Does that network make my wallet look skinny…

One of the pleasant surprises of the Obamacare exchange roll-out has been reported premiums are coming in significantly below CBO projections.  That means two things.  The first is that more people will be able to afford coverage as the sticker price is lower, and the subsidy should drop out of pocket coverage costs even more.  The second is that the subsidy cost is lower which means the total cost of the program should be lower than anticipated. 

Hoocoodanode that markets actually work reasonably well when information asymetries are smoothed out, search costs are lowered, and there is a common framework of understanding? 

Shocking.  We’ll go below the fold to look at a major driver of lower than expected premiums. 

Premium projections are coming in low for two reasons.  The first is that a significant number of new entries and pre-exisiting players are able to price some of their product provider networks at either Medicaid plus a kicker or Medicare plus a kicker instead of standard commercial rates.  Medicaid rates are effectively marginal cost rates while Medicare rates are effectively average cost rates for physical health.  Commercial rates are whatever the market bears. 

This is the immediate and proximate cause.

The root cause is that quite a few insurers are offering “narrow” networks.  Narrow networks offer only a percentage of the total providers an insurer has contracted with to members in a particular plan.  California has seen some high cost and high prestige providers excluded from all Exchange products becuase the Exchange products are trying to compete on cost.

some premier provider networks also are absent from the exchange — although that decision may have been out of their hands.

Cedars-Sinai wasn’t included in any exchange plans, and UCLA Medical Center’s network also was mostly excluded, Terhune also reports.

The rationale for leaving the providers off many payers’ lists: They cost too much. Cedars-Sinai is among the most expensive hospitals in the nation, based on the list price of its procedures, and UCLA Medical Center’s charges also rank above average.

Going narrow or going skinny (I’ve heard both terms) is a signficant cost saver as the New York Times reported yesterday:

In New Hampshire, Anthem Blue Cross and Blue Shield, a unit of WellPoint, one of the nation’s largest insurers, has touched off a furor by excluding 10 of the state’s 26 hospitals from the health plans that it will sell through the insurance exchange.

Christopher R. Dugan, a spokesman for Anthem, said that premiums for this “select provider network” were about 25 percent lower than they would have been for a product using a broad network of doctors and hospitals.

Narrow networks for Exchanges are a significant cultural shift for insurance carriers that had previusly been focused on the commercial employer group market.  There, the network imperative has been to build as broad of a network as possible.  The logic behind this drive is that cost is a component of the buy/no buy decision for an employer group.  A bid has to be within the ballpark of the other bids to be considered.  However cost is not the only driver of the buy/no buy decision.  A group whose CEO has a particular cardiologist and chiropracter that she likes to go to is far more likely to go for a plan that  includes those two providers than a plan that is 1.7% cheaper but does not include those providers.  A group whose employees are concentrated within 10 minutes of a community hospital is far more likely to choose a plan that gives in-network access to that hospital rather than a slightly cheaper plan that does not contract with that hospital.  This drive for expansive networks is expensive as commercial carriers don’t want to say no to a provider.  They can pass on the costs of any high cost provider that was key in winning a major contract across several thousand groups. 

This does not work on the Exchange.  The primary modeling assumption has been the Exchanges are offering basically identical products within a metal band and consumers are highly price sensitive because they don’t have a ton of money to begin with, those consumers will be looking for cost as a primary buy/no buy decision point.  Networks will be adequate or better, but they will be narrower to drive down costs. 

54 replies
  1. 1
    Dan says:

    These posts are really informative and I’m so glad you’re doing them. Keep up the good work!

  2. 2
    WereBear says:

    What we have had before is the “price is no object” kind of thinking… which is fine, unless you can’t afford that kind of fee structure.

    And this led to expensive open heart surgery when lifestyle changes and a few supplements work even better.

    But who makes money from lifestyle and vitamins? Not the medical industrial complex.

