Writhing out of narrow networks in a medical seller's market

In a recent post, I voiced some unease about the "narrow networks" offered by a majority of plans on the ACA exchanges. According to a McKinsey study cited by the WSJ, 70% of silver plans are "ultranarrow" (offering access to five or fewer hospitals) or "narrow" (offering access to thirteen or fewer hospitals). Doctor rosters are similarly trimmed.  These networks reflect insurers' relative lack of pricing power versus providers.  As Ezra Klein highlights in a column spotlighting the missing link in U.S. healthcare reform, "It’s health-care providers -- not insurers -- who have too much power in the U.S. system."  That's because the U.S. is the only wealthy country in which government does not effectively set prices.

Insurers are thus retailing overly expensive care.  You can't blame them for trying to cut out the most expensive providers in our most-expensive-in-the-world market.  In that prior post, I highlighted one alternative that many employer-sponsored (or funded) plans provide:

...as a once and future patient, I am not personally prepared to accept narrow networks with no escape hatch. I know this, because I just recently decided to pay for such an escape hatch. I think it's a fair deal, and everyone should have access to a version of it.

My wife works for a hospital in a multi-hospital system with a self-funded health plan. For fifteen years, we paid a very moderate premium for in-network-only coverage. This year, we're paying extra for access to out-of-network coverage. After a deductible -- I think $1k or $2k each -- the plan purports to pay 70% of out-of-network costs. I know that's not true -- they pay 70% of the"allowable amount" for any given visit or procedure, which is likely to be 40-50% of what's actually billed. But. Our out-of-pocket costs are capped, I think at $10,000 each per year. To me, that's an acceptable cost if one of has a heart attack or gets cancer, and we determine that the best specialist or surgeon for our condition is out-of-network.  In effect, it's catastrophic out-of-network coverage.

Today, Aaron Carroll spotlights another promising alternative to rigidly narrow networks:

Reference pricing is an appealing alternative. With reference pricing, insurers set the price they’re willing to pay for a given service or procedure, typically pegging it to a price at which it can be obtained at good quality – the reference price. A policyholder can then obtain that service or procedure at zero out-of-pocket cost at any provider willing to match that price. For providers that charge more, the policyholder—not the insurer—pays the difference.

Although reference pricing for medical services isn’t common, there are encouraging signs of good performance where it has been implemented. James Robinson and Timothy Brown studied CalPERS, California’s insurance program for public employees, when it set reference prices for knee- and hip-replacement surgery. They found the reference-pricing initiative had profound effects on the market. CalPERS patients shifted their site of knee- and hip-replacement surgeries to lower-priced hospitals. High-cost providers came under a ton of pressure to lower their prices.

And that’s exactly what they did. As Robinson and Brown documented, higher-priced hospitals reduced their prices down toward the reference price. Meanwhile, no CalPERS policyholders were left without any coverage with their preferred providers. They were free to obtain knee and hip replacement surgeries at any facility they pleased. So much for doc shock.

Reference pricing illustrates a key point made by Klein: insurers -- and employers -- can be creative and effective in finding ways to deliver care efficiently.  That's why, as Klein points out, several countries have moved from single payer to delivery through private insurers, whether for-profit or nonprofit.  In all such countries, however, the government has retained much more effective control over pricing than is wielded by government in the U.S. 

Perhaps the U.S. will pioneer new effective means of cost control, e.g., by various alternatives to fee-for-service piloted in the ACA. But as long as buyers remain fragmented, we're operating at a disadvantage.