Code Red: Two Economists Examine the U.S. Healthcare System

By David Dranove and Craig Garthwaite
Narrow Networks Redux, July 29, 2014

The Affordable Care Act is premised, at least in part, on the notion that competition can be harnessed to reduce healthcare costs and improve quality.

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 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.

http://dranove.wordpress.com/2014/07/29/narrow-networks-redux/

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 solutions.

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 health reform.”

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.