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.