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October 13, 2015

Narrow Networks: The Result of Competition, not the Barrier

Source: geralt (Pixabay/Public Domain)
Source: geralt (Pixabay/Public Domain)
This post is co-authored by Seth Trueger & Cedric Dark and also appears on Policy Prescriptions. See also the related post on premiums before & after ACA (PolicyRx).

This fantastic article by Dan Diamond in Forbes on Republican presidential candidate Donald Trump’s gibberish on health care during his 60 Minutes interview sparked some great discussion on Twitter – see the Storify below. Dan makes an amazing analogy:
Blaming Obamacare for insurance companies’ behavior is like saying Trump’s responsible for how America nominates its presidents.
Dan’s piece did, however, clumsily brush over one important issue, saying:
Trump has returned time and again to the idea that there’s not enough competition in the health insurance market. And you know what? He’s probably right. More than 40% of the doctor networks available through Obamacare exchanges are narrow network plans. Around half of all hospital networks on ACA plans are narrow networks, too.
This isn’t so much wrong as it is non sequitur. Narrow network plans aren’t evidence of insufficient competition in the health insurance market; narrow network plans are the result of competition and negotiation in the health insurance market.

Insurers try to find the best provider network (providers include both hospitals and doctors, which are negotiated separately) for their plan at the lowest cost, mostly using their enrollees as leverage. Insurers try to negotiate a discount by bringing volume. Plans basically say to providers, “Take this price and look how many patients we will bring you!”

Hospitals and doctors negotiate for the highest prices and the largest volume of patients they can get, leveraging their quality and brand name (i.e. desirability).

The main “market interaction” in the insurer-provider market is defining the network for the plan. This is primarily how premiums and other costs are determined (in addition to deciding which benefits are covered by the plan).

Incidentally, this is pretty much why selling plans across state lines doesn’t magically fix anything. Consider this example.

An insurer in Illinois still has to negotiate a completely separate provider network if it were to try to sell a plan in another state like Indiana or Georgia. That’s where all the work exists. It’s not the regulatory burden; it’s the provider network negotiation.

There is, in fact, a lot of competition in health markets, primarily in the negotiations between insurers and providers. All Obamacare did was make it so that for insurers to complete against each other they had to come up with new ways of making profits while keeping premiums and cost sharing competitive. Instead of the pre-ACA race to see which insurer could exclude the riskiest people, now insurers fight over patients by cutting costs while maintaining required coverage — and the primary way to do that is by narrowing networks and excluding providers that don’t (as Trump would say) “cut a deal.”

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