Role of Quality and Value in Lower Premiums for Narrow Network Plans

BACKGROUND: Low-premium marketplace health insurance plans are perceived as covering narrow networks of hospitals and physicians; however, previous studies on narrow networks have been limited to either hospital network or physician network, or only a few states. Moreover, hospitals in narrow networks are usually perceived as low-cost and low-quality, although empirical evidence is lacking.

METHOD: We examined the association between hospital and physician network breadth and marketplace plan premiums, controlling for carrier fixed effects, rating area fixed effect, and plan characteristics.

We also examined the characteristics of hospitals in the narrow networks, specifically the payment from insurers, mortality rate, performance rating by patients, controlling for rating area fixed effects.

Compared with the hospital network breadth measures used in previous literature, our measure is more accurate: we first weight each in-network hospital based on its volume of inpatient stays by Medicare beneficiaries of the relevant zip code, and then weight each zip code within the geographic market by the zip code-level marketplace enrollment. Thus, a zip code with more marketplace enrollees will “count more” in our measure. This measure overcomes the simplistic assumption in the previous studies that the distribution of marketplace enrollment across zip codes is identical to that in the off-exchange market.

RESULTS: We showed for the first time that narrower hospital and physician networks are associated with lower marketplace plan premiums in the 38 states that use the HealthCare.gov platform. Interestingly, we found that narrow hospital networks tend to include efficient hospitals, i.e. low cost, average quality hospitals, rather than low cost, low quality hospitals.

CONCLUSION: We presented the first nationwide study quantifying the association between both hospital and physician network breadth and marketplace plan premiums. Interestingly, we found that the lower cost hospitals in the narrow hospital networks are not necessarily lower quality, but cost-efficient. This finding indicates that narrow networks may increase social welfare by channeling patients to cost-efficient hospitals.