  3. 3
    IowaOldLady says:

    This feels like a dumb question, but must individuals buy their insurance through an exchange? Someone with lots of money could buy through an insurance agent instead, right?

  4. 4
    Gypsy Howell says:

    Thanks for this insight. I hadn’t really thought to scrutinize who will be in-network when I shop for a new plan A WEEK FROM TODAY (yay Obamacare!) and I do have a strong preference for which hospital I’d use if I need it. These posts have been so informative. Thanks Richard! (And John for having you post here. )

  5. 5
    Gypsy Howell says:

    @IowaOldLady:
    Yes, you can. And in fact I’ve already started receiving solicitations from insurers (I think it was Aetna yesterday) to “lock in great rates now!” No thanks Aetna, I’ll just wait a week and see what I can get on the Exchange.

    Did I mention “Yay Obamacare?”

  6. 6
    aimai says:

    @IowaOldLady: I think that (though someone can correct me) the private insurance agent will also only be able to offer you “the exchange” if you aren’t willing to spend money to go totally private.

  7. 7
    Boudica says:

    My cost appears to be going up. I get my insurance through my employer. They pay my premium. This coming year, I guess there’s a tax on insurers? About 4% of the premium. Which they’re passing along to the employer…which is being passed on to the employed. So, my employer is still picking up the tab for the premium, but I’m going to be paying about $16 a month for the tax.
    I’m willing to do so because I believe in healthcare for all. I just think it stinks that the tax is getting passed on TWICE to fall on the employees. And by the way, we haven’t had raises in 5 years, so it’s really a pay cut.

  8. 8
    aimai says:

    I’m really pro-Obamacare. We’ve had it in MA for years and its always made me feel a bit safer to know that even if we lost our job related health care we could buy insurance somehow. However, that being said, in most states are the in network and out of network hospitals going to be that different? And isn’t there also a problem at the delivery end when it turns out that some practices get called in to consult on your care–say, your open heart surgery–but that those practices aren’t covered even though your hospital may be? Or does the “metal band” approach simplify things so much that you won’t be staring at a bill that is filled with people who are “out of network” suddenly?

  9. 9
    aimai says:

    @Boudica:

    Our health care costs have always gone up, through our employer, and they have chopped and changed providers and mangled deductibles for years. Costs in private health care have zero to do with Obamacare specifically, in a real sense, and everything to do with the fact that employers don’t want to be providing this and will use any method to pass costs along to employees. Obamacare might never have passed and you would still be hit with cost increases, is what I’m trying to say.

  10. 10
    Randy P says:

    But has it stopped anybody from saying “Obamacare is a really bad law and we need to repeal it ASAP?” Even those people benefitting from the exchanges?

  11. 11
    Chyron HR says:

    One of the pleasant surprises of the Obamacare exchange roll-out has been reported premiums are coming in significantly below CBO projections.

    See?! The GOP TOLD us the CBO projections were wrong! REPEAL AND REPLACE!

  12. 12
    Craig Pennington says:

    Why are they compteing solely on price? I know that a self-employed person buying coverage on the exchanges would likely pay a bit more for a plan whose network included the provider of their choice.

    Additionally, expect the “ZOMG! You wont be able to keep your doctor!” choir to get a little louder because of this.

  13. 13
    Craig Pennington says:

    @Boudica: Remember, employer insurance costs were going up before the socialist* obamacare was a gleam in the marxist muslim usurper’s eyes.

    *I wish.

  14. 14
    Richard Mayhew says:

    @IowaOldLady: Correct, if you are currently insured through individual insurance, you can either go on the Exchange or continue with what you are doing. My bet is the market for off-Exchange individual insurance will dry up in the next couple of years as the admin costs won’t be supported by a shrinking market base..

  15. 15
    Xboxershorts says:

    How does this affect the legally mandated COBRA services? I recently transitioned from contract employee to perm/full time and because I had the bare bones health care plan through the contract house their insurance carrier was mandated by law to offer a COBRA plan. Of course, COBRA plans are notoriously expensive. Will COBRA plans that are mandated by law become a thing of the past?

