Anecdotal reports and systematic research highlight the prevalence of narrow-network plans on the Affordable Care Act's health insurance Marketplaces. At the same time, Marketplace premiums in the period 2014-16 were much lower than projected by the Congressional Budget Office in 2009. Using detailed data on the breadth of both hospital and physician networks, we studied the prevalence of narrow networks and quantified the association between network breadth and premiums. Controlling for many potentially confounding factors, we found that a plan with narrow physician and hospital networks was 16 percent cheaper than a plan with broad networks for both, and that narrowing the breadth of just one type of network was associated with a 6-9 percent decrease in premiums. Narrow-network plans also have a sizable impact on federal outlays, as they depress the premium of the second-lowest-price silver plan, to which subsidy amounts are linked. Holding all else constant, we estimate that federal subsidies would have been 10.8 percent higher in 2014 had Marketplaces required all plans to offer broad provider networks. Narrow networks are a promising source of potential savings for other segments of the commercial insurance market.

We thank Janet Eberly, Amy Finkelstein, and Jonathan Skinner for their detailed feedback, and we thank Julie Hudson and Asako Moriya for helpful comments. Eliana Buckner and Peter Nam provided superb research assistance. We are grateful to Herbert Wong for his assistance and guidance throughout this project. We also acknowledge the Healthcare Cost and Utilization Project (HCUP) Partners. The academic co-authors on this paper received access to the database through a HCUP Contractor agreement. All of the analysis occurred on a secure server that was set up and made available to the academic collaborators for this project for the duration of the study.At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w26289.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We study the welfare effects of offering choice over coverage levels—“vertical choice”—in regulated health insurance markets. We emphasize that heterogeneity in efficient coverage level is not sufficient to motivate choice. When premiums cannot reflect individuals’ costs, it may not be in consumers’ best interest to select their efficient coverage level. We show that vertical choice is efficient only if consumers with higher willingness to pay have a higher efficient level of coverage. We investigate this condition empirically and find that as long as a minimum coverage level can be enforced, the welfare gains from vertical choice are either zero or economically small. (JEL D82, G22, H75, I13, I21)

At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w26289.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

A health insurer's Medical Loss Ratio (MLR) is the share of premiums spent on medical claims, or the inverse markup over average claims cost. The Affordable Care Act introduced minimum MLR provisions for all health insurance sold in fully insured commercial markets, thereby capping insurer profit margins, but not levels. While intended to reduce premiums, we show this rule creates incentives to increase costs. Using variation created by the rule's introduction as a natural experiment, we find medical claims rose nearly one-for-one with distance below the regulatory threshold: 7 percent in the individual market and 2 percent in the group market. Premiums were unaffected. (JEL G22, H51, I13, I18)