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Reference-Based Pricing and Provider Network Size

By April 17, 2023Commentary

These two papers are linked, I promise, and you will see the logic.  They both relate to network composition for private health plans.  As you might imagine, health plans prefer providers who keep spending down, while not compromising quality.  But the plans also want to appeal to as many consumers as possible, so having a broad network with many providers is better for marketing.  Preferred provider designs, in which a broad network is used, but a subset are “preferred” are one attempt to address these conflicting concerns.  Typically when a patient goes to a preferred provider they have lower cost-sharing.  Health plans are trying to find other ways to steer patients to less expensive providers.

The first paper deals with one such method, the use of a technique called reference-based pricing.  Here the plan identifies a provider for a service which has acceptable quality but lower cost.  That provider’s charge becomes the reference price.  A patient can go to another provider, but if they do they will pay the additional cost above the reference price.  I think this is a pretty smart approach, leaving patient choice intact but making them pay for the cost of that choice.  In any event, the paper examined the use of this tactic in regard to advanced imaging, like MRIs.   In the first year of the program there was little change in facility use, but in the second year, enrollees were 22% more likely to chose a low-priced facility.  Both the plan and the patients who used the reference providers saved money.  There was no change in utilization.  Interestingly, the higher-priced providers did not lower their charges.  Among other things, the authors suggest that plans may need to be more aggressive in highlighting the contrast in prices.    (HSR Paper)

The second paper addresses the impact of a plan having a broader or narrower network on plan premiums.  As you might expect, having a broader network of either hospitals or physicians led to premiums that were modestly higher.  This is likely due to the inclusion of higher-priced facilities in the broader network designs, but also may be due to hospitals in a narrow network model receiving more patients from the plan and therefore being willing to provide a larger discount on typical billed charges.  In any event, the study illustrates the trade-offs plans face in designing networks.  And the ongoing consolidation of hospitals and hospitals buying physician practices makes it even harder for plans to design a network that aids in controlling costs and subsequently, premiums.    (HSR Paper)

Join the discussion One Comment

  • James L. Edholm says:

    There is an additional complication for those who don’t self fund their plans: Insurers.

    Insurers’ margins are only allowed to be 15% or 20%, depending on the size of the group involved (smaller employer groups are allowed a greater margin). That is, claims must be at least 80 or 85% of the premium collected. Ergo, the carrier has ZERO INCENTIVE to help the employer lower the cost. If a $10,000,000/year health plan successfully lowers its cost by $1,000,000, the carrier has just lost $150-$200,000 of operating margin.

    Employers are swimming upstream.

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