Are Limited Networks Necessary to Reduce Health Care Costs?

Posted on September 10, 2014 I Written By

Andy Oram is an editor at O'Reilly Media, a highly respected book publisher and technology information provider. An employee of the company since 1992, Andy currently specializes in open source, software engineering, and health IT, but his editorial output has ranged from a legal guide covering intellectual property to a graphic novel about teenage hackers. His articles have appeared often on EMR & EHR and other blogs in the health IT space. Andy also writes often for O'Reilly's Radar site ( and other publications on policy issues related to the Internet and on trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business. Conferences where he has presented talks include O'Reilly's Open Source Convention, FISL (Brazil), FOSDEM, and DebConf.

Among the dirty words most hated by health care consumers–such as “capitation” and “insufficient medical necessity”–a special anxiety infuses the term “out-of-network.” Everybody harbors the fear that the world-famous specialist who can provide a miracle cure for a rare disease he or she may unexpectedly suffer from will be unavailable due to insurance limitations. So it’s worth asking whether limited networks save money, and whether they improve or degrade health care.

As I understand it, four reasons are seen for limiting the doctors covered by an insurance plan.

Increased utilization of approved facilities

This is a pure business concern, not a quality concern. If you can channel patients back into a few hospitals and clinics, you can keep your beds filled and save the money wasted when bored staff sit around posting travel photos to Instagram.

Excluding expensive facilities

Another business concern. Studies have shown no correlation between the prices charged by health care providers–including world-famous facilities and prestigious academic settings–and the quality of outcomes. So just by artificially lopping off the institutions that charge a lot, insurers can save money while still serving their recipients well.

Better coordination of care

Now we move beyond the bean-counters and enter into real issues of quality. Supposedly, institutions that know each other through frequent referrals can work more closely together, making sure that post-discharge plans are followed and patients are kept on track for improvement. There is no guarantee that such coordination will happen, but it’s a goal of health reform and underlies the Accountable Care Organization (ACO) model.

More intensive use of primary care providers

Ideally, every professional in health care would develop a holistic understanding of the patient and think long-term. In practice, the PCP is most likely to do so. (With the intensified use they’ve seen over the past several years, and consequent shortening of time spent with each patient, this valuable perspective may be less common.) If a limited network can encourage the patient to rely more on his PCP, it may keep him healthier.

I was stimulated to write this article by a recent paper by the National Bureau of Economic Research (NBER) examining the costs of health care in my state, Massachusetts. The statistical models used in this article are hard for non-specialists like me to get their heads around, but the study looks well-grounded (as one would expect from the NBER, one of the country’s leading research institutions) and the conclusions are reassuring.

People who choose limited networks pay much less, mostly because the premiums for such networks rise much more slowly than for broad networks (p. 12). The Commonwealth of Massachusetts also benefited from cost savings. Although the data provide very little on which to judge the quality of outcomes, the few statistics available on such measures as inpatient spending and emergency room visits (p. 25) indicate that quality of care for limited networks is at least as good as for broad ones.

As one might expect, the narrow plans deliberately excluded expensive health care providers (pp. 5-6).

The one variable I’m not sure the authors could control for is the possibility that healthier people were more likely to choose limited plans (p. 27), and that costs might naturally be lower for such individuals. I will have to trust that the authors took this possibility into account.

The challenge I’d like to toss into the ring is this: couldn’t a rational health care system achieve all the benefits of limited plans while allowing patients to see anyone they want? Let’s consider again the four benefits I mentioned earlier:

Increased utilization of approved facilities

A rational health care system would pay for outcome instead of utilization, encouraging hospitals and clinics to put their spending where it was needed and hold back from expensive purchases that require excess use to pay off.

Excluding expensive facilities

A rational system would collect and publicize quality measures, and place some of the financial burden on patients to encourage them to do some price-shopping. Both of these innovations are starting to be seen. Idealists among us can even hope for a standard set of fees to replace the current chaotic negotiations between provider and payers.

Better coordination of care

If patient data was stored in a standardized format–preferably by the patient herself–all providers would have access, and a fee-for-value reimbursement model would encourage them to work together for better outcomes.

More intensive use of primary care providers

A holistic approach to health–which would reach outside the individual doctor’s office to the whole community in which the patient lives–would make the PCP the natural starting point for all health issues and give PCPs the tools to maintain patient health year-round.

So even though I acknowledge the value of ACOs and other forms of limited networks so long as our current health care system is limping along, the need for that kind of trade-off could end if we lift our eyes a little higher, look farther toward the future, and make strides toward better goals.