Narrow Networking

Craig GarthwaiteThe Affordable Care Act is premised, at least in part, on the notion that competition can be harnessed to reduce healthcare costs and improve quality. This explains why insurance in the individual market has not been nationalized. Instead, consumers go to an online exchange where they customers can easily (at least in theory) compare plans offered by different firms. Unleashing competitive forces should result in lower premiums for these plans. And why not? Over the past two decades, competition has been one of the few success stories in the U.S. health economy. For example, when competition intensified in the 1990s, healthcare costs moderated. When competition weakened in the wake of provider mergers and the backlash to the narrow networks that were essential to cost containment, healthcare costs rose.

When most people think about the benefits of competition, they tend to think about prices. Monopolies charge high prices; competitors charge low prices. There is nothing wrong with this perspective, but it misses a more fundamental point. In the long run, the greatest benefit of competition is that it has the potential to fuel innovation. This is as true, in theory, for health insurers as it is for telecommunications and consumer electronics. It hasn’t always been true in practice; for several decades after the IRS made employer-sponsored health insurance tax deductible, insurers tended to offer the same costly indemnity products. But consumers eventually demanded lower premiums, and insurers responded with managed care. After the backlash, insurers developed high deductible health plans and value based insurance design. Insurers are now moving towards reference pricing. These plans offer consumers reimbursement up to a pre-specified level for treatments that can be easily broken into a treatment episode such as hip replacements or MRIs. Patients have the choice of any provider, but they bear the cost of choosing a more expensive facility.

High deductibles and reference pricing are fine, but do not always work in practice. Chronically ill patients quickly exhaust their deductibles, and reference pricing does not work well for chronic diseases. In order to complement these tactics, some insurers are once again offering narrow network plans. We commented in earlier blog posts that the ACA would catalyze the return of these narrow networks and also warned that this might fuel another backlash. Unfortunately, a recent New York Times article shows, the backlash is well underway.

Make no mistake, restrictive networks are essential to cost containment. Through narrow networks, insurers can negotiate lower prices. More importantly, they can direct enrollees to providers who have lower overall costs and higher quality. Dranove has written two books about this. Don’t take his word for it. The independent Robert Wood Johnson Foundation has published two comprehensive studies showing that the competition triggered by networks has been successful in reducing costs and improving quality.

By definition, some providers are excluded from narrow networks, and this is where the trouble begins. Excluded providers who have lost out in the cauldron of competition always complain the loudest. In sports, there are pejoratives to describe such complaining losers, and it is the rare referee who is moved by their complaints. In healthcare, they are called an interest group, and when providers complain they have the ear of legislators. We should have no sympathy for them.

What about patients? Some patients knowingly choose health plans with narrow networks in order to save money, and should not be surprised to find that some of their favorite providers are excluded. Others may be in the dark about their networks. The solution isn’t to regulate narrow networks out of existence; it is to shine some light on network structure.

Another concern may be that low income enrollees who cannot afford broader networks might be at a disadvantage. But if we want to provide big enough subsidies so that all enrollees have broad networks, we will have to either (a) raise taxes further, or (b) limit the number of uninsured we can enroll. Neither choice seems better than the status quo.

Now, this does not mean that we think there is no place for regulation of narrow network plans. We don’t think that the newly formed ACA exchanges, or any market, should be the proverbial Wild West. For example, if we want consumers to make educated choices across insurance plans, then they require timely and accurate information about which providers are in which networks. We would think this would be more than feasible, though healthcare.gov was somehow unable to provide this information to many of the initial enrollees. We understand that providers go in and out of networks all the time and it would be burdensome for insurers to inform enrollees of all network changes in real time. But insurers could provide regular updates. We also wonder if insurers have the capability of identifying, through billing records, when a particular patient’s provider has gone out of network, and sending that patient an immediate update. In these situations, patients should be allowed to change their choice of plans outside of the open enrolment period in the same way they might be able to if they had another qualifying event such as the birth of a child. These small steps should prevent some of the worst case scenarios described in the New York Times article.

In addition, narrow network plans are only effective if there are multiple high quality providers offering services in an area. Given the recent wave of provider consolidations, it is critical that anti-trust authorities carefully monitor these mergers. After all, competition can only work in truly competitive markets.

