OP-ED

Reflecting on Health Reform–Narrow Networks: Boon or Bane?

Some health plans sold through the Affordable Care Act’s (ACA) health insurance marketplaces use “narrow networks” of providers: that is, they limit the doctors and hospitals their customers can use.

Go to Doctor A or Hospital A and the plan will pay all or most of the bill. Go to Doctor B or Hospital B, and you may have to pay all or most of the bill yourself.

The narrow network strategy emerged long before the ACA, during the managed care era in the 1990s, and insurance companies and large, self-insured employers have used narrow networks ever since to control health care costs.

In fact, for the first time, the ACA creates new consumer protections requiring that insurers provide a minimum level of access to local providers. A number of states have exceeded these federal standards using their discretion under the new law.

Nevertheless, some consumer advocates and ACA critics still find narrow networks objectionable. Narrow networks mean that some newly insured people are no longer covered for visits to previous providers, or, if they didn’t have a doctor before, are limited in their new choices. Not infrequently, narrow networks exclude the most expensive doctors and hospitals in a community, including some specialists and academic health centers.

More expensive doctors and hospitals are not necessarily better, but for patients with a rare or complex health problem, such restrictions can be problematic.

Welcome to the world of competition in health care, because that is what narrow networks are about. Narrow networks are used by competing plans to control health care costs, and perhaps improve quality as well. In fact, if you don’t like narrow networks, you’re saying, in effect, that you don’t like competitive solutions—as least under current market conditions—to our health system’s problems.

The competitive logic behind narrow networks goes like this. ACA marketplaces require that qualified health plans with comparable actuarial value (at platinum, gold, silver, and bronze levels) display their costs side by side in online insurance marketplaces. This makes it easier than ever before to make apples-to-apples comparisons among health plans, and creates unparalleled pressures on insurance companies to keep their prices down so as to attract new customers.

In the past, insurers often kept prices down by limiting benefits or cherry-picking healthy customers. The ACA takes these options off the table. As noted, within any of the four categories, health plans must offer roughly comparable benefits. And the ACA prevents plans from excluding consumers with preexisting conditions or increased health risks. The result is that to compete on price, insurance companies must control the costs of the care their customers use.

This is great in theory, but enormously difficult in practice, especially for most private insurance plans. High prices charged by providers are a major reason for high costs. Medicare and Medicaid use their regulatory authority to set prices, and providers really can’t object because these public programs have such large market shares that many doctors and hospitals can’t get along without them.

But individual private insurers lack the market power in most communities to negotiate better prices, and banding together to increase their clout would violate antitrust laws.

Narrow networks are a partial solution to private insurance companies’ dilemma. Plans contract selectively with doctors and hospitals who charge lower prices or have a track record of treating episodes of illness less expensively. Narrow networks also give private insurers more market clout. By guaranteeing their chosen caregivers a certain volume of business, health plans acquire the leverage to negotiate better prices in future contracts.

Some plans also use quality metrics to ensure that less-costly providers have comparable or better quality. Thus, the quality of care in narrow networks may be equal to or better than the care patients receive in unrestricted plans.

If the narrow network approach sounds familiar, it should. This is what virtually every company in every other industry does every day to the acclaim of its customers, Wall Street, and many critics of narrow networks. Picking low-cost suppliers that meet quality standards is the key to business success the world over.

The controversy around narrow networks throws into bold relief a much broader debate about the roles of competitive and noncompetitive solutions to our nation’s health care problems. Most other countries in the developed world control health care costs and prices the way Medicare does. Government, or an agent of government, negotiates provider reimbursements that meet national cost goals. Consumers then have pretty much unrestricted choice of provider.

In the U.S., such centralized regulatory solutions are anathema, except in the case of Medicare. But so, it seems, is the pain that private competition inflicts on patients, who, to great public consternation, find they can’t use the doctor or hospital they want.

Government may respond to the narrow network controversy by further regulating private insurers’ contracting practices. Whether this will succeed in providing more relief to consumers, while controlling costs, remains to be seen.

But one thing is clear. Competition in health care sounds like a good idea. But when its effects surface, the public reacts as if health care is a right, not just another one of those gas grills or wide-screen TVs that line those long aisles at your local retailer.

David Blumenthal, M.D., M.P.P., is president of The Commonwealth Fund, where this post originally appeared.

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Balboaalan t falkoff, md, faafpPerryEric PageCynthia Recent comment authors
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alan t falkoff, md, faafp
Guest

Just a simple family physician in private practice for 26 years.
Don’t use LinkedIn or Facebook.
But you can find my CV on my practice website.
http://Www.hrfp.net

Balboa
Guest
Balboa

This is a great discussion!

alan t falkoff, md, faafp
Guest

Too bad Barry Carroll and legacyflyer don’t post their background here!

Barry Carol
Guest
Barry Carol

You should be able to find me on LinkedIn.

legacyflyer
Guest
legacyflyer

I am a physician (Radiologist) who has been in practice since 1984. I live and work in the Baltimore area and belong to a large Radiology group.

