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Reform Update: Narrow networks bring equal parts controversy and savings


By Melanie Evans
Posted: March 12, 2014 - 4:30 pm ET
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Health plans with narrow provider networks—which met with fierce backlash from patients and providers during the last go-around in the 1990s—are once again vulnerable to negative public opinion and legislative action. But their failure now could undermine one of healthcare reform's key mechanisms for keeping premiums down, according to a special report from Moody's Investors Service.

The health insurance exchanges may suffer if plans and providers are required to broaden their networks in response to consumer backlash or new laws and regulations, Moody's Investors Service said in the report. “Narrow networks are one mechanism … that are being used by health care insurers to reduce healthcare costs,” said Moody's senior vice president Lisa Martin. Broader networks may include higher-cost hospitals such as academic medical centers which have added expenses for training future doctors. Premiums would rise to match the network's expenses, potentially driving away customers, Moody's said.

Marketplace success will depend on the degree that consumers trade off broad choice for cheaper prices and the strength of pushback from excluded providers.

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Consumers in the exchanges include millions of lower- and middle-income Americans who are looking for affordable premiums. Narrow network plans often are a lower-price option, because insurers either have selected more efficient providers or have negotiated lower payment rates with them in exchange for steering a large volume of patients to them—or both.

Narrow networks are also being used by accountable care organizations. Providers that participate in ACOs that meet quality and cost-saving targets receive financial bonuses. Targets are easier to manage when patients cannot roam and seek treatment outside the network, with no controls on quality or costs. ACO leaders say narrow networks help ensure that patients seek care from providers with an incentive to coordinate care and control costs. Medicare's ACO initiative, launched under the Affordable Care Act, has been criticized by providers for rules that prohibit ACOs from keeping patients in network or using financial incentives to steer them to network providers.

But narrow networks still have a limited presence outside of the Obamacare insurance exchanges and certain markets such as California. The consumer backlash could increase if these plans expand their reach, said Jon Gabel, a senior fellow who studies insurance markets with the National Opinion Research Center at the University of Chicago. “If it spills over into employer-based health insurance I think we'll see much more politically potent backlash,” he said.

A Kaiser Health Tracking Poll in February found that 51% of Americans surveyed would rather have a plan that costs more money but allows them to see a broader range of doctors and hospitals, while 37% prefer a plan that is less expensive but allows them to visit a more limited range of providers. Still, the survey found that people who are either uninsured or currently purchase their own coverage are more likely to prefer less costly narrow network plans over more expensive plans with broader networks, by a 54% to 35% margin.

So far, public and provider acceptance of narrow networks has been mixed. Federal and state regulators have proposed rules, strongly opposed by insurers, that would limit which providers can be excluded by narrow networks. Narrow networks sold in exchanges would be required to include 30% of community safety net and essential providers under a federal rule proposed in February.

But narrow networks have won consumers in some markets. Kaiser Permanente and Health Net, which primarily offer HMO and other narrow-network plans, have signed up tens of thousands of new Obamacare enrollees in California so far.

Employers also are signing their workers up for narrow network plans. Intel reached a deal with Albuquerque-based Presbyterian Healthcare Services last year to provide care for more than 5,000 employees and dependents at a New Mexico manufacturing plant.

Narrow network accountable care plans sold to employers by Banner Health since 2012 have been the Phoenix-based system's fastest growing private plans, said Lisa Stevens Anderson, chief operating officer of Banner Health Network, the system's ACO. Banner Health also sells the narrow network ACOs in Arizona's insurance exchange, though it's too early to say how consumers have responded, said Chuck Lehn, the ACOs chief executive officer.

A narrow network of doctors who work closely with Banner Health, which operates 24 hospitals across six states, allows the ACO to better manage quality and cost of care, Anderson said. But the system has also worked to ensure access and availability that are attractive to customers. “Employers have been sensitive to narrowing of choice,” she said. “We don't want a smaller network associated with reduced service or access to healthcare.”

Success so far has helped to moderate premium increases, Lehn said. “Affordability was paramount,” he said, as Banner Health executives drafted plans for the ACOs. “We went and knocked on the door of pretty much every insurer and said we need to do something different. [We asked] 'Can we keep people insured and give them something affordable?'”

Coverage benefits highlighted

As the nation enters the final weeks of open enrollment under the Affordable Care Act, new research underscores the financial benefits of health coverage for U.S. households. Researchers Silvia Helena Barcellos and Mireille Jacobson compared financial distress from medical bills and out-of-pocket costs for those slightly too young for Medicare and those who recently turned 65 and entered the Medicare program. “At age 65, out-of-pocket expenditures drop by 33% at the mean and 53% among the top 5% of spenders,” the researchers wrote in a National Bureau of Economic Research working paper. “The fraction of the population with out-of-pocket medical expenditures above income drops by more than half. Medical-related financial strain, such as problems paying bills, is dramatically reduced,” they said.

Insurance and employment

Meanwhile, researchers looking at Oregon's expansion of Medicaid found no change in employment or earnings among those who entered the Medicaid program. Researchers Katherine Baicker, Amy Finkelstein, Jae Song and Sarah Taubman said the results did not support the competing arguments that, under Obamacare, the newly insured would work and earn more or that they would work less to stay within the Medicaid income eligibility limits. The study found Medicaid did not impact employment, earnings or whether someone lived in poverty or not.

Follow Melanie Evans on Twitter: @MHmevans


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