Tuesday, July 29, 2014
Code Red: Two Economists Examine the U.S. Healthcare System
July 29, 2014
Narrow Networks Redux
By David Dranove and Craig Garthwaite
The Affordable Care Act is premised, at least in part, on the notion
that competition can be harnessed to reduce healthcare costs and improve
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.
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. 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 <http://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 enrollment period in the same way they might be able
to if they had another qualifying event such as the birth of a child.
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.
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.
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.
Comment by Don McCanne
This blog entry by David Dranove and Craig Garthwaite is another
example, like yesterday's, where economists from "the other side"
clearly understand the policy issues, but are guided by an ideological
preference for market solutions as opposed to more effective government
Narrow networks do terrible things. As these authors state, narrow
networks provoke backlashes from patients who are unhappy with the
restrictions. Healthy individuals select their plans primarily based on
price but then are disappointed when they find that the networks are
unable to meet either their needs or their choices. The narrow networks
become anti-competitive when excluded providers leave the community and
are not available for the next year of provider contracting. The authors
point out that requiring the providers to be within a reason distance
from patients drives up costs, as if cost containment is far more
important than access. With the inevitable changes in patient plan
enrollment and in provider network enrollment, narrow networks can be
highly disruptive because of the need to leave your established care and
enter new narrow networks. Perhaps worst of all, the authors state that
"low income enrollees who cannot afford broader networks might be at a
disadvantage." But then they state that if we are to broaden the
networks we must "either (a) raise taxes further, or (b) limit the
number of uninsured we can enroll," as if there were absolutely no other
option for containing costs that did not involve narrow networks. They
seem to believe that the trade-off is worth the cost of disadvantaging
low income enrollees.
They contend that "restrictive networks are essential to cost
containment," after making the case that other market tools of
competition have been inadequate. But ideology dictates that market
competition must be the driving force for cost containment. They caution
that mandating broader access "would spell the end of market-based
The case they make for Montana seems to be the clincher on why narrow
networks are such a highly flawed policy - a conclusion that they did
not intend. They complain that requiring reasonable distances to health
care creates a provider monopoly that will cause insurers to either
charge outrageous rates or simply drop coverage. They say that
"Montanans may as well have nationalized healthcare." Maybe they should,
as should the rest of us.
If the inadequacy of other tools of market competition have required
insurers to turn to perverse narrow networks maybe we should be
questioning whether market competition is the best policy for
controlling costs. Come to think of it, maybe we should listen to these
authors when they say that allowing broader access "would spell the end
of market-based health reform." Other national systems depending on
government administered pricing provide care for everyone at an average
of half of what we are spending per capita. Now that's effective cost
containment, and it's accomplished without kowtowing to the ideologues
who insist that health reform must be market based.
at 3:32 PM