Improving Value

Reference Pricing

Reference pricing is a approach that establishes a standard price for a drug, procedure or service and then asks health plan beneficiaries to pay the charges beyond that amount—essentially a ‘reverse deductible.’ Thus, consumers have an incentive to choose a provider or drug priced at or below the reference price to avoid having to pay out-of-pocket for the difference.1 Choice is preserved, but at a cost.

There is strong evidence that reference pricing can produce savings, at least for selected procedures, without harming quality.  The California Public Employees’ Retirement System’s (CalPERS) implemented reference pricing for knee and hip replacement surgery after observing a five-fold variation in prices for these two procedures, with no measurable difference in outcome quality across California hospitals. In 2011, these two procedures, setting an upper limit of $30,000—the reference price. CalPERS designated certain in-network hospitals as meeting the reference price, and patients using designated hospitals are responsible only for the health plan’s usual cost-sharing amounts. However, if patients use a non-designated hospital, they are responsible for both usual cost sharing and any amount beyond the $30,000 reference price.

A major study examined the impact of CalPERS program from 2008 to 2012.2 The analysis found that CalPERS saved an estimated $5.5 million in 2011 and 2012 from the joint replacement surgery program—approximately $7,000 per patient. There was a substantial increase in the share of inpatient knee and hip replacements provided by designated facilities, and there was a dramatic prices charged by non-designated facilities—with more than 85 percent of overall savings coming from hospitals lowering their prices to meet the cap. There was a decline of 5.6 percent in prices charged to CalPERS members at low-price facilities, and a decline of 34.3 percent at high-price facilities. A separate analysis, however, feels that the measurement of quality outcomes did not go far enough.3

Despite this success, the potential savings from reference pricing are modest for two reasons:

  1. Shoppable services only account for a third or less of total health spending,4 and reference pricing only directly affects prices at the high end of the price distribution. Reference pricing could be an effective cost containment tool in instances when a procedure exhibits wide variation in price but uniformly high quality.

  2. 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 just raised their prices elsewhere in order to maintain revenues.

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.

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1. Note that the enrollee’s out-of-pocket maximum does not apply in these cases, despite the use of in-network providers.

2. Robinson, James C., and Timothy T. Brown, “Increases in Consumer Cost Sharing Redirect Patient Volumes and Reduce Hospital Prices for Orthopedic Surgery,” Health Affairs, Vol. 32, No. 8 (August 2013).  

3. “Go Slow on Reference Pricing: Not Ready For Prime Time,” Health Affairs Blog, March  9, 2015.  

4. White, Chapin, and Megan Eguchi, Reference Pricing: A Small Piece of the Healthcare Price and Quality Puzzle, Research Brief No. 18, National Institute for Healthcare Reform, Washington, D.C. (October 2014).