I have been:
– Chief Resident
– A subspecialist in Interventional Radiology
– Chief of Radiology at a mid size hospital
– A member of the governing board of our group
– A “Nighthawk” working the overnight shift
– A malpractice expert witness – for many years

Alan, what is your background?

legacyflyer
Guest
legacyflyer

Barry, I am well aware of the factors that motivate doctors choice of practice location since I headed recruiting for my large group for many years. Among them are: – Educated/Big Metro Life Style – which you refer to – Spousal Asynchrony – a catchy name for the fact that one member of a couple may be constrained by their partners career location. For example, the husband is already established in a Internal Medicine practice when the wife finishes Radiology. Since he doesn’t want to switch practices, she needs to find a job near his practice – and vice versa… Read more »

legacyflyer
Guest
legacyflyer

Barry, You say: “A national fee schedule would not work in the U.S. because regional difference in medical input costs including real estate, staff salaries and malpractice insurance among other costs are too great.” Except that in my field, reimbursement is typically better in low cost areas! In the Baltimore area reimbursement is well below what it is in many parts of the South and Mid West that have lower cost structures. Salaries are typically better in the boonies than they are in the big metro areas. Reimbursement is not about what is “fair” or what is “right”, reimbursement is… Read more »

Barry Carol
Guest
Barry Carol

legacyflyer, Yes, I’ve heard about high pay for doctors in rural areas. I think the main reason boils down to lifestyle choice. Doctors are by definition highly educated and so, for the most part, are their spouses. Unless they grew up in a rural environment and like it, most doctors and their spouses prefer the lifestyle typically found in or near cities and in suburban areas from which the city based activities like professional sports events, theater, nice restaurants, museums, etc. can be easily reached. Even if the docs are well paid in the rural areas, most other staff costs… Read more »

Bob Hertz
Guest

I grant the fact that Germany has a long history of craft guilds, and a long tradition of pattern bargaining in many professions.

Whereas American MD’s and quite a few hospitals are essentially entrepreneurial. George Halvorson covers this quite well in his seminal book Strong Medicine.

However, I do not quite follow why all providers cannot adopt similar payment codes.

legacyflyer
Guest
legacyflyer

Not sure what you mean by “adopt similar payment codes”. In fact physicians use what is called CPT codes to describe the procedures that they perform and CPT codes are standardized. If you are suggesting that physicians should get the same payment for a particular service, that is more or less true with Medicare (there are regional variations for cost). Payments by commercial insurers are set by negotiation. If all insurance companies got together and agreed on prices I believe that would constitute an anti-trust violation (I am not an anti-trust lawyer). If all physicians got together and agreed on… Read more »

Barry Carol
Guest
Barry Carol

A national fee schedule would not work in the U.S. because regional difference in medical input costs including real estate, staff salaries and malpractice insurance among other costs are too great. Even Medicare incorporates regional differences in medical input costs into its payments. In the small country of Switzerland, a health insurance plan in the most expensive canton costs twice as much as the same plan in the least expensive canton. On the other hand, Japan has a national fee schedule. I don’t know how the heck the docs in Tokyo find it acceptable. Also, most people don’t know that… Read more »

Bob Hertz
Guest

I realize that this is a pipe dream, but in other advanced nations the payors make a united front. The hospitals still negotiate rates, and there are a lot of conflicts, but once things are settled there is a national fee schedule that both sides can live with.

They would look at the American scene of individual insurers getting their own rates as extremely wasteful.

legacyflyer
Guest
legacyflyer

And in other countries (like Germany), physicians are allowed to organize and bargain as a group. This is illegal in the US.

I don’t have a problem with payors organizing as long as providers are allowed to organize too.

Barry Carol
Guest
Barry Carol

An anti-trust exemption would be needed for both providers and insurers to negotiate as a group in the U.S. I’m not sure how Germany, Switzerland and others who use this approach handle differences, if any, in payments to long time veteran doctors and rookies just out of residency training or between high cost academic medical centers and community hospitals. In Switzerland, negotiations are done at the canton level. There are 26 cantons in Switzerland, a country of something over 7 million people. In the U.S., such negotiations would have to be at either the state, regional or, in the case… Read more »

Peter1
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Peter1

“An anti-trust exemption would be needed for both providers and insurers to negotiate as a group in the U.S.”

Where are the premium payers at this table Barry? All I see with this behind closed doors “negotiation” is collusion.

Barry Carol
Guest
Barry Carol

Peter1, I think you’re being a bit paranoid here. Insurers know darn well that their health insurance plans need to be affordable if they expect to sustain a viable business. They can’t just pay providers whatever they demand and expect to pass the cost on in premiums. Also, under the new ACA rules, they must spend at least 80% of their premium revenue on medical claims in the individual and small group market and 85% for large groups. If they spend less than that, they have to rebate the difference to policyholders. Customers are implicitly at the table in all… Read more »

Peter1
Guest
Peter1

I can see how affordable when everyone needs a subsidy. As for the 80/85% spending well if reimbursements go up then premiums go up and they can still make that %.