    COBRA!!!!! just because!

  16. 16
    Richard Mayhew says:

    @aimai: It will really depend on who your carrier is and how narrow the network. If your network is East PoDunk Community Hospital and friends, then if you go to Big City Medical Center, you’ll be screwed with Out of Network charges.

    My company is offering three network flavors, 99% of commercial network (we have a few Paultards who opted out), 90% of commercial network (Paultards and a few high cost providers) and 40% of commercial network (cheap but good access to Big City Medical Center)

  17. 17
    bd of mn says:

    Is there any expectations that this “narrowing” will cause the more expensive providers to follow the market downwards so they can compete in, say, 2015? Seems to be win/win if they do, and that’s when the rethugs will be for it after they were against it…

    I wonder if the current “defund” mania is because they figure it’s essentially their last stand….

  18. 18
    Richard Mayhew says:

    @Xboxershorts: Daily Kos is running a good series on COBRA and Exchanges. COBRA will still be available past Jan. 1 without significant changes (full premium cost plus 2% admin fee). Definately after Jan.1 a lay-off is a qualifying event that allows someone to go onto Exchange after the open enrollment period.

    I think during the initial open enrollment period individuals on COBRA can go on Exchange but I am not sure.

  19. 19
    Richard Mayhew says:

    @bd of mn: Yup, that is part of the strategy — demonstrate that there are a lot of paying customers who could be going into the door of Provider X if Provider X dropped their price by 12%.

  20. 20
    Xboxershorts says:

    @Richard Mayhew:

    Thanks for the link, that’s a good article….bookmarked it!

  21. 21
    Richard Mayhew says:

    @Craig Pennington: Benefits are roughly similar, co-pays and co-insurance and deductibles are roughly similar. The big differences between plans on Exchange are networks, price and user experience/customer service. There will be Exchange products that offer full commercial networks, so in your scenario, the self-employed individual on Exchange can get a full network policy but the subsidy will only cover a smaller proportion of premiums.

    The assumption that price sensitivity is a driving selling point comes out of Massachusetts and their experience with their Exchange.

  22. 22
    hoodie says:

    @Richard Mayhew: Isn’t it likely this may eventually work against the network narrowing you describe? Seems like the biggest games in town are going to be the exchanges and corporate plans. If the exchange carriers are going narrow, will employers paying through the nose for private market health insurance with wider networks look at the exchanges and wonder why they’re paying so much for the privilege of letting their employees go to high end providers that offer little or no demonstrable benefit for the vast majority of their enrollees? I know we’d look at it, especially if it looks like the exchanges are providing adequate care.

  23. 23
    IowaOldLady says:

    @Craig Pennington: From what Richard says at 14 above, those folks complaining about having to switch doctors can just keep their current insurance if they’re so happy with it.

  24. 24
    Richard Mayhew says:

    @hoodie: This was the direction things were heading in the group market as it was — narrow networks and managed care was coming back into vogue in 2008/2009 for the group/employer commercial network. Exchange is just accelerating that, and it will be offering an existance claim that good care is available and a whole lot cheaper if the most expensive 5% to 10% of the providers who don’t provide amazing value aren’t in network.

    The big test will be 2017 when SHOP (the business group side of Exchange) opens up to large employer groups.

  25. 25
    Donut says:

    @Richard Mayhew:

    I have an interesting situation, I think. I work for a small but successful professional devices firm. 12 employees including the owner. I work from home in Chicago. The company office is on Long Island. The boss does not provide a group plan. He instead pays us
    All an “extra” wage over our market value that, in my case, picks up about 99% of what it costs me to buy basic coverage (80/20 with a 5k deductible) for our family
    – my wife and I, plus two kids. We buy coverage through BlueCross BlueShield of Illinois.

