Narrow Networks Are Here to Stay

Open enrollment closed last month, and healthcare watchers have been counting the winners and losers. One indisputable winner is the narrow network. Plans that feature one are the fastest growing insurance products on the market. According to the McKinsey Center for U.S. Health Reform, half of the plans on the exchange have them.

Many criticize these plans for not including enough medical providers in their networks. The insurance companies defend them saying that they help keep costs down.

Often lost in this debate is the answer to "Why now?" In other words, if these networks keep costs down, then why has the insurance industry waited until now to offer them?

The rise of the healthcare consumer, jumpstarted by President Obama's Affordable Care Act, fully explains the answer to "why now?" It also explains why narrow networks are here to stay.

Don't believe me? Let me try to explain with eight bullet points.

1. Why we have group health insurance

First things first: the only reason we have group health insurance is because the government gives huge tax subsidies for group health insurance.

To be clear: we don't have it because employers like to use it to compete for or retain talented employees. Employers could offer all sorts of other things if that were the case--free family vacation to Disney World, anyone? No, employers offer group health insurance because they can offer it tax-free.

It's easy to forget this fact, because group health insurance has been subsidized since the 1940s. Anything we've had for so long is easy to take for granted. In fact, the story for why group insurance is subsidized dates back to 1913.

For now, though, just bear this fact in mind. We have group health insurance because of heavy government subsidies for it. This is critical to understanding the "why now" question.

2. How group buyers of healthcare think

Buyers of group health insurance are business owners, CFOs, HR professionals and office managers. Regardless of title, they all generally think the same way when it comes to networks.

How do they all think? They all consider employee dissatisfaction.

John is the healthcare buyer for his employer, Music City Inc., which has 350 employees. His broker, Sara, presents him with an option that would save the company an impressive twenty percent. The deductible and other features of the plan would be the same as last year. The only difference is that one of the local hospitals would not be in the network. But there are still more than ten other hospitals that would be in-network. Nice work coming up with this option, Sara! Right?

Wrong. The one hospital that would not be in-network is the only one that has a pediatrics unit. Here is how John, our group healthcare buyer, thinks about that:

"Hmmm. Twenty percent savings is pretty good. But what if one of our employees has a child who needs to go to the hospital? We could get slammed as a heartless employer. Or even worse, what if one of our employees has a child in that hospital right now? Maybe we should just keep the network we've got, but raise the deductible and copays a little bit. Or maybe charge employees more."

Makes sense, right? As a result, all 350 of John's employees get a plan that has the hospital with the pediatrics unit in-network.

3. Health insurance company nightmare

Deep groan. "Brutal!"

That pretty much summarizes how your typical insurance company executive would respond to the question "What's it like to negotiate prices with the hospital that has the only pediatrics unit in town?"

Those hospitals realize they have a ton of market power because of how group buyers of healthcare think, and they use it to command the highest prices.

I know what you're thinking. "Well, it's probably expensive to operate a pediatrics unit. And after all, these are kids. We should be giving them the best care that money can buy."

That's fine. But these hospitals use the market power given to them by their pediatrics until to demand the highest prices for everything. From MRIs and CT scans to annual check-ups and everything in between--they have the highest prices of any hospital in town.

4. Why the individual market is expected to grow

Let's take a time-out from the group market for a minute and focus on the individual market.

While people insured in the group market have been enjoying subsidized health insurance since the 1940s, people in the individual market have been on their own. Zero, nada, zilch--all good words to describe how much in tax subsidies they've been getting to help with individual health insurance.

That is, until President Obama's Affordable Care Act. In fact, many Americans can now get even better subsidies in the individual market than in the group market. Yay! A historical injustice--the disparity in tax incentives between group and individual coverage--has been addressed.

Americans are good at responding to tax incentives. Witness the disparity between the number of employers who offer group health insurance rather than free trips to Disney World to attract and retain talent. As a result, we've seen massive growth in the individual market and expect to see more.

5. How individual buyers of healthcare think

In part because John's company wasn't able to get its healthcare costs under control, it went out of business. It left 350 employees on their own to get their own health insurance.

