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.

40 replies »

  1. 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?

  2. 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 to cover those. Doctors are allowed to charge more than the government rate but they have to tell you in advance if they do so. About 13% of them charge more with a higher percentage in the large cities like Paris. Overall health spending in France is essentially the same as Canada but with fewer wait time issues.

    There are tradeoffs. The hospitals have fewer amenities in France. Doctors in the U.S. make 2X-3X or more than what their French counterparts earn. Defensive medicine is not nearly the issue in France that it is in the U.S. Under the ACA, though, people with income between 250%-400% of the federal poverty level (FPL) can get a subsidy to the extent that the health insurance premium exceeds 9.5% of Modified Adjusted Gross Income (MAGI).

    To duplicate the French system in the U.S., including Medicare level reimbursement rates for everyone and financed by payroll taxes plus the need for the supplemental plans, most Americans would have to pay more than 15% and probably closer to 20% of their income for health insurance. I think our perception of what health insurance should cost relative to income is unrealistically low even if nobody charged more than Medicare rates.

  3. 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.

  4. 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 negotiations in all private sector industries because companies know that they need to deliver at least adequate value for a reasonable price. If they don’t, it won’t be long before they don’t have any customers.

  5. “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.

  6. 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

    – Foreign Community – a fair number of our docs are immigrants and/or children of immigrants. They prefer areas where they have others in their “community” near by.

    But of course (and this is something I heard a while ago) the best predictor of where a (male) physician ends up practicing is his wife’s home town.

  7. 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 along with real estate, security costs, insurance and the like are likely to be considerably higher in cities like NYC, SF, Boston and LA than Houston, Dallas and Chicago. That’s especially true for hospitals. Medicare and Medicaid don’t negotiate, of course, as you know though I think it would be better if academic medical centers were fully compensated for the cost of their education and research missions with separate payment streams as opposed to building them into the reimbursement rates for the services, tests and procedures they provide.

    As a patient, by the way, I would prefer small groups for primary care but I also like the idea of electronic records if they’re user friendly and interoperable so I don’t have to answer the same questions over and over when I need to see a specialist or go to the hospital. Parts of medicine, including radiology, have gotten a lot more capital intensive and back in the day, there wasn’t nearly as much that medicine could do for us patients. Access to capital can be a tough problem for solo practitioners and small groups. Finally, more and more medical school grads today just don’t want the hassle of setting up and operating a business. They would rather work for a salary, have more or less regular hours, and leave the business end of things to others to take care of.

  8. 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 an ACO is beyond a small physician group. Hence, practices sell out to hospitals or band together. This was not something they wanted, but was forced on them.

    2) Many small physician groups don’t have the time or expertise to deal with EMRs and meaningfull use. Again most EMRs are not ready for prime time but are being forced on physicians by the government. Hence they sell out to hospitals, merge or retire!

    3) Many physicians believe that the “handwriting on the wall” shows a large target on the back of solo or small group physicians for a variety of other reasons.

    So what you long for – powerful Insurance Companies able to negotiate from a position of strength with small disorganized physician groups won’t happen. And frankly, anyone who didn’t anticipate this reaction to our governments policy is not very smart or good at predicting the future.

  9. 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 about supply, demand and negotiation.

  10. 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 Medicare’s relative value unit actually consists of three components. 52% of the value is intended to cover the physician’s skill and technical effort, 44% is for practice overhead and the other 4% is for malpractice insurance.

    I also don’t think it makes sense for a veteran doctor to accept the same payment for a given service as a rookie. In the legal profession, senior partners are paid a far higher hourly rate than young associates who may have just recently passed the bar exam. That makes perfect sense to me.

  11. 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 prices, again that would be an anti-trust violation.

    Coming from an area of the country with relatively low insurance payments, I would be happy to get together with other physicians and negotiate a national price. Don’t see that happening though.

  12. 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.

  13. 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 of our most populated areas, the county level.

    My understanding is that even if we attempted to pass an anti-trust exemption to facilitate this approach, the largest insurers and probably the large hospital systems would oppose it because they think they get a better deal vs. their smaller and weaker competitors under the current system.

    Personally, I would like to see full price and quality transparency tried first to see if the current system can work a lot better than it currently does. If we had that and it failed, the insurer vs. provider group level negotiation model might be worth a try assuming Congress passed the necessary anti-trust exemption and the president signed the bill.

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. “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.

  19. Eric,

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

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

  20. 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.

  21. 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 is all because the number of trust busters in the courts, including the almighty Supreme Court, are few and far between. There are far too many crony corporatists in the courts to ever bust up the Big Providers.

    Thus, the only way for insurers to gain leverage over providers is to create narrow networks among themselves. Hopefully by the time we have a very narrow network of insurers, single payer will step in and save the day.

  22. 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.

  23. 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.

  24. 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.

  25. “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.

  26. legacyflyer,

    Since Maryland has an all payer system for hospital care, it seems that it insurers should be willing to contract with all the hospitals in a region except for the academic medical centers. I wonder how much more Johns Hopkins and University of MD get paid on average than the local community hospitals for comparable services. I also always wondered why insurers don’t try to contract with hospitals for some services but not others. For example, perhaps they could contract for sophisticated inpatient services and procedures and ER services but not outpatient care that can be scheduled in advance and can probably be done equally well by community hospitals. Is it that powerful hospitals refuse to sign such contracts and insist on all or nothing contracting instead?

