Friday, October 10, 2014
National Institute for Health Care Reform
NIHCR Research Brief No. 18
Reference Pricing: A Small Piece of the Health Care Price and Quality Puzzle
By Chapin White, Megan Eguchi
As purchasers seek strategies to reduce high health care provider
prices, interest in reference pricing—or capping payment for a
particular medical service—has grown significantly. However, potential
savings to health plans and purchasers from reference pricing for
medical services are modest, according to a new analysis by researchers
at the former Center for Studying Health System Change (HSC) using 2011
private insurance claims data for about 528,000 active and retired
nonelderly autoworkers and their dependents. In 2011, the California
Public Employees' Retirement System (CalPERS) adopted reference pricing
for inpatient knee and hip replacements. Using quality and price
information, CalPERS set an upper limit of $30,000—the reference
price—for hospital facility services for a knee or hip replacement.
CalPERS designated certain in-network hospitals as meeting the reference
price, and patients using designated hospitals are responsible only for
the health plan's usual cost-sharing amounts. However, if patients use a
non-designated hospital, they are responsible for both usual cost
sharing and any amount beyond the $30,000 reference price. While
reference pricing for inpatient services has some potential to steer
patients to hospitals with better quality metrics, only limited
savings—a few tenths of a percent of total spending—are possible from
applying a similarly narrow reference pricing to other privately insured
populations. The potential savings from reference pricing are modest for
two reasons: Shoppable services only account for about a third of total
spending, and reference pricing only directly affects prices at the high
end of the price distribution. When considering reference pricing,
employers and health plans need to weigh potential savings against
increased plan complexity and financial risk to enrollees, along with
the analytical and financial resources needed to create and manage the
From the Implications
The CalPERS reference pricing experience tells two different but equally
true stories—a dramatic percentage decline in prices and spending on
knee and hip replacements and an extremely small percentage decline in
total spending. To significantly impact spending among the privately
insured, reference pricing would have to be applied quite broadly. And,
even using a very inclusive list of shoppable services, the potential
savings are relatively modest.
Both conventional network-based plans—preferred provider organizations
and health maintenance organizations—and reference pricing suffer some
of the same limitations. Both types of plans rely on patient
cost-sharing differentials to steer patients to certain providers, but
the higher cost sharing cannot reasonably be applied in emergencies when
patients can't choose their provider. Also, both types of plans are
vulnerable to the demands of dominant "must-have" providers, either to
be in network or to be both in network and designated.
Compared to a limited-network plan, reference pricing faces at least
three additional logistical hurdles. First, the health plan must have
reliable price data for specific providers for specific services so that
it can set the reference price and designate providers. Even very large
plans will lack the historical data to accurately measure the prices
they typically pay to smaller hospitals. Second, the plan would ideally
have provider-specific quality metrics on hand that can be used to
assure patients that they are not being steered to low-quality
providers. Although hospital quality metrics and rankings abound, the
methodologies behind those rankings are still under development. Third,
reference pricing requires new customer-service tools to support
shopping by patients and to deal with inevitable member complaints.
Implementation would require commitment of significant resources by the
plan, potentially offsetting some or all of the savings from reductions
in payments to high-price providers.
The main disadvantage of reference pricing is that it adds a new layer
of complexity for plan administrators and enrollees. Rather than
facilities simply either being in or out of the network, there are now
three types of facilities: in-network designated, in-network
non-designated and out of network. Even more confusingly, a single
facility might be designated for one type of service—for example, an
inpatient hospital providing a knee replacement—but not designated for
another—that same hospital providing a colonoscopy in an outpatient
department. Additional complexity raises significant concerns, given
that the basic elements of conventional benefit design are already
beyond the grasp of many consumers.
One question is whether a reference pricing program can steer patients
to lower-price, adequate-quality providers. The answer, based on the
CalPERS experience, appears to be yes. But, that may not be the right
question. A better question may be why private health plans would ever
pay negotiated prices over $30,000 for inpatient knee and hip
replacements. The CalPERS reference pricing program seemingly took a
hard line against hospitals charging unreasonably high prices—$30,000 or
more—for knee and hip replacements. But, is $30,000 really a reasonable
price for an inpatient knee or hip replacement? To put that amount in
perspective, the Medicare program on average paid $14,324 for inpatient
knee and hip replacements in 2011.
Comment by Don McCanne
Our policy wonks continue to look for methods of controlling health care
costs that will protect the role of private insurers, and, above all,
prevent us from drawing the inevitable conclusion that we desperately
need a single payer national health program. Reference pricing is one
more supposed cost-saving tool that has garnered much interest. What is
it and will it work?
Reference pricing is a process in which a maximum price is set for a
given medical service. The patient then either goes to a designated
provider who has agreed to accept that amount, along with contracted
patient cost sharing, as payment in full, or, if the patient chooses a
provider with higher prices, the patient must pay the full difference.
California Public Employees' Retirement System (CalPERS) experimented
with reference pricing by establishing $30,000 as a reference price for
the hospital services for a knee or hip replacement. The experiment was
considered to be a success based on the fact that 15 to 30 percent of
patients who would have gone to a non-designated hospital switched and
went to a designated hospital instead. But how do you define success?
The package fee that the private market was able to negotiate was
$30,000. Medicare on average paid $14,324 for the same services. Is it a
success when private insurers are paying double the fees set by a public
Some might consider it to be a success when the patient did not have to
pay the difference between the reference price and the price that would
have been charged in a non-designated hospital, though what is the
patient giving up?
Consider how a decision is usually made to have a joint replacement. The
patient typically goes to his or her primary care professional where
initial evaluation indicates that a joint replacement may be indicated.
A referral is made to a specialist qualified to do joint replacements.
If the decision is made to go ahead with the procedure, arrangements are
made with the hospital the specialist is associated with. But then the
insurer intervenes and threatens the patient with severe financial
penalties (all costs above the reference price) unless the patient
agrees to give up the specialist and hospital that is part of the team
of her primary care professional, either as a formal integrated health
system or as an informal team of community professionals working
together. To escape the financial penalty, the patient pays the penalty
of disruption in care.
So what did this successful experiment that everyone wants to emulate
actually accomplish? Care of 15 to 30 percent of patients was disrupted
in exchange for establishing a cap on payment that was twice what
Medicare pays, and yet netting only "an extremely small percentage
decline in total spending."
Another important consideration discussed in this report is that
reference pricing significantly increases administrative complexity -
just what we need in a system that is unique in the world for all of its
profound administrative waste. But very telling is the comment in this
report that some of this administrative increase will be in the form of
new customer-service tools "to deal with inevitable member complaints."
Great- a disruptive program that doesn't work very well but ticks
everyone off! We'll say it again - single payer.
at 2:46 PM