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.
Mitt Romney’s/Paul Ryan’s premium support/voucher plan was heavily derided during the dark days of Campaign 2012, but the devil was always more in the details than the theory. While the re-election of President Obama left premium support dead on the Medicare level, health insurers are increasingly turning to the ideas that drove it – choice, competition, and the power of a (carefully regulated) market – to address high costs on the procedural level. Call it the micro-voucherization of health insurance.
This is known by wonks as reference pricing, and its recent results in California are promising: the costs of hip and knee replacements fell by 19%, with no attendant decrease in quality. Using reference pricing is an assault on the status quo that holds the promise of “bending the curve” in a meaningful way, but it faces technical and political concerns that may consign it to the graveyard of promising-but-unfulfilled ideas.
Broadly-speaking, reference pricing is the act of offering a set amount of money for the purchase of a good, where the reference is an amount that can reasonably said to offer meaningful coverage for that good. Sometimes, reference pricing is focused on a given procedure – what I’ll refer to as “inputs-oriented reference pricing”; other times, a given outcome, or “outputs-based reference pricing.”
That’s pretty vague, so let’s use the colonoscopy procedure (which has recently received a lot of attention thanks to an informative New York Timesarticle) to help color this in. The inputs-oriented approach would see the payer asking: given the choice to have a colonoscopy – a procedure which varies wildly in cost without varying wildly in quality – what’s a reasonable price to pay? It would decide this based on some combination of price, quality, and geography, and would inform consumers of its spending cap.
Say it finds that most of its insured population can reasonably access a high-quality colonoscopy for $10,000; if a consumer choose provider that charges $15,000, he or she would pay the $5,000 difference out of pocket. Choice is preserved, but at a cost. The simple chart above shows how this may work.
But, if you read the colonoscopy article, you may be asking a separate question: why pay for a colonoscopy at all?
Purchasers of health care, long-time supporters of organized systems of care, are watching with growing alarm as horizontal and vertical mergers between providers accelerate. Buyers with experience in other sectors understand that consolidation can improve efficiency, quality, and the generation of capital, especially where there is excess capacity and abundant waste. They are equally aware, however, that ‘over’-consolidation can lead to pricing power, the absence of competition, and the crowding out of disruptive innovations.
There, the nation’s leading experts discussed and debated how to maintain enough competition among health care providers to stimulate improvements in the delivery and affordability of care.
Participating experts stated that by as early as 2006, over 75% of U.S. metropolitan statistical areas (MSAs) had experienced enough hospital mergers to be considered ‘highly consolidated’ – a trend that continues. Economists agreed that the evidence demonstrates that highly-consolidated providers can raise prices considerably. Provider leaders offered their views on why consolidation is occurring, including to meet the demands for integration and efficiency, to counterbalance a highly-consolidated health insurance market, and to have enough income to invest in IT systems and other infrastructure necessary for population management.
The Illinois hospital dinosaurs continue to defy evolution and prove that they are not extinct. I am talking about our health facilities planning board, which just turned down another Certificate of Need application for a new hospital, this time in the northwest suburbs of Chicago. The board justified the decision by stating that the new hospital would harm existing hospitals.
I know that the Chicago School of economics tells us that regulators serve the interests of those they regulate, usually at the expense of the public. But just because the Illinois planning board sits in Chicago, that doesn’t mean they have to slavishly follow the Chicago School. They could act in the public interest at least once in a while! (Though if the board started approving too many new health facilities, someone might notice that they are not needed and put them out of a job.)
In the 1960s, Texas Instruments developed the first handheld calculator. It could display up to 12 digits while performing addition, subtraction, multiplication and division. And it cost $2,200.
Since then, the calculator has come a long way. Competition forced continuous innovations, and today’s models are more lightweight, have longer battery life, are capable of performing more complex computations –all at a dramatically reduced price point.
That’s the typical cycle in virtually every sector of the American economy. Innovations are introduced, competition forces design improvements and cost reductions and products are continually improved until the next big thing comes along to start the process over again.
But that’s not the way things work in healthcare.
Like the calculator, Medicare was first created in the 1960s.
But even though the practice of medicine has changed dramatically over the last 40 years, the Medicare program has stayed largely the same. And, since most commercial insurers tend to follow the government’s lead in terms of payments and benefit design, even private markets have played a role in limiting innovations in the way we pay for healthcare.
