendors.
3. There is a greater than 1:1 return on the cost of engaging these vendors, making the use of their services financially advantageous to payers.

While this model has provided them with significant financial success, continued medical inflation is challenging assumptions #1 and #3, and changes in the political and cultural climate around healthcare is threatening assumption #2.  There is likely to be considerable market shift in sub-markets such as workers’ compensation, but it is unclear that these recent events will significantly alter the cost containment vendor marketplace overall.

Speaks to multiple leverage points:

• Intermediation and Disintermediation
• Insurance companies are themselves a disintermediation between health providers and recipients.  These cost containment vendors provide yet another layer of disintermediation, one whose existence is largely invisible to consumers but whose effects can be significant
• New Alliances
• To the extent that certain cost containment firms provide (or are capable of provide) valid and useful services, new alliances may be able to draw upon them.