Misunderstanding Narrow Networks

In a recent New York Times opinion piece, Obama advisor Ezekiel Emanuel attempts to ease the minds of millions of Americans who may be selecting narrow network plans in the exchanges.

In defending narrow networks, Emanuel cites the well-known example of Kaiser, which has for decades required enrollees to choose among only Kaiser-owned hospitals and Kaiser-employed physicians.

He goes on to propose some “safeguards” for plans in the exchanges such as mandating that insurers disclose the criteria used to establish their network of providers and requiring that insurers pay for second opinions from elite out-of-network providers.

Perhaps surprisingly given our previous commentary, we agree with the general thrust of Emanuel’s argument, which is that freedom of choice is overrated. And while we do not agree with many of his recommended safeguards, our quarrel today is not with his proposals for even more new rules and regulations.

Rather, our primary quarrel is with the vast majority of the individuals who chose to comment on, and often lash out at, Emanuel’s article. These comments are emblematic of the general misunderstanding of the role of narrow network plans in controlling the future growth of health care expenditures.

In a nutshell, this is the archetypal response against Emmanuel’s claim: “Evil insurers have given us narrow networks. The government must intervene in this bloodthirsty lust for profits. Give us freedom of choice! (And preferably with the government taking over the business of insurance altogether).”

Given previous comments on this site, we suspect that many readers of our blog might share similar sentiments. So we would like to take our readers on a stroll down memory lane to explain how insurers ended up creating networks, and why we are all better off for it.

Prior to the 1980s, states forbade health insurers (who were not HMOs) from restricting provider choice. The result was disastrous. Prices rose precipitously year after year – noted antitrust economist Dennis Carlton predicted (only half facetiously) that prices would soon reach infinity.

And why not? Insured patients had no reason to shop around, and so price was irrelevant.

Even with today’s high deductibles, most hospital patients and many ambulatory care patients reach their deductibles and pay only a fraction of their medical bills. If patients don’t care about prices, then providers will charge what they want. Some states responded by regulating prices, but these barely put a dent in medical price inflation.

Self-insured plans were exempt from state laws governing access, and by the mid-1980s some of these plans were offering narrow networks. Providers who wanted to be included in the networks had to offer much lower prices, which ate into profits but also encouraged efficiencies.

By the early 1990s all states had revised their laws to permit narrow network fully insured plans and perhaps as a result of this development, for at least five years during the 1990s, health care prices (and the premiums that we paid for our health insurance) were virtually flat. Never before had Americans enjoyed such a respite from healthcare cost inflation.

And then the managed care backlash hit.

Patients complained about unpaid bills and missing referral forms. Mostly, they complained that they couldn’t see their favorite provider. And that seems to be the essence of the ongoing opposition to narrow networks. What good is a low cost insurance plan if the quality of care is compromised? Networks expanded, and healthcare inflation returned.

But here is where the critics made their (literally) fatal error. Over a decade ago, the Institutes of Medicine published two landmark studies documenting serious deficiencies in the quality of care offered by American doctors and hospitals. Most of the deficiencies result from medication errors, lack of sterility, and poor surgical technique, with a toll that could exceed 100,000 unnecessarily fatalities annually.

This does not even capture all the needless pain, suffering, and death resulting from botched diagnoses. If we value our health as much as we claim, it is absolutely essential that we seek out quality providers, especially those of us with complex conditions for which skill and experience can be the difference between life and death.

But when it comes to how Americans think about the quality of healthcare providers, we are reminded of humorist Garrison Keillor’s fictional Lake Woebegone, where “all of the children are above average.” In the real world of health care, only half of the doctors are above average.

We have asked hundreds of people, in all walks of life, whether they agree or disagree with the following: “My primary care physician offers higher quality care than the average PCP.” Nearly 100% agree. The truth is that about half of them are wrong.

If you agreed with this statement, there is about a 50% chance that you are wrong! We have asked cardiologists whether they agree or disagree with the following: “The thoracic surgeons that I refer to offer above average quality.” They all agree, but again, about half are wrong.

So are half the surgeons who agree with the statement that their hospital offers above average quality.

