Why do narrow network plans cost less?

Narrow network health insurance plans have been shown to have lower premiums and lower costs to insurers. This paper decomposes and quantifies the magnitudes for various mechanisms by which networks may reduce premiums and costs. Using data on the Colorado non‐group market, we examine three mechanisms through which a narrow network might achieve lower costs: (1) enroll a population with lower utilization, (2) negotiate lower prices, or (3) steer patients away from high‐cost hospitals. We find that all three mechanisms play a role. Narrow plans are partly able to achieve lower costs because they both steer patients to lower cost hospitals and, for a given hospital, negotiate lower prices than broad plans. The lower negotiated prices mechanism accounts for 15% of the cost savings to narrow network plans, and the steering away from higher cost hospitals accounts for about 18%. Both of these mechanisms can be ways to efficiently lower costs. The remaining 67% of the cost savings is due to lower utilization of narrow network plan enrollees. These findings are important for policymakers considering how to balance containing healthcare costs with concern for the appropriate regulation of narrow network plans.