Why do insurers make you go in-network?

One of the more infuriating experiences of private health plans, aside from potentially high premiums and out-of-pocket costs, is figuring out what doctors your insurer is going to cover. For some, going out of the provider network for care can cost hundreds or thousands more than getting care in the same network.

But the question arises of how health plans structure these networks. How do they choose the providers in the network and the prices you pay those providers? Moreover, how does going out of network affect anyone to the extent that it's so expensive to get care out of your own health network?

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What the Insurers Care About

Talking about provider networks requires us to first look through the lens of the health plan insurer. Regardless of your opinion of these insurers, their incentives and priorities are what drive a lot of the way we understand the need for provider networks.

The job of a health insurer is, in essence, to pool the health costs of a group of individuals to make the average cost of care lower for each member of the plan. Each person pays a premium each month to stay on the health plan, and that pool of money is used by the insurer to pay for treatment, diagnoses, drugs, and medical devices. While patients (health plan members) usually still have to pay out-of-pocket costs, theoretically, the insurer is still helping pay for care at some point.

High out-of-pocket costs for plan members probably indicate that the insurer has to deal with high costs charged by care providers or a small amount of financial resources to spend on covering care. It's the same reason why a health plan with a relatively low premium may have higher deductibles, co-pays, and co-insurance -- the insurer simply does not get as much revenue through premiums and thus cannot pay for as much.

Because we're talking about health plans, members are typically what is used to describe patients/ordinary people who have health insurance, because they are members of a health plan.

Shifting focus to the insurer, they typically want to control the costs of care, because if healthcare costs continue to rise while revenue stays relatively constant, it won't be long until the plan cannot pay for the coverage of its members.

One easy way to cut costs is to reduce the services that are covered by the plan, but a health plan can only do that so much.

Because of some parts of the Affordable Care Act (ACA aka Obamacare) most health plans have to maintain some minimum level of coverage of treatments and services. Just because it's expensive, an individual health plan cannot cut services if they are considered essential.

These same restrictions do not apply to employer-sponsored coverage, but these plans tend to already offer that minimum level of coverage. Some economics-based perspectives see employer health coverage as an incentive that acts like a worker's salary. If the quality of the employer health coverage is bad or if many services are not covered, a worker will probably move to find a new employer, because the value of the health coverage added to the salary is not as high as it could be (though this is not a perfect way to explain why employer-sponsored plans may be a little more consistent).

So if expensive services cannot be cut entirely, insurers have to take on a new approach of reducing costs through managed care.

Managed Care

Many health plans today, and even many Medicaid plans, are considered managed care organizations (MCOs), and this concept is not exactly very new.

In the 80s, MCOs were credited with controlling ballooning healthcare costs, and they eventually grew to dominate American health insurance.

The National Library of Medicine provides a good definition for us to break down the idea of managed care and tie it into your experiences as part of a health plan.

Health insurance plans intended to reduce unnecessary health care costs through a variety of mechanisms, including: economic incentives for physicians and patients to select less costly forms of care; programs for reviewing the medical necessity of specific services; increased beneficiary cost sharing; controls on inpatient admissions and lengths of stay; the establishment of cost-sharing incentives for outpatient surgery; selective contracting with health care providers; and the intensive management of high-cost health care cases

Probably the biggest part of the definition you will recognize is the bit about "selective contracting with health care providers". This is where your provider network comes in. These health plans tend to negotiate directly with a select group of doctors, clinicians, and pharmacies to set prices that the insurer guarantees will be paid for care. This negotiated rate or allowable cost is paid for through a combination of the patient's out-of-pocket expense and insurer's payment to the provider.

Theoretically, these contracted providers are offering cheaper care, which could be enabled because the insurer can say "we can direct our members to get care from you, so the increased quantity of patients can justify lower cost per patient".

Some other parts of the definition can explain some of the other more concerning parts of modern health insurance. Here are some translations for you to think about.

economic incentives for physicians and patients to select less costly forms of care

"...primary care physicians may receive incentives to be conservative in using referral or hospital services, and FFS [fee-for-service] physicians may be rewarded when the plan, the provider group, or individual provider does well on various measures like cost, utilization, patient satisfaction, and quality of care"

This was an excerpt from an article on financial incentives under MCOs. One concern is the risk of physicians not giving enough care to get these incentives.