I’ve had a couple of meetings recently with leading figures in UK health policy – one of them a senior figure at a doctors’ organisation, the other at a private health company – who both talked excitedly about the lessons Britain could learn from the US.
That’s rarer than you might think. Our National Health Service may be cautiously embracing market-led reforms, but there’s still plenty of scepticism about the US’s full-on competitive system, and people here tend to be nervous about citing it as an inspiration.
Still, the two figures I am referring to, both leading players in the British Government’s NHS reform programme, were talking not about US healthcare as a whole, but about one particular organisation with something of a cult following on this side of the Atlantic.
I am referring to Kaiser Permanente, and its ideas are about to become very big over here.
Kaiser is one of those iconic organisations that aren’t just known for what they do, but whose names come to define their particular way of doing things – in Kaiser’s case, managed care.
It is the classic managed care organisation, running all the disparate parts of the local health system as a fully integrated whole, and deftly incentivising doctors to make sure patients receive their care in the part of the health system where it can be delivered most efficiently.
Last week, the British Government’s Health and Social Care Bill finally completed what has been one of the most tortuous passages through Parliament of any piece of legislation in recent memory.
The bill has been the subject of 15 months of intense political wrangling and more than a thousand amendments – many focused on its provisions for greater competition in the National Health Service (NHS).
Competition is a fact of life in most areas of UK society, but as soon as it is proposed within the sphere of the state-funded NHS, many people here start to get very jittery about it.
The key concern among critics is that competition between multiple providers will fragment the NHS and remove one of its big potential advantages – its ability to get different elements of healthcare working together within a single, integrated system.
On the other hand, proponents of competition argue that state monopolies like the NHS can become sluggish and unproductive, and that an injection of competition is just what is needed to drive efficiency and push up quality.
One of the great myths about American society is that our lack of a “universal” health plan harms our competitiveness. The masters of this refrain, of course, are the American automakers. Years before driving themselves into bankruptcy and the unwelcoming arms of their new owners, the American taxpayers, they used to claim that they spent up to $1,600 per car on health care. This was more than they spent on steel, and a multiple of what they claimed their foreign competitors spent. In her well received book, Who Killed Health Care? America’s $2 Trillion Medical Problem – And the Consumer-Driven Cure (New York, NY: McGraw-Hill, 2007), Professor Regina Herzlinger of Harvard Business School claims that these complaints are inflated (pp. 104-105).
Furthermore, we don’t hear Mark Zuckerberg complaining that Facebook’s health care costs are preventing him from competing against foreign social-media businesses. Indeed, while all Americans complain about health costs, the argument that our health “system” reduces our competitiveness versus other countries with “universal” health care is actually quite weak. Indeed, the percentage of all firms offering health benefits actually increased from 66 percent in 1999 to 69 percent in 2010, and a greater number of smaller firms have begun to offer health benefits, according to the Kaiser Family Foundation.
One oft-cited metric is that the United States spends far more on health than other countries as a share of Gross Domestic Product (GDP). But this measurement can mislead. It is a ratio composed of a numerator and a denominator. The numerator – the real cost of medical care – has grown slightly slower in the U.S. than Europe. Advocates of government monopoly health care point out that Canadian and U.S. health spending as a share of GDP was about the same before the Canadian government took over health care, but diverged starting in 1970, soon after the government completed its takeover. They present this as evidence that the state can control costs better than the private sector. However, real GDP growth in Canada dramatically outpaced U.S. growth between 1969 and 1987, meaning that the denominator of the health spending per GDP ratio grew much faster in Canada, not that the numerator grew much slower, according to research by Professor Brian Ferguson.
On Labor Day Costs of Care asked doctors and patients to send us anecdotes that illustrate the importance of cost-awareness in medicine, as part of a $1000 essay contest aiming to shine a national spotlight on a big problem: doctors and patients have to make decisions in a vacuum, without any information on how those decisions impact what patients pay for care.
Two months later we received 115 submissions from all over the country – New York to California, Texas to North Dakota, Alaska to Oklahoma. We feel these stories are poignant because they put a face on some of the known shortcomings of our system, but also because they unveil how commonplace and pervasive these types of stories are. According to essay contest judge Dr. Atul Gawande, a surgeon and staff writer at the New Yorker, “These [stories] are powerful just for the sheer volume of unrecognized misery alone.” The following story from Brad Wright is one of the finalist submissions in our contest …
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