Reference Pricing Effects

By July 18, 2019 Commentary

Health insurance, public or private, tends to deaden consumer sensitivity to the cost of health care services and products.  A number of methods have been used to attempt to revitalize that sensitivity within the context of insurance.  One is giving patients information on cost-effective providers, but in the absence of financial incentives that would do little good.  Another is creating that financial incentive, usually in the form of deductibles or copayments.  This is a blunt instrument, which may lead consumers to avoid both needed and inappropriate services.  Yet another approach for some services is reference pricing.  In this method, the insurer sets a cap on what it will pay for a service.  If the consumer goes to a provider who charges more, he or she bears the full cost, in addition to other cost-sharing.  An article in the Journal of Health Economics examines the effect of a reference pricing scheme.   (JHE Article)   CalPERS buys health insurance for California’s public employees.  It began using reference pricing for certain procedures in 2012, including colonoscopy.  The authors looked at the impact on use of lower-cost providers and on the spending of both the payer and the patient.

CalPERS set the reference price at $1500.  Many of the covered employees still had deductibles or other cost-sharing, but as long as they used a provider with a price under $1500, that cost-sharing was capped.  The program did not apply to colonoscopies at ambulatory surgery centers because they tended to have prices at or below the reference price already.  The mean price for a colonoscopy at a hospital was $3026, while at a surgery center it was $1047.  The study used data from 2009 to 2013, so three years before and two years after implementation.  They found that the program did increase use of low-cost providers and lowered spending for CalPERS by around 12%.  The researchers hypothesized that lowering cost-sharing would increase the likelihood of use of low-cost providers and increase patient savings.  Those patients who did use the low-cost sites also obviously had savings, but those who continued to go to high-cost centers paid more.  Those consumers have no one to blame but themselves.  In addition the researchers looked at complication rates, finding no difference among low-cost and higher cost providers and found that patients did not have to travel further to find a low-cost provider.  Reference pricing seems to be a better strategy than high-deductibles to improve consumer price sensitivity.  If coupled with lower cost-sharing, it should strongly encourage patients to get needed services, while having little out-of-pocket spending.  The health plans and the patients both would see significant savings.  And high-cost providers would be forced to figure out how to become more cost-efficient.

Kevin Roche

Author Kevin Roche

The Healthy Skeptic is a website about the health care system, and is written by Kevin Roche, who has many years of experience working in the health industry through Roche Consulting, LLC. Mr. Roche is available to assist health care companies through consulting arrangements and may be reached at khroche@healthy-skeptic.com.

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