Feds shouldn't mandate wider networks

The latest federal healthcare foray involves control of provider network size. While horror stories abound about patients being cut off from long-standing clinician relationships because they had to switch to an exchange plan, indiscriminately mandating wider networks will not solve the problem.

First, some background about this sector. Four conditions are necessary for a viable insurance market: financial risk must be measurable; losses must not occur too frequently or too rarely; losses must occur randomly (out of the individual's control); and large numbers of people must be available to pay premiums. Health plans traditionally compete on four features: benefits, premiums, out-of-pocket expenses and size of provider network. At one extreme are fee-for-service plans with high premiums and completely open networks, and at the other, HMOs with lower premiums and out-of-pocket expenses, but a much more restricted network.

The Patient Patient Protection and Affordable Care Act has distorted the market in four ways: the demographic mix of enrollees is not as predicted (e.g., fewer younger people have signed up), making expense measurement less accurate; delayed enforcement or lack of a substantial penalty for non-enrollment has taken away the randomness of the population that signs up; incentives encourage sicker people to join more often than healthier ones; and the removal of pre-existing conditions as a reason for coverage denial allows sicker people to enroll. These changes are not bad (particularly the last one), but they do alter market characteristics.

Given these alterations, insurance companies need a revised portfolio of actions to maintain a sustainable marketplace. However, the ACA has taken away this flexibility in several ways. Benefits are mandated; premiums are closely scrutinized, if not outright regulated; and out-of-pocket expenses are also controlled.

The only tool that remains to address these distortions is limiting networks. This limitation helps hold down costs by allowing companies to negotiate more favorable rates and control the volume of waste built into fee-for-service incentives. Another benefit of driving volume to select providers is enhanced quality.

Since the federal government created these marketplace conditions, it should ensure that an adequate provider network exists with respect to quality and coverage of mandated benefits. But networks that include a needless variety and number of providers will, at worst, destroy the private insurance market, and at best, make insurance even more costly for those who need it the most.