    Insurers should also be able to contract with some hospitals within a system but not others but the hospitals resist that approach as well. That issue is more relevant in states that don’t have an all payer system which I think is all the others except MD. Regulators could potentially have a positive impact in this area if they choose to. What am I missing here?

    As a general economic rule, if I find a product or service useful, I expect to pay the provider of that product or service enough to cover all reasonable costs including capital costs (profit plus debt service costs). I also think I have a right to expect price and quality transparency. I want doctors to be sufficiently well paid by national standards so that we continue to attract smart and dedicated people to the medical profession. Everyone, including the wealthy, should expect to not be gouged, especially by hospitals.

  27. A narrow network means that an insurance company has MUCH GREATER bargaining power in dealing with physicians and hospitals. And although they will tell you they only use it to get the most qualified doctors/hospitals this is total nonsense – they use it to save money. “Credentialling” largely means finding the lowest bidder. However saving money is a worthwhile goal.

    Meanwhile, the patients want to pay as little as possible, but still get to see their doctor of choice and go to their hospital of choice. Hence conflict is inevitable.

    I used to belong to a group of 7 doctors, now I belong to a group of 100 doctors. Although there were a variety of reasons for our mergers/acquisitions one of the prime reasons was to be able to deal better with insurance companies. We are now in a situation where our bargaining position and sophistication more closely match that of the insurers we deal with.

    What we did (and what various hospital groups did) was an entirely logical and predictable result of “Hillary Care” and “Obama Care”. I will not be crying for patients that bought cheap insurance and can’t go see the doc or go to the hospital they want. Nor will I be crying for high cost hospitals that get bypassed by insurance companies.

  28. It’s understandable that people who have to buy health insurance with their own money are going to be much more price sensitive than those who get their insurance through an employer. The two key issues related to narrow networks, in my opinion, are (1) is the quality up to par or not and (2) can the patient determine whether or not the provider is in the network before services are rendered?

    With more and more people buying their own insurance either through an exchange or outside of an exchange and higher deductible plans gaining more and more traction in the market, the demand for price transparency meaning disclosure of actual contract reimbursement rates will continue to grow and pressure will increase to eliminate the confidentiality agreements that currently preclude disclosure. I think we should also get rid of the confidentiality agreements that prohibit hospitals from disclosing to other hospitals what they pay for medical devices and supplies like disposable one time use surgical instruments. Disclosure of chargemaster rates is worth little or nothing in my opinion.

    Finally, as Bob and I noted numerous times, there needs to be strict limits on how much can be charged for care that must be delivered under emergency conditions. My proposed limit is 115% of Medicare and his is 150%. I think those boundaries constitute a zone of reasonableness. Anything above that is unreasonable and unfair at least for care that Medicare pays more than a few hundred dollars for.

  29. Lynn you are absolutely right, thanks for the observation.

    We need another one of my pet laws —

    if fees are not disclosed prior to care in nonemergency situations, the patient owes nothing.

    Let that happen a few times, and providers and insurers will come together with a solution for narrow networks.

  30. Provider networks are moving targets and some providers are clueless to which plans they participate with. There is no way to determine if the health plans’ provider networks are current and accurate.
    In major metropolitan areas in South Carolina certain specialties are missing in action. For males 45 to 64 what specialty might they need? …a urologist perhaps. Well most urologists are nowhere to be found. You have to leave the area. Radiologists and anesthesiologists may be practicing at certain participating facilities and not others so you can get hit with out of network full charges and not know until you get a surprise bills.

  31. Final note:

    if Cedars of Lebanon and other high-priced centers really cared as much about their cancer patients as they profess to, then they would agree to lower cross-network fees.

  32. Note:

    My language above is kind of punchy, but Michael Porter and Elizabeth Teisburg said about the same thing 5 years ago.

  33. There is a another solution to the narrow network problem.

    For lack of a better term, let me call this the “mandatory assignment” solution.

    (I realize that this has some specific applications, but bear with me.)

    In this solution, the payment by an insurer for a procedure or hospital stay is legally considered to be “payment in full.”

    Deductibles and coinsurance would still apply.

    So, the patient goes in to Cedars of Lebanon for an emergency appendectomy.

    The patient’s insurer has a fee schedule amount of $16,000.

    Cedars of Lebanon demand an additional $20,000.

    The Cedars of Lebanon extra bill goes into the wastebasket.

    (this all assumes that the insurer is paying no less than the Medicare rate for the care in question.)

    If Cedars of Lebanon wants to deny admittance to patients with this insurer, be our guest. (other than pure emergency care.)

    This will provoke confrontations between insurers and providers. That is fine with me.

    If Cedars of Lebanon wants to in effect go in strike, good riddance.

    No big deal in a big city. In a rural area, we may need adjustments.

    Bob Hertz, The Health Care Crusade

  34. Just going to leave this here:

    “Lambda Legal today filed a federal class action discrimination lawsuit in U.S. District Court for the Middle District of Louisiana against BlueCross BlueShield of Louisiana (BCBS), which will no longer accept the federally-funded premium subsidies that enable low-income Louisianans living with HIV to purchase health insurance. Two other insurers included as defendants — Louisiana Health Cooperative and Vantage Health Plan — are also following the lead of Louisiana’s largest insurer, BCBS. Lambda Legal is seeking an emergency injunction to force all three defendants to accept the premium payments and to provide health insurance until the lawsuit is heard.”


  35. This essay flunks the Kool Aid test. Your argument assumes that it is not possible for a company to do business WITHOUT maximizing revenues. There are other ways to do business.