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Reference Pricing: Another Tool That Saves Money, or a Limitation on Care?

Setting caps on medical costs may save us money… but not without sacrifice.

In 2010, the California Public Employees’ Retirement System (Calpers) made a big move to rein in how much they were spending on hip and knee replacements. They capped the amount they would pay after noticing a shocking disparity in prices for the same procedures throughout their state.

At the low-end, they were paying out $20,000, and at the high end, $120,000 for a retiree’s new knee. So-called “reference pricing “ is being seriously suggested as a potential solution to our countrywide problems with overpriced health care.

“Reference pricing is very, very simple, easy for everyone to understand and that’s what makes it so powerful,” says Timothy Tyler Brown, associate director of research at the Berkeley Center for Health Technology and co-author of a study on the Calpers reference pricing plan.

Price Caps

The idea behind reference pricing is this: a standard price is set for a medical good or service. The payer (usually an insurance company) covers this standard price, anything more than that must be paid by the patient. In the case of the Calpers study, payers agreed to $30,000, which was about the mean cost of the procedures statewide.

In the first year alone, charges for joint-replacement surgery to Calpers dropped 26 percent.

Brown’s study looked at pricing and consumer choices from 2008 to 2012 in the Calpers system. The year before reference pricing was introduced, 48 percent of Calpers patients chose low-price hospitals. The year after, that number jumped to 63 percent.

Perhaps a more surprising effect was that the hospitals began to move their prices toward the cap amount. In the first year alone, charges for joint-replacement surgery to Calpers dropped 26 percent. Two years post-reference pricing, Calpers had saved nearly $6 million.

Another study of this situation, conducted by the health outcomes research group HealthCore, found the patient outcomes to be similar or better in the low-cost hospitals. Now, the retirement system is looking to cap costs on other procedures.

The Down Side

The results from this study are no doubt impressive but, although reference pricing is easy to understand, it is somewhat complicated to implement.

“The key issue with reference pricing is, effectively, you need to have two services or products that are clinically identical,” says Lorens Helmchen, associate professor of health administration and policy at George Mason University. This need for equivalency limits where reference pricing can be applied. It is already in common use for pharmaceuticals and Brown sees it being applicable to standardized procedures such as cataract surgery and colonoscopies. However, other procedures — such as cancer surgeries — vary widely and it would be difficult to identify what qualifies as the standard form.

“We want people to get what they need but make sure that they’re getting it at a place that gives the highest amount of value.”

There may also be push back from certain medical providers and patients. Helmchen says that the high-priced providers will likely try to argue that their service differs from the standard and should therefore not be included in the cap price. Patients, he says, may also argue that their good or service of choice is superior to the standard and feel cheated when they have to cover the cost difference.

Costlier Options Remain

While patients may be miffed about a perceived infringement on their options, Brown points out that reference pricing is neither meant to limit choices nor discourage the use of medical goods and services. He compares reference pricing to Preferred Provider Organizations.

If people want to choose a hospital that will charge above the reference price, it’s similar to people who choose doctors outside of the PPO. They can make that decision but they will pay extra for it.

“We want people to get what they need but make sure that they’re getting it at a place that gives the highest amount of value,” says Brown.

Reference pricing is not widely used yet and Helmchen says we’re still a ways away from that happening. But both Brown and Helmchen agree that it’s part of a bigger movement toward transparency in medical pricing.

“If [a] consumer is exposed to at least a fraction of the cost differential then that should engender some more critical review of the effectiveness relative to the cost of these alternatives,” says Helmchen.

Reference pricing may not end up the pricing strategy of choice, in fact you may not ever hear about it again, but with our country’s ever-rising health care tab, increased consumer knowledge of health care cost seems all but inevitable.…