    BC/BS has been sending me truckloads of emails that seem to amount to the stance of Kevin Bacon’s character at the end of “Animal House” and which do not acknowledge the ACA in name. They just say “big changes are coming October 1st!!!!”

    The IL Dept of Insurance as also refused to give out detailed info on rates. Last I checked they were gonna sit on everything until the Exchange is up and running on 10/1.

    So right now, we know only that we are lucky enough in terms of our income to not qualify for the subsidy. Everything else remains to be seen. I’m hoping to see at least a double digit drop in our premium, but even though I myself am an insurance broker (only property/casualty – I don’t do any life/health/accident), I have no friggin idea if that hope is realistic or pipe dreaming. We are also lucky enough to be relatively healthy, and don’t use our insurance for much. We have, knock on wood, never hit the deductible since buying this policy a few years ago.

    That said, when we first bought it, we had a hell of a time. My wife had a cancer scare a few years back and I was also way overweight at the time. She is since all clear, preexisting conditions be damned now, and I’ve gotten my health back on track.

    So enough babbling – the point is, I wanna see what the exchanges do for middle class families like mine. I support the ACA regardless, if only we had a single payer systems I’d be happier. Our premium went up $5/month last year, so we already saw a slowing of rate increase.

  26. 26
    Craig Pennington says:

    @Richard Mayhew: “There will be Exchange products that offer full commercial networks,”

    Nice. I am glad that I misread that part.

    I do wish that the exchanges were available to those with employer-based coverage. I have an HSA-based plan and man is it lousy. I would happily pay more for better coverage (I pay a lot in this plan anyway, but I also have to fight the insurance company to get them to pay anything for some of my preferred providers or medications.

    One of the things that deeply disappointed me abt the ACA is that it did not have an individual track out of the employer-based health insurance.

    BTW, thank you very much for you work on this blog. Excellent stuff.

  27. 27
    Patrick says:

    Does anybody know what happens if one moves from one state to another state during the year? For example, let’s say I live in CA and I sign up for insurance from their exchange by 12/31/13. Then I move to NY in May 2014. I assume my CA insurance would cease when I move from the state. But can you sign up for a new insurance in the middle of the year in a new state? I heard 3/31/14 was some kind of deadline.

  28. 28
    WereBear says:

    @Richard Mayhew: One of the thrilling things for me, on the geek side, is that whole “let’s do what works” in terms of healthcare.

    Any treatment modalities that are going to change with that mindset?

  29. 29
    Belafon says:

    OT, but this cracks me up. The ad on the right, featuring a woman in a short, strapless dress says: “Why would some conservatives want this video banned? Conservative men have a right to see this!”

  30. 30
    Belafon says:

    @Boudica: How much did your premiums go up the previous years? Mine have gone up every year since I started working professionally, easily close to 10% (welcome to Texas).

  31. 31
    Belafon says:

    @Craig Pennington: Which doctor?

  32. 32
    Violet says:

    Thanks for your really informative posts.

  33. 33
    sparrow says:

    @Craig Pennington: I assume that is because you would have that “adverse selection” thing again? Where everyone jumping ship into the exchanges were mostly higher-cost people… just a guess.

  34. 34
    MomSense says:

    I’ve been in the self-insured or individual market for years and it is truly awful. Because we are not part of a large group, the premiums increase much faster than for the people who are part of groups. We used to be able to control the premium increases, at least somewhat, because we had an insurance regulator who held hearings and made determinations about rate increases. For instance, Anthem said they were raising rates by 10% but that was an average. The individual market rate hike proposal was for 32% and the 10% was an average. We also only had one choice in Maine. Anthem had about 90-93% of the market share. So our Republican Governor and legislature were elected in 2010 and decided it was pro-business to get rid of all the regulations including the insurance regulator and let people buy insurance across state lines, etc. Well what happened was that there was no defense against the huge premium increases, no recourse for problems, and some really shady insurance companies started selling plans, collecting premiums, and stiffing the providers. So when rates go up–guess what they blame. ObamaCare!! The Democratic controlled legislature that was elected in 2012 has tried to mitigate the damage but it really is a mess.

