Why we need insurance networks

1/31/2016 12:43:00 PM

Here's one of the questions I often encounter when discussing health insurance markets and single payer: Why do we need insurance networks?

It's an understandable frustration. You get sick, find a doctor you like and BAM! your insurer says it's out of network and won't pay. Narrow network plans can be particularly problematic for a variety of reasons. I've seen plenty of cases where children with rare diseases were unable to get coverage for their doctor because the only specialist in the region that handles their condition is, of course, out of network. And there's a never-ending parade of stories in the media where individuals went to an in-network hospital with an in-network doctor only to find an out-of-network bill from an un-requested "drive-by doctor" while they were unconscious under anesthesia. Wouldn't it be nice if insurers just paid all health providers like in-network providers?

Unfortunately, that just doesn't work.

To understand why, it helps to be specific about the policy we are considering. To abolish out-of-network charges, we'd need a regulation that prohibits insurers from refusing to pay for out-of-network care. Now imagine that you are a healthcare provider in this environment. Insurers are obligated to pay your bills regardless of whether they've negotiated any prices with you. What stops you from raising your prices? Patients don't pay the prices, so they have no incentive not to continue to come to you for care, and insurers legally can't prevent their enrollees from coming to you for care, because of the new regulation. As a result, the new higher price has zero impact on demand for your service. Why not raise prices further? Why not charge infinity. Legally, insurers are obligated to pay you infinity.

Ok, actually healthcare providers wouldn't charge infinity because insured patients do still have to pay a portion of their prices. For a typical private insurance plan, patients pay 10 to 15 percent of total costs, though after the deductible the share is typically smaller than that. Of course, the same single-payer advocates who want to abolish insurance networks also want to abolish co-pays, co-insurance, and deductibles. But even if we keep them, with patients on the hook for only 10 percent of providers' price hikes, providers would be able to hike prices quite substantially before they'd start losing enough patients to harm profits. This in turn means insurers would have to hike premiums quite substantially, and most people would no longer be able to afford any insurance.

Insurance networks are the end result of negotiations between insurers and healthcare providers on your behalf. Insurers insulate you from the full price of healthcare; in exchange, they ask you to only use healthcare providers who have agreed to charge them reasonable prices. In the absence of this bargaining step, providers would have little incentive to charge reasonable prices, and the insurance plan would collapse.

Medicare-for-all, or single-payer, does not solve this problem. In the US, Medicare and Medicaid do have de facto insurance networks, even though they work slightly differently. Instead of the one-on-one negotiations with providers, Medicare instead promulgates a list of maximum prices it will pay for things, and the network forms around these rates as individual health providers decide whether or not to accept Medicare patients. It is then up to Medicare patients to make sure they see only Medicare-accepting doctors. And medicaid is way more complicated than that, since most states run tons of different medicaid plans that each pay different rates for different kinds of care—I often see cases where kids have to be dropped from one medicaid plan and moved to another medicaid plan as their medical condition changes overnight in the hospital.

I definitely think the way we regulate insurance networks could be vastly improved, and the financial liability for non-consensual out-of-network care should never fall on patients (as in case where out-of-network doctor drops in while patient is unconscious). But still, unless we commit to a system where the government directly dictates the prices providers are allowed to charge—with all of the waiting lines and misallocation of resources that government price-setting typically causes—insurance networks will remain a necessary part of the health insurance system.

Anonymous 1/31/2016 01:21:00 PM
What a sad excuse for not providing healthcare - the whine of "it's complicated and you won't understand; it'd be hard." P
Prices are different between payers because the providers have to figure out how to cover their cost across all their patients, an unknowable annual mix of treatment needs, and what can be negotiated wih the payor. All of which amounts to cost shifting on a system-wide level. Perpetuating multiple insurance networks only preserves the profit intrests of the insurance companies.
Max 2/08/2016 06:15:00 PM
If insurance networks have a real purpose (as opposed to just being a way to screw people, or avoid being screwed), it's to sort medical care by quality. So the doctors that got As in school go into one network, the doctors that got Bs go into another network...and if you have the money you buy insurance that gets you the A doctors.

Not sure that's really how it works, though!