Reference pricing — or capping payment for a specific healthcare service — offers only modest potential savings for health plans and purchasers looking to contain costs, according to an analysis released by the nonpartisan National Institute for Health Care Reform.
Researchers from the former Center for Studying Health System Change (which has merged with Mathematica Policy Research) simulated the effects of applying reference pricing to 528,000 active and retired nonelderly U.S. autoworkers and their dependents in 19 metropolitan markets in the Midwest, based on 2011 enrollment and claims data. They found that capping the amount health plans and purchasers would pay for "shoppable" inpatient and ambulatory services — defined as those that are typically scheduled in advance, can be performed by multiple providers in the market and have pricing data available for the different providers — would lead to estimated potential savings of only 5 percent of total healthcare spending.
In the most famous real-life example of reference pricing, the California Public Employees' Retirement System set a $30,000 cap starting in 2011 for inpatient hip and knee replacement, based on quality and price information, according to the study. CalPERS designated certain hospitals that met the reference price, and patients receiving hip and knee replacements at these facilities face only the health plan's typical cost-sharing requirements. Patients who received replacements at non-designated hospitals faced the usual cost-sharing (such as co-payments) as well as responsibility for any amount beyond the $30,000 cap.
The reference pricing resulted in $5.5 million in cumulative savings in 2011 and 2012. However, that represents only a small fraction of the amount CalPERS spends annually to provide health benefits: In 2011, the system's price tag totaled more than $6.67 billion.
Overall, reference pricing is limited as a cost control tool because shoppable services only account for about a third of total healthcare spending, and it only affects prices at the high end of the spectrum, according to the study. Reference pricing also potentially leaves patients vulnerable to significant cost sharing, which makes health benefit designs even more complex. "From a plan management perspective, the analytical and financial resources needed to establish a reference pricing system might be better invested in other activities, such as narrowing the plan's physician network or renegotiating outlier facility contracts," the researchers write.
Additionally, they suggest those asking whether reference pricing can successfully steer patients toward lower-cost providers are potentially missing a bigger, more important issue. "A better question may be why private health plans would ever pay negotiated prices over $30,000 for inpatient knee and hip replacements," especially considering that Medicare paid an average of $14,324 for inpatient hip and knee replacements in 2011, the researchers write.