What happens when patients discover that the new insurance exchanges under the Affordable Care Act try to lower costs by restricting the number of authorized providers? Photographer: Alastair Muir/Glyndebourne via Bloomberg
What happens when patients discover that the new insurance exchanges under the Affordable Care Act try to lower costs by restricting the number of authorized providers? Photographer: Alastair Muir/Glyndebourne via Bloomberg

Prices on the insurance exchanges that will make their debut on Oct. 1 will, by broad consensus, mostly be higher than you were paying before,* but lower than some studies had projected. And why is it lower? The answer, it appears, is that state and federal regulators have been pushing insurers to hold the cost down. In some cases, insurers have simply pulled out of the market, as Aetna did when Maryland asked it to lower prices by 29 percent. In other cases, such as Kaiser Permanente in California, the companies have gone ahead offering high priced insurance that few people seem likely to buy. But it’s been clear for a while that most of the insurers who stayed on the exchanges, at least in states with aggressive pricing policies, have been keeping their costs down by restricting the number of authorized providers in the policies they offer on the exchange. The New York Times had a big piece on it this morning:

In a new study, the Health Research Institute of PricewaterhouseCoopers, the consulting company, says that “insurers passed over major medical centers” when selecting providers in California, Illinois, Indiana, Kentucky and Tennessee, among other states.

“Doing so enables health plans to offer lower premiums,” the study said. “But the use of narrow networks may also lead to higher out-of-pocket expenses, especially if a patient has a complex medical problem that’s being treated at a hospital that has been excluded from their health plan.”

In California, the statewide Blue Shield plan has developed a network specifically for consumers shopping in the insurance exchange.

Juan Carlos Davila, an executive vice president of Blue Shield of California, said the network for its exchange plans had 30,000 doctors, or 53 percent of the 57,000 doctors in its broadest commercial network, and 235 hospitals, or 78 percent of the 302 hospitals in its broadest network.

Mr. Davila said the new network did not include the five medical centers of the University of California or the Cedars-Sinai Medical Center near Beverly Hills.

Restricting the networks, providers say, allows for lower premiums -- one New Hampshire insurance executive estimated that by including only 60 percent of the state’s hospitals, his company was able to lower premiums by 25 percent.

The patient activist groups are already gearing up for a fight over this and other potential sources of out-of-pocket costs for their very sick membership. Kevin Drum of Mother Jones expects this to be “a bit of a festering sore.”

But why should it be? After all, they’re getting access to doctors -- just not every single doctor they might consider seeing. Restricted networks are a problem only if the doctors and hospitals in them are not as good as the ones that have been left out, or if they are too few in number to serve the number of patients in the network, so that while people nominally have comprehensive health insurance, what they actually have is something that will pay their bills at the emergency room.

To understand whether this is the case, we need to know the answer to a related question: Why does this save the insurers money? You can think of a number of reasons:

1. They’ve booted the high-cost providers out of their networks. If you agree with Joseph Doyle’s research showing that more intensive treatment produces better results, then you will worry that this means people on the exchanges will get worse health care. If you think that a lot of the extra spending by higher cost providers is wasted or goes into their own pockets, then this probably won’t worry you much.

2. They’re using pricing to direct traffic to providers with spare capacity. Most providers have high fixed costs, but it doesn’t cost them that much to care for one additional patient. If you set your prices below the average cost, but above the cost of adding that one patient, then providers who are at or near capacity will turn you down, while providers with a lot of excess capacity will say yes. They’re just directing their patients to the unused capacity, thereby making the whole system more efficient.

3. Having fewer providers reduces administrative overhead because you can now focus on better managing a smaller number of relationships.

4. Having smaller networks discourages sick people from buying your insurance. People with serious acute or chronic problems tend to care a lot about who their doctors are. People who go to the doctor once every few years for a checkup or an injury are just going to buy the cheapest insurance and find a doctor who takes it. So restricting the network encourages very sick people to look elsewhere.

5. Having smaller networks limits your cost exposure, because people will find it hard to actually access services. Nominally, you’re paying $60 every time one of your clients goes to see his or her primary care physician, but since only a minority of them can actually find a primary care provider taking their insurance, your costs are much lower than the rates would suggest.

#5 seems unlikely to me -- not only too nakedly mercenary, but also inconsistent with the facts. Even with fewer providers, these networks still have enough doctors and hospitals that most of their customers should be able to find someone if they want to. #4, on the other hand, seems entirely plausible. The New York Times reports that hospitals that specialize in serving the poor seem to have been passed over for the Obamacare provider networks, apparently because the people they tend to serve are too sick, with complex sociological problems that make them expensive to treat.

#2 and #3 are probably correct, but I doubt the savings are enough to explain the extent of the restrictions, or the extent to which those restrictions have reduced premiums. There is just not that much spare capacity in the system.

#1, on the other hand, probably explains quite a lot. The first thing that providers did in Massachusetts when regulators told them to keep costs down was to try and bounce Boston’s expensive research hospitals out of their networks. And the New York Times article seems to indicate that insurers in other states are also excluding those expensive teaching institutions.

So what does this tell us? That probably the insurance offered on the exchanges will feature restricted networks that will make it hard for people to access a lot of care, particularly cutting edge care. They will be a good deal for folks who are basically healthy except for the occasional uncomplicated trauma or surgery -- which probably describes the majority of people who will use them. And if you don’t have insurance, you may be glad to have even this reduced coverage.

But this does present certain political problems. People with the limited policies available on the exchanges are going to frequently brush up against the fact that their policies don’t cover what other people have covered -- and they’ll be especially mad if the Affordable Care Act resulted in their employer cancelling their old coverage and “dumping” them onto the exchange. That’s going to be a near-term political problem for the Democrats who supported the law, who have tended to imply that the law was going to let everyone buy top-notch coverage for very little money. But over the long term, it’s going to be a really ugly political problem for everyone. The first time a cute child’s limited policy keeps him out of a top-notch research hospital, that kid's parents, and the activists for whatever disease he has, are going to turn him into a poster child on the nightly news. Legislators and regulators are going to be under severe pressure to expand coverage to prevent these sorts of sad stories: slapping limits on the cost-sharing insurers may impose on out-of-network providers and expanding the treatments that are covered. This is approximately what did in the HMO revolution of the early 1990s, which did a good job of controlling costs until voters got their legislators to put a stop to it.

As the cost-controls erode, the prices will rise, and then the regulators will go back to insurers demanding better cost control. Who will win that cycle? The only way to know is to stay tuned. But whichever way it turns out, it’s not going to be the kind of show that anyone enjoys.

* This is a complicated argument, because some people will get subsidies, and some people -- mostly older and sicker people -- will get implicit subsidies because insurers aren’t allowed to charge those people more than their young and healthy counterparts. But the weak consensus is that for the majority of people, the cost of insurance will go up thanks to mandated coverages and lower deductibles. Whether you are better off -- especially if the government picks up part of that tab -- is a different argument.