Reference Pricing

The cost of certain procedures or treatments can be quite large and controlling these costs has bedeviled the health system for a long time.  The public programs, Medicare and Medicaid, can deal with this issue to some extent by fiat–just saying we will only pay a set amount, which is limited only by political pressure that providers and suppliers may be able to exert.  A new method being tried by commercial payers is to set a price that they will pay for the procedure or treatment and see which providers will accept that.  A report from the Center for Studying Health System Change examines early experience with the method and identifies challenges in how it might be adopted by other payers.  (CSHSC Report)   The index case for reference pricing is CalPERS use of the technique in regard to hip and knee replacements.  CalPERS invented enrollees to use hospitals for these procedures that would charge at or below a set price, and engaged in an extensive education effort to encourage use of these hospitals.  Data showed prices from $15,000 to $110,000 for these procedures, with no distinguishable difference in quality.  CalPERS decided to set the reference price at $30,000.  Early results suggest that a number of procedures were moved to these facilities and many hospitals found it necessary to lower their prices to the reference price in order to keep business.  There was no deterioration in quality and enrollees saved money.  Some of the challenges for payers to utilize reference pricing is difficulty in getting enough cost and price information to set an appropriate reference price, fear of disrupting existing hospital relationships, and fear of upsetting enrollees who may have difficulty understanding the program.  In addition, the total cost savings possible are limited because a relatively small number of procedures are likely to be amenable to reference pricing.  And the technique only addresses unit cost, not the appropriateness of utilization.  Nonetheless, every little bit of savings helps and anything that offsets the increasing market power of hospitals is very welcome.