Some Good News about Reference Based Pricing

Way up there on the list of things not to like about the U.S. healthcare system is the extreme variation in prices charged for the same service from one provider to the next – variation that is very often unrelated to quality of care. While employers are tackling this problem in a few different ways, there isn’t a ton of data to show how well any of these strategies work. So I jumped on the recent New York Times article reporting on one mega-employer’s attempt to achieve more standard pricing while still allowing members to choose their providers – reference-based pricing. The employer in question is the California Public Employee Retirement System, or Calpers for short, and the experiment included 450,000 of its members.

Beginning in 2011, Calpers set a limit on the amount it would contribute to the cost of a number of elective procedures, including knee and hip replacement surgery, colonoscopies, and cataract removal surgery. They made sure there were some hospitals that met certain quality criteria that would provide the service at or below their maximum contribution amount. Patients who wished to get a procedure at a hospital charging more would have to pay the difference themselves. That was a strong incentive for members to go to the less-costly hospitals, and a strong incentive for hospitals charging above the maximum to lower their prices.

As described in the article, it’s hard to see the program as anything other than a success. In two years, Calpers saw a 20% drop in prices for the services with reference-pricing, while, according to the article, “typical health care prices paid by employer-sponsored plans rose by about 5.5%.” During that time they saved $6 million on knee and hip replacements, and $7 million on colonoscopies. Even better news: Researchers found no evidence that quality suffered as prices fell.

You might think results like those achieved by Calpers would send other employers flocking to this strategy. But our most recent survey found that just 13% of all large employers currently have reference pricing in place for some services, although another 18% say they are considering it (among the largest employers, the number considering rises to 29%). As with most good things in life, there are a number of caveats that go along with reference pricing. You need enough hospitals in a given market so that patients have a choice about where to receive care and hospitals have an incentive to reduce prices. You need the resources to assess quality and choice, to set fair reference prices, and to communicate the program to employees. You need employees who will be able to use the program to their advantage.

And even if you can check all these boxes, reference pricing will only be part of the solution. It addresses elective care – “shoppable care” – which only accounts for about 40% of healthcare spending (leaving a lot of price variation to be dealt with by other means). But it could be a good starting point. And for employers that don’t have the right market conditions or the resources to pull off a program like Calpers’, think about a Center of Excellence approach – another way to build value and transparency in the U.S. healthcare system.

Beth Umland
by Beth Umland

Director of Research, Health, Mercer

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