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Reference Pricing Savings

By October 13, 2014Commentary

The National Institute for Health Care Reform has released a brief exploring the potential of reference pricing to generate health spending reductions.  (NIHCR Brief)  Reference pricing involves setting a fixed price that will be paid for a particular health care service or product.  It may be set by a payer and covered persons will be directed to providers who accept that price.  It may established by negotiation, so that the provider or providers who agree to a particular price become preferred providers in a network.  The focus recently has been on certain high-cost procedures with substantial variation in price across providers, but if you thing about it, reference pricing has been used for a long-time in the form of fee schedules set by Medicare, Medicaid and some private insurers.  The downside for patients is that if they don’t use a provider who has agreed to the reference price, they will be responsible for the usual deductible and copays, but also any excess charge over the reference price.

CALPERS initiated a noted reference pricing experiment with knee and hip replacements and some other procedures, which did shift volume to providers using the reference pricing and provided savings to CALPERS.  The authors of the current brief, however, note that the savings available depend on the amount of spending on “shoppable” services.  Using data from the autoworkers plan, they create a model to simulate savings from a narrow look at hip and knee replacements and from a broader list of shoppable services.  They determined that about 90% of ambulatory services and about 73% of inpatient DRGs fit into this broader classification, representing around one-third of all health care spending.  They assumed that the designated providers would price at 65% or less of the maximum price and that a switching rate of about 30% of patients would be obtained.  Using a mix of quality measure results and pricing, about 30% of hospitals were categorized as high value and their average case-mix adjusted price a shoppable inpatient stay was 38% lower than the price at other hospitals.  But the savings under the model were pretty modest–2.4% of total inpatient spending.  And under the scheme, patients, at least those who use non-designated facilities, would end up shouldering a 4.4% higher financial burden.  About 1.9% would be saved on imaging and lab services and 2.1% on outpatient visits.  The total savings is about 6.4%, which is nothing to ignore.  There are logistic challenges in getting price and quality data to consider and there is a cost-shift to non-conforming patients.  But it looks to me like this technique is definitely one that can force providers to be more realistic about pricing and perhaps even more efficient in their own operations, without sacrificing quality.

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