This also gives us some clues for why an insurer may not be trying its best to cover as many providers as possible. Take this quote:

The more physicians in a pool, the smaller each physician's incentive to control costs. Alternatively, an organized risk pool may discipline its members, either formally or informally.

Smaller provider networks are simply easier to enforce the needs of the health plan.

programs for reviewing the medical necessity of specific services

Insurance claims and processing them is a huge business in and of itself, because it facilitates what many health plans try to do in the utilization review process:

When a patient is admitted to the facility, a first level review is conducted for appropriateness; this includes medical necessity, continued stay, level of care, potential delays in care and progression of care.

Medical necessity determines whether the hospital admission is appropriate, justifiable and reimbursable.

So yeah, a health plan can deem your treatment unnecessary (assuming there aren't regulations preventing that in the process of claims review).

increased beneficiary cost sharing

Basically this means higher patient out-of-pocket spending in the form of deductibles, co-pays, and co-insurance. The idea is that patients who have to pay more up-front costs will be discouraged from getting treatments they don't need.

controls on inpatient admissions and lengths of stay

Inpatient admissions are fancy talk for hospital admissions. Health insurers want to reduce these admissions and the length of stays at the hospital, because these visits tend to be comparatively expensive.

Many studies have pointed out that patients typically come in two ways -- through emergency department visits and "scheduled elective admissions". Let's start with the second bit, which we can translate to admissions the patient plans in advance, like for a surgery. This may be controlled through requiring a referral for these procedures and admissions, which makes the referring provider something of a gatekeeper to control costs.

To reduce emergency department visits, the health plan will typically want to encourage care coordination and continuity of care for members in the health plan. This means physicians are encouraged to address and provide plans to maintain long-term health to prevent emergencies that may emerge. These ideas attempt to help long-term wellness by ensuring doctors are all on the same page with regards to ongoing conditions, treatments, and medications; as well as following through on long-term developments in a patient's history, respectively.

the establishment of cost-sharing incentives for outpatient surgery

Outpatient care is received through places that are not in a hospital, like the office of your specialist provider. Surgery in outpatient locations tend to be cheaper, because there is not as much overhead as in a hospital, so the MCO may make patients pay patients lower out-of-pocket cost for getting surgeries here.

intensive management of high-cost health care cases

The majority of health expenses faced by a health plan usually come a small set of members in the health plan, so the reasoning is that managing the cost of care for these members will reduce overall costs the most effectively.

These may be members with serious chronic conditions like some cancers, AIDS, and ALS or those suffering "catastrophic events" like stroke, heart attack, accidents, and complicated births.

The health plan's management of high cost care can be summed up with these common elements:

efforts to find less costly alternatives to the care (usually hospital care) that would be provided for specific patients in the absence of case management;

willingness to approve payment for services not covered by the patient's benefit plan, if doing so will help reduce overall costs; and

concurrence from all relevant parties—patient, family, and physician—in implementing cost-saving alternatives for meeting the patient's needs.

Quite a Handful to Consider

When we think about provider networks, it seems that this limitation on where you can get care is largely a matter of controlling cost. While MCOs may have cut costs in the 80s, its performance since then in reducing the cost of healthcare is quite mixed.

If reformers want to adopt a healthcare model where patients can go to literally any care provider, then there will also have to be initiatives and models to control costs in these situations.

For those who are fine with provider networks but concerned about rising costs of care or not being given a sufficient amount of care, it's clear that there might have to be some incentives that are re-worked. Most likely, MCOs need to do a better job of reducing long-term costs with care coordination and continuity of care instead of resorting to limiting a member's access to preventative services.

Or perhaps the root isn't even a purely healthcare policy. In public health, social determinants of health are all the rage.

Maybe serious reforms in education, community stability, and socioeconomic policy could be the driving force to bring down the cost of care in the long run through reducing occurrences of chronic care and catastrophic accidents.