But what we must avoid is mandating broader access. This would spell the end of market-based health reform. If insurers cannot exclude some providers, then providers have little incentive to lower prices and become more efficient. In the wake of the last managed care backlash, patients equated access to quality and virtually all insurers decided they needed to include in their networks virtually all providers. The result was double digit price growth that ended a decade of pricing tranquility. In the new post Great Recession economic reality, enrollees must have a low price alternative to high cost, broad network plans.

Many states have already attempted to mandate minimum access through Any Willing Provider laws. These laws require insurers who have come to terms with a specific provider to accept all providers who agree to those same terms. This may sound fair, but the economic implications of AWP for patients are anything but fair. Under AWP, no providers need negotiate with insurers or accede to an insurer’s request for discounts. Providers can bide their time, knowing that they can always force their way into the network. Having lost all their leverage, insurers can no longer demand discounts, and prices invariably rise.Research confirms this dim dynamic.

The push for broad access seems to be especially strong in sparsely populated states such as Montana. But proposals to assure access, which often take the form “At least X% of enrollees must live within Y miles of a provider” do more to drive up costs than any other rules we can imagine, because they grant effective monopoly rights to rural providers. Insurers facing such rules have two options (a) accede to the pricing demands of the local monopolies, or (b) drop coverage in areas where providers have been granted local monopolies. Montanans may as well have nationalized healthcare.

Health policy makers love to talk about the need to reduce costs, improve quality, and expand access – and like to talk themselves into believing that through government intervention they can achieve all three. They would do well to heed the economist’s “golden rule”: There is no free lunch.

12 replies »

  1. This is what happened to me since the “unaffordable” for health act has kicked in. My insurance premiums have gone up over 400%!!!! My deductible has gone from $1200 to $3600……where I had NO co-pays before, I NOW have $30 co-pays too? My first prescription of the year was 1000% higher. (ten times the price of my old insurance!!!!) This same rate was also true on a simple finger stick….. old price $6….new price $59 ????

    This is all out of my pocket now!!! (every time) Like others have said …this is like NOT having any insurance at all. With BIGGER payouts. PLUS the insurance did not add any value or benefit to me coverage wise. PURE JUNK!!!!
    What if one of your bills went up 400% how would you feel…..ripped off RIGHT? You got it!

  2. Narrow networks are horrible for consumers – and only exist to help insurance companies keep costs low. In my personal experience, it forced our family to purchase non ACA compliant school offered plans for our children who attend school out of state – ACA coverage would only cover providers available in the zip code of their legal address – no out of network coverage available at all. We decided to not purchase any insurance – why buy something you can never use?

  3. The free market only works when one of the customer’s options is to not purchase anything. That’s obviously not a viable option with regard to health.

    Of course, this essay is saturated with homage to the god of free markets, so don’t expect to find that limitation included here. So here’s a question for all you free marketeers. How much do you like your auto insurance? Because that’s mandated too. Be honest. It sucks, doesn’t it. Unless you never use it. Which is the same thing we’re moving to in health insurance. We’ll be insuring our bodies just like we insure our auto bodies. Nice, huh?

  4. Network pricing is the most important component to having lower premiums
    That is why Blue Cross has a good percentage of the business
    With their huge customer base they are able to garner massive negotiating leverage
    What we need is an insurer that competes in an environment where network prices are important but one whose aggregate growth of annual paid for benefits is paramount
    Where instead of earning piddly interest on an HSA one earns 8 percent a month of credited benefits and the crediting of paid for benefits increases 8 percent a month capping at 3 in month 34
    Imagine paying $300 in one month and earning $900 in paid for benefits
    These paid for benefits that grow every month eventually provides $25,000-$50,000 of benefits
    This underlying first dollar paid for coverage provides discounts of 60-80 percent off the premiums whether you are Blue Cross or National Prosperity Life and Health
    We look for approval next week as a licensed insurer in Texas to be in a state near you over the next year
    Look for Health Matching insurance a patented product design crafted for three years with a premier actuarial firm
    Don Levit ,CLU,ChFC
    Treasurer of NPL

