Reference pricing is not a new concept. Generally defined as a mechanism by which a payer with sufficient market strength can impose a fee structure on high-cost procedures such as hip or knee replacement, it has also been applied to high-cost diagnostic imaging and laboratory services. It’s designed to save money for third-party public and private payers.
Since its inception, reference pricing has been used by government health plans. These plans imposed a fee schedule on the market, which providers could either accept or reject. One of the most successful early uses of reference pricing was for certain classes of prescription drugs. However, reference pricing has much broader applicability in terms of medical services and has the potential to affect every segment of the health care industry, including government-sponsored health care exchanges.
The most publicized recent example of reference pricing is the experience of CalPERS (1.3 million covered lives) in paying $30,000 for a knee or hip replacement at hospitals across California. Previously, the prevailing Anthem Blue Cross of California network contract price ranged from $15,000 to $110,000. Implementing reference pricing in 2011, CalPERS saved $7,000 for each surgery (30% savings per procedure). However, because the program included only 450 to 500 enrollees in Anthem PPOs, the estimated savings of $2.8 million amounted to only 0.26% of total health care spending ($1.1 billion for Anthem enrollees). Thus, the program had limited potential to address overall cost trends or utilization.
Without a formal agreement on reference pricing, there is no prohibition against balance billing by physicians and hospitals.
CalPERS’ reference pricing program was expanded from 45 hospitals in 2011 to 54 hospitals the following year, when arthroscopy, cataract surgeries, and outpatient colonoscopies were added. The largely successful initiative has helped to create a fad among many purchasers, especially employer-sponsored health plans, to consider reference pricing as a strategy for reducing costs. Some people now perceive this pricing tool as a silver bullet to reduce costs without a downside risk.
These people are uninformed. Actually, there are six factors that threaten to limit the effectiveness of reference pricing.
Medicare fee schedules are complicated. They encompass more than 10,000 CPT and HCPCS services and are priced by RVU adjustments for each ZIP code. Hospital institutional and technical fees are priced by ZIP code-specific DRG codes.
To generate a Medicare-referenced price fee schedule, most TPAs must acquire expensive software from a third-party vendor that specializes in Medicare reimbursement data.
If an employer-sponsored health plan wants to implement reference pricing as a meaningful cost-reduction strategy, three objectives should be met. Reference pricing should:
Self-funded employer-sponsored health plans can select a more comprehensive cost management design by combining a reference price for a particular service or billing category with cash rates for all other services not covered by reference pricing. Thus, reference prices for specific procedures can be linked with a wraparound of lower-priced cash rates for bundled billing categories. This wraparound strategy meets the objectives of including all services (institutional, professional, and technical fees) and further reducing medical expenditure (lower cash rates for services).
In addition, bundling services for guaranteed cash price is generally accompanied by the employer-sponsored health plan waiving any patient deductible and coinsurance. This serves as an incentive for employees to participate. Likewise, it enhances beneficiary access to medical services in the private health care market by removing the obstacle of patient liquidity concerning high deductibles.