Charlie Arlinghaus

May 21, 2014

As originally published in the New Hampshire Union Leader

The real problem with the Obamacare network in New Hampshire is not that it is too narrow but that there is any network at all. Healthcare costs are lowered not when the one government sanctioned picks winners and losers but instead when providers compete for the customer pool. The oddly constructed health exchange in New Hampshire is not the beginning of the future but the last gasp of the past.

Under the Affordable Care Act (ACA) commonly known as ObamaCare, the federal government created a set of regulations to offer approved health insurance in what was optimistically called an exchange. In theory — and in some larger states this sort of worked – multiple insurance companies would offer competing products albeit ones that were all constructed according to the thousands of pages of regulations that limit differences.

In New Hampshire – and this wasn’t actually a surprise to anyone – it didn’t work that way. We don’t have a lot of competition in the regular health insurance market and only one company, Anthem, signed up to be the government insurer. This is where the trouble starts.

Insurance companies worried that the population would be somewhat sicker than typical and have fewer young people than they’d like (young people consume very little healthcare so their premiums are profit used to subsidize others). In fact, we’re discovering the population is much sicker and less young than previously thought.

To control costs, Anthem did what so many exchange insurers have done across the country: they developed a narrow network of hospitals and affiliated doctors. Some hospitals were in and others out. At first, half the hospitals were in and half out but they added back in a few small rural hospitals under pressure. Right now there are 16 winners among hospitals and 10 losers. Naturally the ten that have left out of the government-subsidized health insurance system are worried.

The use of preferred providers and networks of allowed providers was common in the 1990s era of HMOs and is making a comeback. The Kaiser Family Foundation reported that narrow networks in employer plans rose from 15% to 23% in the last six years. On ACA exchanges across the country narrow networks account for 70% of the plans.

The reason is cost. Exchange plans are not like regular private insurance. They need hospitals and the doctors they own to accept a significantly lower payment that your insurance and mine give them. The deal offered is that you’ll get less money but we’ll improve your market share by excluding some of your competition.

In April, the Congressional Budget Office found that costs will likely be $1.38 trillion rather than $1.48 trillion over ten years or about 7% lower than they would have been. The CBO said exchange plans have narrower hospital networks, lower payment rates, and tighter management of use of care (think HMOs) than regular insurance does.

In a regular free market, there is nothing wrong with one company deciding to offer a product that can’t be used everywhere. Narrow networks are fine. If it’s too narrow, try another product. But the exchange isn’t regular. One provider of a government plan that many citizens are required by law to purchase insurance from is not the same thing as regular choice. As the government pushes more and more of the traffic into the exchange, hospitals are rightly worried that if they’re left out that the government as de facto selected them for closure.

So we end up with hearings about whether the state should have, once it knew there was to a monopoly provider of the service, approved picking winners and losers this way.

It doesn’t have to be this way. There is an argument to be made for not having networks at all. Noted national policy expert John Goodman writes about Wellpoint in California. They noticed that knee replacement cost from $15,000 to $115,000 for the same thing. They offered a plan for state workers and retirees that paid $30,000 which any one of 46 hospitals would accept. Consumers could go anywhere else but any cost over $30,000 was on their own. The result: Prices came down everywhere to meet demand. Anyone who wished could provide the same service at the same cost.

I think that model of pricing is worth repeating: Any provider who chose to meet the cost was eligible to provide the service. This model doesn’t pick winners and losers. It creates an incentive and offers complete customer choice. Customers could pay more but providers competed and often lowered their price to get the business.