Improving Value

Reference Pricing

Reference pricing is a strategy used by healthcare payers to lower costs by incentivizing health plan beneficiaries to shop for the best price. First, payers establish a standard (i.e. reference) price for a drug, procedure or service. Beneficiaries are free to choose a drug/procedure/service from a provider charging higher than the reference price, but are required to pay the difference, in addition to their normal cost-sharing amount. Enrollees who chose a drug/procedure/service priced at or below the reference price avoid having to pay the difference, encouraging them to seek lower cost care.

There is strong evidence that reference pricing can produce savings, at least for select procedures, without harming quality. The California Public Employees' Retirement System (CalPERS) implemented reference pricing for knee and hip replacement surgery in 2011, after observing a five-fold variation in prices for the two procedures with no measurable difference in outcomes across California hospitals. CalPERS set a reference price of $30,000 for each procedure, representing the maximum amount that it would contribute towards a patient's cost of care. Patients who chose to receive the procedure at hospitals charging higher than $30,000 were required to pay the difference, in addition to the standard cost-sharing amount.

Evaluations revealed that CalPERS saved an estimated $5.5 million in 2011 and 2012 from the joint replacement surgery program — approximately $7,000 per patient.1 The bulk of savings (more than 85 percent) resulted from facilities lowering their prices to meet the reference price. The remainder of the savings (approximately 15 percent) resulted from consumers "voting with their feet." Despite this success, a separate analysis raised various concerns, such as an incomplete understanding of reference pricing's impact on quality.2

Limitations

Reference pricing's ability to meaningfully lower healthcare costs is limited for two reasons:

  • Shoppable services only account for a third or less of total healthcare spending, and reference pricing only directly affects prices at the high end of the price distribution. Thus, reference pricing's impact is limited to instances when a procedure exhibits wide variation in price but uniformly high quality.3
  • It is unclear whether smaller payers can extract the payment concessions from providers that CalPERS has achieved.

It is also unclear whether or not system-wide savings were achieved or whether the hospitals that lowered their prices for hip and knee replacements simply raised their prices elsewhere in order to maintain revenues. 

When to Use Reference Pricing

When considering reference pricing, employers and health plans need to weigh potential savings against increased plan complexity and financial risk to enrollees, along with the analytical and financial resources needed to create and manage the program. 

Related Topics

Value-Based Purchasing

Narrow Networks

Value-Based Insurance Design

Price Transparency  

 

Notes

1. Robinson, James, and Timothy Brown, "Evaluation of Reference Pricing: Final Report, letter to David Cowling of CalPERS," (May 15, 2013). See also: Lechner, Amanda E., et al., "The Potential of Reference Pricing to Generate Heathcare Savings: Lessons from a California Pioneer," Center for Studying Health System Change," (December 2013). 

2. Frankford, David, and Sara Rosenbaum, "Go Slow On Reference Pricing: Not Ready for Prime Time," Health Affairs Blog (March 9, 2015). 

3. White, Chapin, and Megan Eguchi, "Reference Pricing: A Small Piece of the Health Care Price and Quality Puzzle," National Institute for Health Care Reform (October 2014). 

 

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