The fact of the matter is that we implicitly restrict our own networks and we often do a bad job of it. We choose a primary care physician recommended by a friend. We choose the specialist recommended by the PCP. We choose the hospital recommended by the specialist.

Yet time and again, we make lousy choices.

Seen in this light, one has to wonder if restrictions imposed by insurers would be any worse than the restrictions we impose on ourselves. In fact, the (admittedly limited) empirical evidence suggests that insurer networks tend to exclude lower quality providers. This makes sense. Low quality healthcare often leads to more complications and higher costs. Choosing a high quality provider can be a win-win for insurers and patients.

Americans who are frustrated by our high cost and complex healthcare system may get some measure of satisfaction by criticizing insurers for restricting access. But how satisfied would they be if they understood that mandating broader access will drive up costs and maybe even harm quality?

So what can be done to improve the way we select our providers? It is well-known that when it comes to medical care, experience and quality are highly correlated. So when one of us learned of a family history of a deadly condition, he sought out a provider who has extensive experience diagnosing and treating this condition.

Does this guarantee a good outcome? Of course not, but it does improve the odds. We can also turn to one of the many quality report cards available on the Internet. Some report cards are better than others, and all are far from perfect. But these report cards are not useless – high ranking providers are likely to offer better quality than low ranking providers.

Yet to this day, most Americans ignore this information, as if putting one’s finger in the air is a better way to find a high quality provider than checking the empirical evidence.

Until we demand and act on information about quality, it is pointless to complain about narrow insurer networks. And when the time comes that we become savvy consumers, and not just belly achers, we can start to criticize insurers whose networks really are substandard.

And, this is where we differ from Dr. Emmanuel, we can do more than criticize, we can vote with our purses and take our business elsewhere. That is how we ought to be punishing insurers whose narrow networks fail to serve our interests.

David Dranove, PhD is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.”

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

Dranove and Garthwaite are the authors of the blog, Code Red, where this post originally appeared.

18 replies »

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  3. I have this conversation with patients everyday. The above discussion is true except when it applies to you, the patient needing the heart cath or MRI. You want it because it will potentially save your life. The denial of payment is also the denial of care in 99% of the cases because the patient cannot afford to pay out of pocket. Most times the insurance company reviewer will allow the study if it is reasonable and you make the correct arguments. There are “Appropriate Use Guidelines” that we all have to follow, but sometimes proper care falls outside of the guidelines and it takes significant effort to reverse the denial. One solution would be to have the physician reviewers be subject to malpractice litigation if they make the wrong decision and the patient is injured. This puts everyone on the same playing field. This is not the case now. They are immune from personal litigation. I am not. Just had a patient with symptomatic angina, positive stress test and multiple risk factors who was denied a heart cath despite several phone calls by me to insurance company. Had to do her as an emergency the next day whereupon she needed 2 stents in her “widowmaker” artery. Just one simple example of what occurs every day. She would have died had she not had the procedure. It’s too easy to speak in generalities when it is really important to be sure each and every patient receives appropriate timely care.
    The comment about the Physician Assistants does not take into consideration the fact that they may have felt it more exciting and rewarding intellectually to do cardiology or ortho and not primary care. The implication in the comment is that everyone makes job decisions based upon money. Research shows this is not true and in fact, money is quite low on the list of priorities when looking for a new job or career. Not true with the financial industries however.

  4. No insurance company stops anyone from having any service they wish if they pay for it with their own money. Have a heart cath every week if you are rich and extremely anxious. Third party payors only restrict how much of someone else’s money you can have to pay for your care. I care about how much of my money you care to spend and that means my taxes and specifically government supported programs such as Medicare and Medicaid which absolutely should be more specifically transparent as to where the money is going. I just heard that 90% of recent physician assistant graduates from a local program were interested in working in invasive cardiology or orthopedics when the whole program was touted as a source of more primary care providers. Surely the incentives are very wrong!!