    Now we have a situation where northern Maine has higher insurance rates (much poorer part of the state) than southern Maine. Our governor has decided not to set up a state exchange (even though we accepted federal dollars intended for that purpose and don’t hold your breath waiting for journalists to cover this) and decided not to expand Medicaid (MaineCare) even though it will bring in a lot of money and save some of our rural hospitals and lives!

    There is also the issue of Dirigo which is a complicated issue but demonstrated exactly why we needed a federal approach to health insurance.

  35. 35
    Punchy says:

    None of this argy bargy matters because ObambiCare will be effectively defunded after Ted “Dont Call me Tom” Cruz plays some Senate Jujitsu-mojo-tomfoolery on Reid’s ass and gets the House bill filibustered-passed-signed by doing his best Bill Murray circa 1996 impersonation by merely being alive.

  36. 36
    Richard Mayhew says:

    @Patrick: Moving between states is a qualifying event. You’ll be able to hit the Exchange in State #2 for a new part-year policy.

  37. 37
    Botsplainer says:

    @Belafon:

    Clickbait. I damn near went for it, but knew in my heart that it is a tease.

  38. 38
  39. 39
    Sister Rail Gun of Warm Humanitarianism says:

    @Craig Pennington: My guess is that it would destroy any leverage the employers have in their negotiations with the insurers.

    I also suspect that when the business exchanges get going, they will encourage businesses to offer multiple plans to their employees.

    I’m looking at my insurance options right now. (October has always been open enrollment month for us.) The new plans have some interesting features. I’m going to have to ponder the pros and cons of each for a while.

  40. 40
    liberal says:

    @WereBear:
    Just to emphasize a point which I think you’re making, it’s the entire medical sector, including doctors. They don’t make money when they don’t treat, not to mention that when you’re a hammer, everything looks like a nail.

  41. 41
    aimai says:

    @Richard Mayhew: My husband’s employer hates being involved in the handling of the health insurance side of things. They have to offer it because of the nature of their workforce which could get this perk somewhere else. But the headaches administering it or even acting as a passthrough must be incredible. If there were some way they could still “offer” it to their workers but simply go through the exchanges they would be thrilled.

  42. 42
    drkrick says:

    @bd of mn:

    I wonder if the current “defund” mania is because they figure it’s essentially their last stand….

    Bingo. This was the point of Bill Kristol’s famous strategy memo about Hilarycare back in ’94 which was a rare example of him being correct about something. His basic point was that if you (the GOP) let this pass, it will work and will join Social Security as both proof that the government can do stuff that helps people and an achievement the Dems can point to and run on for years.

    As Ezra Klein pointed out over the weekend, if they really thought this was going to be a trainwreck, they’d stand back, let it happen and point and laugh in every campaign between now and 2040.

  43. 43
    Richard Mayhew says:

    @aimai: I’m too bogged down in implementation details right now, but that is the plan in either 2016 or 2017 for all employers, and it is the reality starting next week for tiny employers.

  44. 44
    Sister Rail Gun of Warm Humanitarianism says:

    @Richard Mayhew: Define ‘tiny’?

  45. 45
  46. 46

    In New Hampshire, Anthem Blue Cross and Blue Shield, a unit of WellPoint, one of the nation’s largest insurers, has touched off a furor by excluding 10 of the state’s 26 hospitals from the health plans that it will sell through the insurance exchange.

