Obamacare Health Insurance Has “Narrow Networks,” but Why Are There Any Networks at All?

Julie Appleby of Kaiser Health News recently reported on a presentation by Paul Mango of McKinsey & Co. to an audience of health-insurance executives. According to Appleby’s report, Mr. Mango’s research found:

• About two-thirds of hospital networks on the exchanges are “narrow” or “ultra-narrow”;
• This was defined by surveying 20 urban areas and identifying the 20 biggest hospitals in each area;
• An insurer with at least 15 hospitals in network have a “broad” network; those with 7 to 14 hospitals have a “narrow” network; and those with 6 or fewer hospitals have an “ultra-narrow” network.

Furthermore, Appleby reported that Mango’s research concluded that the “narrow” and “ultra-narrow” network plans did not always have the lowest premiums. Nevertheless, “broad” network plans have premiums 26 percent higher than the plans with smaller networks, according to Appleby’s report.

The point of this blog entry is to discuss why health insurers have networks at all. However, before we get to that, I would like to emphasize that the previous paragraphs specify “Appleby’s reporting of Mango’s research” and not “Mango’s research” itself.

This is because there is no publicly available document that contains Mango’s analysis. During my efforts to track one down, a source informed me that a document exists, titled Hospital Networks: Configurations on the Exchanges and Their Impact on Premiums, which was finalized by McKinsey on December 14, 2013. However, my source told me that the document is “confidential and proprietary” and that “any use of this material without specific permission of McKinsey & Co. is strictly prohibited.”

So, I ceased my efforts to lay my eyes on the source document. I have no reason to cause trouble for McKinsey & Co., and they have gotten in trouble with the administration before. Back in June 2011, McKinsey & Co. were attacked on the White House blog for having published a report concluding that Obamacare would result in a significant loss of employer-based health benefits (as discussed by Avik Roy at Forbes.com).

Today, of course, Obamacare’s destruction of employer-based benefits is accepted by everyone, and even admitted by President Obama himself. So, if Appleby’s reporting of Mango’s new analysis is accurate, we should accept it as the first systemic analysis confirming anecdotal evidence that “Obamacare” is actually “Obamacaid,” and those who are driven out of employer-based benefits into the exchanges will find limited access at higher cost than before.

Nevertheless, the issue raises a bigger question: Why do health insurers have networks at all? Auto insurers have preferred auto-body repair shops, but it’s not quite the same thing. You may think that your auto insurer has a comparative advantage over you in determining the quality of work at a particular shop. However, you can go to any shop, get an estimate, and report it to your insurer. By default, most auto insurers pay the insured party (or lien holder), unless the insured party directs the insurer to pay the repair shop directly.

Most importantly, there are no huge cost surprises after the repair. For hospitalization, it can take months or years to figure out how much a discharged patient owes, largely because it has been impossible to get a good-faith estimate of a scheduled procedure before admittance.

Slowly, this is starting to change for the better. Earlier this year, John Goodman reported results of “reference pricing” for certain hospital procedures. Large groups like Walmart, Safeway, or CalPERS identify hospitals that provide high quality procedures, such as joint replacement, at low cost, and commit to paying that fee and no more for the standard procedure. However, patients are free to go to another hospital if they pay the difference. Of course, prices at other hospitals came down very quickly.

Insurers are cautious of this because they benefit from the opaqueness of network contracting. The CalPERS reference-pricing program was designed by Anthem Blue Cross, but it is not a general feature of Anthem Blue Cross offerings in California.

Because most Americans do not observe the true cost of health insurance, they find it difficult to appreciate the benefits of this price transparency. A post-Obamacare reform that gives individuals choice of their own health benefits will quickly make insurers’ networks less important, and make cost and quality more important.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.