  5. I would like to take issue with some of the comments made by Dr. Dranove. The comments stating half the physicians are below average, while true is at best misleading. First, the measurement of “quality” is at best dubious. Many studies have demonstrated that this is a difficult proposition to get your hands around. Additionally, suppose all physicians performed excellently and the spread from top to bottom was less than 1 percentile. In that instance, there would be no significant difference between those above or below “average”.The same argument regarding above and below average can be made for every profession including PhD’s in healthcare. In the absence of clear scientific data on the measures,
    the comment regarding the average (above and below) is meaningless. Though I agree there is need for quality improvement at all levels, until there is more scientific precision in the measures of quality, caution is required.
    The notion that the US healthcare system and its physicians are poor quality seems to be at odds with the overall data. The US is still the place where people from all over the world flock to when they have a serious illness. Additionally, if the quality of care is so poor, why has the incidence of death from heart disease and stroke been reduced by 50% while the incidence of obesity and resulting diabetes has doubled? Despite poor patient compliance with diet and activity, these illnesses are less deadly. The comment regarding cost increases and a broader network:
    ” But how satisfied would they be if they understood that mandating broader access will drive up costs and maybe even harm quality?” also requires a challenge. Children’s Hospital of Philadelphia is the most expensive hospital in the country and there is no way that any regional health plan could exist without it. With quality often comes cost. Though I agree that better quality reduces errors and cost, lower cost does not necessarily mean better quality.
    Certainly, the issue of narrowing the provider network is an ongoing proposition. In the absence of good scientific evidence as to how to do this and what measures to use, it is unreasonable to permit this. One could certainly require board certification, societal certification of testing facilities such as imaging and lab centers as well as surgical centers. Beyond that, it is difficult if not impossible to decide upon quality at this time. There are too many variables and certainties.
    For more information, see: healthcare-financing-myths.blogspot.com

  6. Why does nobody ever mention the fact that the US is the only country in the world that allows private insurance companies to effectively restrict the doctors (and treatments) that patients can use?

    There are so many different forms of health care coverage all over the world, single payer, combination public and private insurance, more or less government regulation and so on. Yet nowhere else are there such narrow insurance networks. I guess we just know much better and provide better care for our citizens.

  7. One of the things I like about the UK (and this is them talking so probably don’t talk about all their problems) is that they give each GP a pmpm payment for each payment, but it’s higher for inner city practices to make sure they (1) don’t have panels that are too large; and (2) have enough practitioners in all parts of the country. They are more sophisticated on this issue because they have only one payer.

  8. Most of the comments just exemplify the lack of understanding of this whole problem. Yes cost is at the bottom of it all because America spends twice as much per person per year on health care as any other developed country and has in general poor quality statistics compared to other countries. The cost is a product of the charges for every service provided and the volume of those services. Thus a gastroenterologist who performs a colonoscopy for $1,000 and follows the guidelines of doing this every 10 years might cost much more than a colleague who charges$2,000 but recommends the test every 2 years, a not uncommon occurrence. Then the procedure may be done in the office with $500 overhead or in the hospital with$5,000 overhead for a variety of justifiable or non justifiable reasons including the amount of discomfort experienced. With the large increase in deductibles and co-pays the only way a consumer can make a meaningful choice is if the cost per provider per patient per year is made public preferably on the internet broken down by zip code and specialty. This figure would be taken from insurance data both private and public and would also account for the provider who also requires every lab test they can think of and a cardiology consult before performing the colonoscopy, also something done not infrequently and in the name of quality but often involving services performed by or at facilities that they have a commercial interest in supporting. The net cost for primary care providers would be the total cost incurred by their patient including any hospitalizations and referrals an encouragement to chose cost effective specialists which does not now exist. This is one big side of transparency that needs to be addressed.
    Another aspect of determining quality based on charge data is the patient who has possible diabetes with end stage liver, kidney or heart disease who remains non compliant with therapy and perhaps continues to smoke drink alcohol or abuse other drugs. This patient makes the quality of the provider who is attempting to treat him look very substandard and I believe accounts for the poor statistics that look troubling at inner city county hospitals. As a physician whose patients are generally doing better the primary care provider in Malibu or in East LA?

