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Thursday, June 19, 2014

Reference Pricing Programs Need to Follow Key Guidelines to Ensure That They Don’t Shift Costs to Consumers

Lydia Mitts

Former Associate Director of Affordability Initiatives

Recent news articles have highlighted how some employer-based health plans have started to set dollar caps on what they will pay for certain health care services. If a consumer goes to a provider that charges more than the cap for that type of care, he or she must pay the difference. This strategy is called reference pricing.

Reference pricing is meant to encourage consumers to shop for the best care at the best price, and it even has the potential to pressure some expensive providers to set more competitive prices. However, if reference pricing programs are implemented poorly, there is a real risk that they could shift significant costs to consumers and hinder their access to high-quality, affordable health care. 

Families USA’s new brief, How to Make Reference Pricing Work for Consumers, explains how reference pricing works. It also outlines eight key principles that reference pricing programs must follow to ensure that they protect consumers’ access to care and give consumers the support they need to shop for care based on price and quality. 

Reference pricing aims to minimize variation in health care prices

Today, the price for the same exact medical service can vary dramatically depending on the provider. But more expensive providers often don’t deliver higher-quality care—rather, they have greater market power to negotiate higher prices with health insurers. 

On top of this, it is very difficult for consumers to get information on the price of the care they need. 

In some states, it is becoming easier for consumers to obtain providers’ “list prices” for services, which are sometimes called “charges.” But these “charges” are often much higher than the discounted prices that insurers negotiate with providers and, therefore, are less useful to consumers who are trying to figure out what they will end up paying. 

It is much more difficult for consumers to get information on the negotiated prices their providers charge their health plan, and an estimate of the portion of the bill they will be responsible for paying through cost-sharing (for example, copayments and deductibles). 

Reference pricing can be designed to address these problems by 1) giving consumers price information and incentives to choose care from higher-value providers (providers that deliver the best care at the best price) and 2) pressuring expensive providers to lower their prices.  Whether reference pricing is an effective tool hinges on if it is implemented in a consumer-friendly way. 

How reference pricing works

In reference pricing, an employer or health plan identifies a few health care services where there is significant price variation. The employer or health plan then sets a maximum price it will pay for this care based on the amount that a significant portion of high-quality providers in the area charge for that service.  

If consumers opt to get care from providers who charge within the reference price, they have to pay only the standard cost-sharing for their plan. But if consumers opt to see providers who charge more than the reference price, they also have to pay the full difference between the reference price and the price of their care, in addition to any other cost-sharing.  

Reference pricing can help—or hurt— health care consumers

If implemented effectively, reference pricing can give consumers more transparent information about the price and quality of care that is available from different providers. It can also encourage consumers to get care from high-value providers.  

More importantly, over time, reference pricing can actually drive overly expensive providers to lower their price for care. The California Public Employees’ Retirement System’s (CalPERS) reference pricing program, which targeted hip and knee replacement surgeries, actually generated substantial savings from hospitals lowering their prices to more closely align with CalPERS’ reference prices.

However, health plans need to carefully design their reference pricing programs  to protect consumers. If poorly designed, reference pricing risks shifting significant costs to consumers or hindering their access to high-quality providers. For example, if a plan sets a reference price too low, it could make it difficult for consumers to find high-quality providers who charge within the reference price.  And if consumers do not have the tools and support they need to find high-quality care that is within the reference price, they could be unexpectedly left with significant bills.  

How to ensure reference pricing programs work for health care consumers

There are a number of guidelines reference pricing programs must follow to ensure that they protect consumers’ access to care and provide consumers with the necessary tools and information they need to shop for care based on price and quality. These include: 

  • Transparent price and quality information: Reference pricing programs must be built on a foundation of price transparency. This means giving consumers understandable and actionable information about the price and quality of different providers. This information needs to come in easy-to-use formats (like online comparison tools) that help consumers compare providers and understand what they will pay.
  • Appropriate services: Reference prices should be set only for “shopable” health care services for which consumers have the time to compare and choose providers. These are standard and scheduled health care procedures like a colonoscopy, or a standard hip or knee replacement surgery.  It is never appropriate to set a reference price for emergency care or for otherwise standard care when a consumer suffers complications. 
  • Adequate networks: When a health plan sets reference prices, it needs to ensure that these threshold prices are high enough to include an adequate network of high-quality providers across all regions that the program serves. If a plan is already struggling to maintain an adequate network of providers in a particularly specialty, it should never set a reference price for services delivered by those providers.
  • Consumer support: Reference pricing adds a layer of complexity to health insurance benefits that may already be very confusing to some consumers. In addition, consumers are not used to comparing providers based on both price and quality. For these reasons, it is very important for health plans that implement reference pricing to invest significant time and resources in helping consumers understand how reference pricing works and helping them find providers who charge within the reference price. 

These and other safeguards are critical to ensuring that reference pricing programs are designed in consumer-friendly ways and don’t hinder access to high-quality, affordable care. 

For more information, check out How to Make Reference Pricing Programs Work for Consumers and our accompanying infographic.