  5. the question here-not dealt with in these studies OR the article- is are costs lowered enough? The answer is clearly no. Health and treatment are not commodities. A person, based on their genetic makeup and other factors has no way to know or plan for the need for expensive treatment. The median income-and even those earning say 500% above poverty level which makes them ineligible for subsidies and at the mercy of narrow networks which have pretty real-world consequences in terms of bills showing up in the mail- shows that most people will not, over their lifetime, earn enough to pay for even one emergency surgery ( at US prices ) and meet their other obligations, let alone treatment for a chronic illness.
    Narrow networks are not a solution to the problems of who gets health care and how much.Look to other western countries for saner solutions. Adoption of the Canadian system wold also result in many businesses having a clearer path to success since they would be reieased from trying to act as intermediaries and as ersatz providers. Countries that have adopted “single payer” have lower costs and better results.
    BTW Dr Scherr, most people having expensive medical treatment for life-threatening conditions feel a sense of urgency and anxiety that does not resemble the upper-middle class income shopper calmly comparing prices at Costco. If everyone has the same treatment expectations like in Canada- ie the Doctor or the Prime Minister has the same card as the Costco worker who processes these bargains for the upper class shopper, this will do a lot more to make costs more uniform than leaving geographic costs tied at least in part to the income of a health insurance CEO, Ever see what the head of Humana makes?

  6. Narrow networks are not inately bad and do lower costs, that is why plans with narrower networks have lower iinsurance premiums attached to them. People complain that their premiums are too high but also that there is less choice. When I go to costco prices are better but I usually must buy Kirkland Brand articles. I am ok with that as the Kirkland products are generally good. In Charlotte, where I practice, we have essentially 2 health care monopolies and our health insurance is the 6th highest in the nation. Many commercial insurance contracts with the big provider groups pay at 175-190 percent of medicare. This is well above market price in most of the rest of the nation. Charlotteans get gouged in this wide network model. Obamacare is changing this and costs are falling here. I think it is a good thing. Please see my blog for futher discussion. http://www.lakesidemedicalmusings.com

  7. “This is as true, in theory, for health insurers as it is for telecommunications and consumer electronics. It hasn’t always been true in practice;”

    It’s never been true for insurers. All insurers have done is lower benefits or raise premiums/deductible. That is in no way comparable to tel or electronics where we’ve gotten more for less. Innovation of widgets is possible, not so for health care funding.

    “Monopolies charge high prices; competitors charge low prices.”

    Regulated monopolies charge fair prices and in the face of profit restrictions truly innovate to produce better returns.

    “For example, when competition intensified in the 1990s, healthcare costs moderated. When competition weakened in the wake of provider mergers and the backlash to the narrow networks that were essential to cost containment, healthcare costs rose.”

    Only an economist could view “moderated”as good news. When have health care prices even been held to the general rise (or less) in inflation or wage increases? Moderated to an economist means only a 4% compounded rise in yearly premium costs.

  8. Do not confuse restrictive networks with higher quality. The narrow networks are only an attempt to lower costs. If you look at the contracts that were sent out when these networks were formed the contract only asked if a provider would perform the same work that they had been doing for 10%, 20% or 30% less. Also, the insurance plans have huge incentives to keep the networks small, their payment for out of network services is much less than for in network care.

  9. The benefits of competition are, in general, greatly exaggerated. I think Schumpeter pointed that out: the idea that firms compete to reduce their marginal costs, so that in equilibrium marginal costs will equal to prices, should be be cast aside.

    It all sounds so hunky dory: if you want to join our club you must be cheap and of high quality. Notwithstanding the fact the we still haven’t figured out how to measure quality (please don’t give me the percentage of providers recommending colonoscopy, metric!), let’s assume that is true.

    There’s another problem you have to deal with. It’s called risk classification by design. It’s not your true risk classification: i.e. you have interstitial lung disease let’s fleece you. It’s more subtle. You have interstitial lung disease and you are costly, so let’s make it difficult for you to get your full repertoire of treatment.

    The problem with policy is not simply that there’s no free lunch. There’s always some meta-gaming going on.

  10. “They would do well to heed the economist’s “golden rule”: There is no free lunch.”

    I would say Americans in general would do well to heed this rule.