The insurance industry looks after it’s shareholders, not its premium payers and BCBS looks after its executives.

Not having customers in health insurance is about as threatening as not having customers for gasoline.

I’m not paranoid at all – just realistic in the way of the world.

Barry Carol
Guest
Barry Carol

Peter1, On the subject of affordability, you might want to take a look at the French system which seems to be highly regarded by many. They use government set prices and the system resembles Medicare for all except that the public system only pays 70% of the government determined reimbursement rate. The system is financed by payroll taxes some of which are nominally paid by the employer but the total adds up to 13% of income for most of the French people. For the other 30% of costs, about 93% of the population buys a supplemental policy called a mutuelle… Read more »

Peter1
Guest
Peter1

Barry,

More background on French system here from Kaiser.

http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7852.pdf

Their out-of-pocket is about 1/2 of U.S. with some hefty exemptions.

Perry
Guest
Perry

“So many of the approaches taken by the big players (payers, hospitals) seems so heavy handed when the alternative, helping patients and primary care make the right choice, is both effective and positive.”

Good point, Eric, unfortunately the patients and primary care providers don’t have expensive Lobbyists.

legacyflyer
Guest
legacyflyer

Eric,

What are your “provider groups” “at risk” for?

And if they are “at risk” shouldn’t someone help them diminish their risks?

Barry Carol
Guest
Barry Carol

I think he means that providers are either paid on a capitated or shared risk / shared savings basis as opposed to pure fee for service. Under the first two approaches, better control over utilization and total healthcare costs means the PCP’s make more money when they do a good job of cost control and less money when they don’t.

legacyflyer
Guest
legacyflyer

Barry,

Thanks for the explanation.

I actually knew that and was “yanking his chain” about the terminology. It is interesting how “at risk” means something “good” when applied to Physicians taking care of patients, but something bad when talking about “youth”, “behaviors”, etc.

Eric Page
Guest

Check out Direct Primary Care (replacing FFS with PMPM primary care) for how to create a de facto narrow network without the problems.

I run an analytics company (Amplify Health) that works with at risk provider groups. It’s amazing to watch the shift from expensive to cost effective hospitals / specialists when a DPC model is deployed.

So many of the approaches taken by the big players (payers, hospitals) seems so heavy handed when the alternative, helping patients and primary care make the right choice, is both effective and positive.

Cynthia
Guest
Cynthia

Larger providers are responding to narrow networks by gobbling up more and more smaller providers. This is what’s happening right now. Pretty soon insurers will get what they want, which is very narrow networks, but not under conditions which are the least bit favorable to them. Narrow networks under these conditions will lessen competition among providers, causing insurers to lose their ability to negotiate lower prices, which will ultimately cause healthcare costs to go up. This is why the narrow network strategy won’t work. Perhaps in the short term, this strategy will work, but it won’t in the long run.This… Read more »

legacyflyer
Guest
legacyflyer

Insurers already are a “narrow network”. They are large, well organized and at work primarily for their own benefit – secondarily for the patient. (By the way, the same could also be said for large “provider” groups) Most physicians would prefer to practice in small groups or even solo. But everything that has been happening over the past 5 years has been driving physicians to join larger organizations. 1) Most small physician groups don’t know how to deal with ACOs – allegedly the wave of the future. The amount of IT and business experience needed to setup or participate in… Read more »

William Palmer MD
Guest
William Palmer MD

Don’t narrow networks mean that from the patients point of view there are fewer sellers, hence more oligopolistic, than otherwise? And from the doctors point of view, he faces a more oligopsonic marketplace than otherwise because he sees fewer buyers for his services?

In the first case if there is an increase number of patients, prices will be driven higher than competitive market. In the second case, if there is a need for more doctors, their labor costs–including costs of all those docs who were there before–will be driven higher than competitive market.

Many buyers-many sellers still remains superior.

Bob Hertz
Guest

John is correct. Most outsiders do not realize the incredible financial effect of just a few high cost cases on the premium structure of a health plan.

A few months ago one writer on this blog recounted that he administered a large plan of 80,000 persons and 23 individuals ‘broke the bank’ on large claims.

With numbers like that, a health plan does not mind making people mad if that is what it takes to keep out the very sick.

John
Guest
John

Driving down costs using narrow network design to extract price concessions is one rationale. However, given that plan design is fixed and that the premium range is somewhat rigid based on plan design, one might argue that the greatest remaining financial opportunity lies in risk selection. Carve out a few high-profile specialists and cancer centers, and you essentially encourage sick people to enroll in another network. It’s another hedge.

Peter1
Guest
Peter1

“Welcome to the world of competition in health care, because that is what narrow networks are about. Narrow networks are used by competing plans to control health care costs,”

The wrong way to attempt to control costs that hurts patients and restricts doctor choice. This kind of competition is destructive and has no place in health care.

Where’s were the, “I can’t keep my doctor” screams before ACA, because its been there all the time.