Health Care Provider Networks: Are Insurers Better Off?

Certain health insurers offer a free choice of providers and an identical copayment regardless of the provider. Others build networks and use selective contracting and financial incentives to channel policyholders to contracted suppliers. In the case of unregulated prices, we compare these two policies when the off-network medical service is not covered. We show how policy ranking depends on the characteristics of demand. If demand is linear, a for-profit insurer and a not-for-profit insurer obtain a higher profit and utility under selective contracting than under uniform reimbursement. In the constant elasticity case, these results do not hold. Insurers prefer uniform reimbursement while consumers are better off under selective contracting in both cases.