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Use of Reference Pricing for Testing

By August 2, 2016Commentary

In the commercial insurance market there can be wide variation in the cost of a service, driven by negotiating tactics and leverage of providers versus health plans.  One technique to help drive utilization toward the lower unit cost providers is reference pricing.  In reference pricing, the insurer typically identifies a low-cost provider and creates a benefit design in the health plan that ties payment for the service to that low-cost provider.  The member must pick up the difference in cost if they choose to use a higher-cost provider.  The impact tends to be that other providers must lower their prices to maintain market share and that patients gravitate toward greater use of the low-cost suppliers to minimize their out-of-pocket spending.  The tactic gained widespread attention when CalPERS began to use it on joint replacement surgeries.    Now research in JAMA Internal Medicine examines use of reference pricing in connection with diagnostic testing.  (Int. Med. Article)   The authors compared a large company that used reference pricing for laboratory tests with  comparable members who were not in a plan using the technique.  The employer had set maximum reimbursement at 60% of the distribution range for testing prices and had made pricing data available to members on a mobile app.  The change appears to have worked well, although no quality data was reported, so we don’t know if care was impacted, but that is doubtful in the case of lab testing.  Members covered by reference pricing were more likely to use lower cost labs.  By the third year, the average price paid had declined 32%.  The employer saved around $1.5 million over the three years and the employees saved $1.05 million in out-of-pocket spending.  Lab testing is a relatively small portion of overall spending, but you can imagine that if it were more broadly applied to health services and products and even 15-20% price reductions were seen, a substantial reduction in health spending could occur.

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