  9. Just more PR and preemptive damage control by Obamacare apologists and defenders. Healthcare will be forever tarnished by this ugly experiment by politicians and their crony special interests who only stand to profit and control the public by this legislative intrusion into care.

    And the usual suspects writing these posts, who they quote as experts and allegedly appropriate sources for unbiased data, and the usual commenters at these ensuing threads, i just hope those who are the real unbiased and objective readers know these partisan shills promoting this ugly political agenda , as the dishonesty continues in their fraud and disingenuous commentary.

    The man who recently very publicly resigned from the OIR of HHS may hopefully shed more revealing and bright light on this black hole the Democrats huddle within to shield their goals for the country.

    Watch how vile and ugly the attacks will be on Mr Wright.

  10. When narrow networks are accompanied by deep specialty centers of excellence, then those who argue that the networks are “poor quality” will need to revisit this criticism.

  11. Darius, the narrow networks are associated with exchange plans that likely are not selected by the employer, but rather by the consumer, so there is the possibility for consumer choice.

  12. You beat me to it Bob. I’m in favor of narrow networks containing good doctors that add value and don’t over charge, but has anyone figured out how to identify those doctors in a scalable way?

    The implicit argument that seems to be made in this post is that there is a good way to measure doctor quality and further, that insurers are the ones who have figured this out.

    In reality, insurers are just measuring providers’ willingness to join networks with lower fee schedules.

    The reason Kaiser works is not because of their narrow networks but because their incentives are aligned with those of their members and because their networks are closed and self-contained, i.e. they have total control over the entire patient life cycle. ACOs would do the same, but because they don’t enforce closed networks, they will not be successful in the way Kaiser is.

  13. The problem comes when you find a “high quality” doc on that report card, who then isnt in your insurer’s network (and you could say choose a better insurer, but then most are chosen by your employer in the first place) and choosing an employer w/ better insurance offerings isnt exactly easy in a good job market, in this one i wish i could laugh…

  14. I read Ezekial Emanuel’s editorial but my takeaways were different.

    1) He trotted out the arguments for capitation as if he and Obama’s advisors had just come up with them. In fact, the rationale for capitation is not new and wasn’t invented by “Zeke” and his buddies.

    2) His discussion of malpractice was also interesting. I had no trouble believing the total contempt that Rahm showed for any attempt at tort reform. But his contention that Obama has done more for tort reform than other presidents set off my BS detector considering how much money is donated to Obama and other Democrats by the trial lawyers.

    And finally do insurance companies want “narrow networks” – of course they do – do dogs lick their b#lls? The ability to have “narrow networks” is key to insurance companies ability to negotiate lower reimbursement rates. Just don’t believe all their nonsense PR that “providers” are “credentialled” based upon quality and results. Narrow networks allow insurers to choose the lowest bidder. And if you want to reduce the cost of health care, choosing the lowest bidder is a very rational way to go.

  15. I am not in the health care field, but let me share some observations:

    1. It seems that insurers define a “quality network provider” as someone who accepts their standard fee.

    2. It seems that the main goal of narrow networks is to discourage anyone who has cancer or heart disease or a similar condition not to enroll……or, once they are in, not to enroll for a second year.

    in other words, narrow networks are one of the few remaining forms of underwriting.

    I have no idea whatsoever of what constitutes a good doctor. I do however have a long career in the insurance industry.

  16. I so disagree! You are right that people don’t understand how to measure quality but that can change! When Toyota started making better cars, GM and Ford needed to step up their game to compete! I would hate for people to have their “car networks” forever limited, even though they had bought and been satisfied with GM and Ford cars before choice was available. I hope we can get out of this paternalistic frame of mind where “choice” means “high cost” because consumers can’t figure out how to measure value in healthcare products and services. The more choice the better, and the faster we get there the better.

  17. Very nicely articulated. Having worked on both sides (Insurance and Medical Practice) it’s been an interesting discussion to watch. A number of the more enlightened Health Plans have started using quality outcome data to support the narrower networks rather than just unit price. Great quality will save them Health Plans money and they are starting to understand this. Unfortunately not all of them have the BI tools needed to gain these insights…. but they are getting better.