Fifty percent of the 350 employees are single. Thirty percent don't have children. Ten percent have kids who are all in high school or older. Ten percent have younger children.

In other words, 90 percent of the 350 people formerly employed by Music City Inc. don't care at all about whether their network includes a pediatrics unit. Of the remaining 35 people, some of them are risk-takers willing to gamble on it being out-of-network in return for premium savings now.

6. Joe Biden: "This is a big f****** deal"

Kevin is the CEO of Koala Health, a major health insurance company. Jennifer over in product development has been pounding the table for 20 years about the need to develop a narrow network plan for the individual market. After all, everyone in the industry knows that individual buyers think differently and would buy a plan that doesn't have a pediatrics unit in the network.

For 20 years, Kevin has nodded thoughtfully as Jennifer made the case for her narrow network plan. Then he has told her, politely, "No." Why? Because Kevin just had too many other priorities. Wellness, for example. Or the Medicare Advantage business. Or Part D. And so every year, Jennifer would go home disheartened, disappointed that her product idea was not being pursued.

To be clear, Kevin always knew Jennifer was right. But it just wasn't worth it. The market opportunity was too small with the government only giving subsidies in the group market to justify the headaches Kevin knew he would face creating a narrow network plan.

But then the Affordable Care Act addressed the disparity in tax incentives between the group and individual markets. Everyone, including Kevin and Jennifer, knew this meant there would be huge growth in the individual market.

Voila. Kevin calls Jennifer and says "Yes! Let's create that narrow network plan for the individual market that you've been talking about for 20 years!"

And so this is the "why now," and part of why Vice President Joe Biden was right about reform being such a big deal. Before the disparity in subsidies between the group and individual health insurance market was addressed, it was just not worth it for the insurance companies to go to the trouble of creating narrow network plans.

7. Real-world examples

So far, I've been using fictional people and companies to explain "why now." Let's look at a few real-world examples.

Take Nashville, Tennessee, where BlueCross BlueShield of Tennessee is the largest insurance company. They excluded Vanderbilt University Medical Center, which has the largest pediatric hospital in town, to create Network E for the individual market. It was first introduced on on the marketplace in 2013, and 29,000 people signed up for a plan with this network in 2015, dramatically shifting the city's market toward the nonprofit system Saint Thomas Health.

Or Indianapolis, Indiana. At first, Anthem BlueCross BlueShield excluded the St. Vincent and Indiana University Health systems from its narrow network in 2014, which meant the plan didn't include a pediatric hospital. By 2015, Anthem added St. Vincent's back in-network, but the plan still excludes IU Health--the largest pediatric hospital in Indianapolis.

Or Austin, Texas, where many plans have narrow networks. In fact, just one marketplace plan--Superior HealthPlans' Ambetter EPO--includes both the city's top hospitals in-network. The other 63 marketplace plans available in Austin do not have in-network access to both Seton Medical Center and St. David's Hospital.

Narrow networks like the the above examples continue to grow in popularity across the U.S., demonstrating changing trends in insurance products and the purchasing power of consumers.

8. The future

Some healthcare watchers say these narrow network plans are destined to share the same fate as HMOs did in the 1990's. People will scream bloody murder when they find their plan's network doesn't include a medical provider they want to see, and the market for narrow network plans will go away.

It's correct that people will protest. It's wrong, however, that the market for these plans will go away. The difference is the existence of group buyers. In the 1990s, it was the group buyers who were choosing the HMOs. These are the people who worry about employee dissatisfaction when considering networks, and so they reacted strongly when employees screamed bloody murder.

Today, it's individual buyers who are choosing narrow networks. These buyers think about their own needs. If there is a story about someone frustrated over the size of their narrow network, the reaction will be more subdued. Some individuals will even be so callous as to write the consumer off as someone who just didn't research the options appropriately. Others will just take more care in researching their own options next year. Few will stop buying narrow networks.

Bottom line: The rise of the healthcare consumer, making his or her own choices in the individual market, means narrow networks are here to stay.