May 29, 2014 7 Comments
There has been a lot of coverage in the news over the last few months about the “narrow networks” of most health insurance plans available in the Marketplaces (AKA Exchanges) [see here, here, and here]. Most plans sold in the Marketplaces will only pay for your care if you use a provider who is a member of the plan’s network. Plans form networks by negotiating with various providers. If a provider is willing to accept a price that the plan offers, the provider is included in the network. If not, the provider is excluded. The carrot of being in a plan’s network (and getting the influx of patients enrolled in the plan) and the stick of being excluded from the network (and losing any patients enrolled in the plan) are how plans bargain down physician and hospital prices and save us all money.
It turns out that in many locations, most Marketplace plans exclude a large portion of doctors and hospitals from their networks. Some have decried this as evil insurers taking advantage of consumers and pocketing all of the extra profits they make by limiting consumer choice. Others have applauded this result, suggesting that insurers are finally competing on price and providing consumers with the low-cost health insurance they want.
I tend to fall in the latter camp, but I think there is an additional issue to consider: the salience of information provided to consumers. In the Marketplaces, plans are differentiated mostly by three factors: Price, cost-sharing, and network. Anyone who has visited one of the state Marketplace websites knows that both price and cost-sharing information are very salient. However, information about a plan’s network is much murkier. Sure, anyone can follow a series of links to an insurer’s (often unclear) website and type in the name of specific providers to determine whether they belong to the insurer’s network. But, for most consumers, especially those with limited experience interacting with specific providers, a list of every doctor in the insurer’s network obviously does not provide a clear picture of the quality of the network.
In economics, this lack of information about network quality is referred to as an information asymmetry. Information is asymmetric because insurers know more about the quality of their network than consumers. In a famous paper that won him the Nobel Prize in Economics, George Akerlof showed that asymmetric information can produce market failures. In his paper, he used the example of used cars. The argument goes something like this: Suppose 50% of used cars are “lemons” and worth $100 and 50% of used cars are good and worth $1000. If consumers don’t know which used cars are good and which are lemons, they’ll only be willing to pay the average value of a lemon and a used car, $550. If that’s the case, then individuals selling good cars won’t be willing to sell because the value of the good car ($1000) is higher than the price the consumers are willing to pay ($550). Because of this, in the market only lemons are sold.
Now, what do lemons have to do with health insurance plan networks? Well, instead of lemons and good cars, in insurance markets we have wide and narrow networks. If consumers can’t tell the difference between the two when they purchase, they’ll only be willing to pay the average value of a wide and a narrow network. Because wide networks are worth more than this average price that consumers are willing to pay, insurers don’t sell wide networks. In the end, only narrow networks are offered. This is a classic market failure due to asymmetric information a la Akerlof, and it seems like a definite possibility that the Marketplaces are suffering from it (though other forms of asymmetric information like adverse selection are likely to be a factor as well, an issue for a future post).
So, if we have competitive insurance markets, are we just doomed to only be able to choose from narrow, lemon networks? Fortunately, there are solutions to such market failures. The most obvious one is to provide consumers with more information about plan networks. But how can we provide them with more information than a list of every doctor included in the network? This is where the issue of salience comes in. In order to fix this market failure, consumers need more salient information about network size and quality that they can see and easily understand and compare across plans.
How can we provide consumers with such simple and salient information? Well, one way is to copy the method used to provide information about plan cost-sharing in the Marketplaces. In the Marketplaces, plans are divided into one of four cost-sharing metal tiers: Bronze, Silver, Gold, and Platinum, with cost-sharing increasing with the value of the precious metal. Why not provide “network quality tiers” as well? All plans could be categorized as Bronze-Wide, or Platinum-Narrow, or Silver-Medium. Or we could use more flashy names like Awesome, Mediocre, and Lame to describe plan network quality.
Of course, any plan to provide consumers with information on network quality would require us to come up with good ways of measuring network quality. But that sounds like a topic for future research, and good job security for me and other health economists…