    This piece is particularly important because it illustrates a dynamic that everyone swore would never happen – that the insurers would not be able to assist in driving down costs because they had limited ability to do so before. Well, with the exchanges as a new constraint on the insurers ability to operate, they now have a lever that they previously did not. The hospitals may not be happy with this development, but the source of it is clear and inarguable – here’s a menu of prices that simply will not fit in the exchange because doing so would cause the exchange to exclude the plan altogether. The hospitals now have a choice – either lower their prices or be excluded from that population. And because the marginal cost for adding patients is low, when your customer base shrinks it’s particularly painful. I predict that at least half of those excluded hospitals gets their costs in line to get back in on the exchange next year.

    I’m not sure how Congress could have done this directly. Having the government dictate prices was never going to fly and supply side solutions always fail. Instead they put their energy on the demand side, which meant partnering with the insurers, which is starting to work. Its slow and difficult, but it is working.

  47. 47

    @Richard Mayhew: It’s 2017, and states must opt-in to that. That was a compromise to get guys like Lieberman on board who was protecting his state’s private insurers.

  48. 48

    @aimai: It’s interesting to note that private exchanges have been expanding to fill that gap. These aren’t part of ACA but they mimic it in many ways. I can’t tell if it’s an effort to head off the exchanges being offered to employers in 2017, or if they’re just filling a perceived gap riding on ACAs coattails.

    There’s a lot of benefits of this trend – it will make it a lot easier for small-medium businesses to jump on board. The downside is that these are just another example of a shift from defined benefit to defined contribution. That’s a bit more tolerable in the case of ACA where the government is going to define a reasonable set of minimums on the benefits, so workers can’t get screwed too badly, but these private exchanges are relying on market forces to set those minimums and that usually doesn’t work great. Put another way – what would cause the private exchanges to be cost competitive with the public ones, other than having the ability to escape the protections of the public exchanges?

  49. 49
    fuckwit says:

    Ooh that’s really good! And also, employers who are NATIONWIDE or scattered across a wide geographic area are HIGHLY motivated to choose expensive plans with a huge number of in-plan doctors and hospitals. Because otherwise you have the guys from the sales office in East Buttfuck, Iowa– or even New York City if the corporate office in California picked a network that has great coverage on the west coast and almost nothing on the east coast– complaining that his family can’t get medical help because there are no in-network doctors or hospitals anywhere near. I vividly remember those almost mutiny-level complaints at sales meetings. Insurance is useless if you can”t use it, and you can’t use it if you have no local doctors in network.

    So our company chose a much more expensive plan just so there would be network coverage for people in our non-California sales offices. This is something that employer-based insurance is biased towards in a big way! And doesn’t need to be a factor if you’re picking a plan individually for yourself and your family.

  50. 50
    Peej says:

    I get good insurance through my job so I haven’t really looked at the exchanges. The premiums for the coverage I chose went way up this year, but there was no blaming Obamacare. Instead they told the truth…the premiums went up because of high usage…and since I m one of the ones to blame, I can’t complain. This is what happens when you work for a company with fewer than 200 employees.

  51. 51
    Stella B says:

    @WereBear: Something tells me that you have never tried to talk someone into stopping cigarettes, losing weight or going for a walk once a day. Now try doing that all day, every day. It’s pretty easy to sell people on taking “vitamins”, so it’s too bad they don’t help.

  52. 52
    Stella B says:

    Deleted double post.

  53. 53
    JustRuss says:

    Associated Press has started a running series on how the ACA affects different people. I’ve only seen the first two profiles, and surprise, they’re going to end up paying more. The first family they profiled ran their own business and netted around 150 grand a year. Hopefully they’ll work their way down the food chain, but I’m not sure I’d bet on it.

  54. 54
    JaneE says:

    @IowaOldLady: You can buy insurance from any agent, but if you qualify for a subsidy, you will only get it if you buy through the exchange. If you don’t need or want the subsidy, buy from whatever source you want. I think there are minimum coverage requirements to avoid the tax penalties, but I expect any decent policy would be good enough. You can be exempt from penalty for no coverage if your (lowest?) policy cost is more than a certain percentage of your income. I think the people in this category were supposed to be covered by the medicaid expansion that not all states are doing.

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