Reference Pricing

Policy at its best is not only effective, but simple to implement, and easy to understand

--Timothy Brown, Associate Director for Research

Reference Pricing: Surgical and Diagnostic Procedures

Prices paid for the same services vary significantly even within the same market yet, consumers often lack access to information about price and quality when seeking medical care, and providers are not required to justify higher prices with evidence of better quality. Reference pricing can motivate providers to compete based on price as well as quality, and to pursue cost-reducing innovations. The Berkeley Center for Health Technology (BCHT) conducts reference pricing research in order to identify and refine methods to control health care spending while insuring access and quality.

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Reference Pricing is an insurance benefit design that: 

  • Encourages enrollees to favor providers charging low prices for non-emergency “shoppable” surgical procedures, diagnostic tests, and pharmaceuticals
  • Can supplement or substitute for annual deductibles in health insurance
  • Can motivate providers to compete based on quality and price
  • Can motivate providers to pursue cost-reducing innovations
  • Requires access to information on price and quality to be effective

 

Reference Pricing for Diagnostic Tests and Procedures

Reference Pricing for Surgical Procedures

 

BCHT Projects

Reference Pricing as a Purchasing Strategy to Promote Cost-Effective Drug Choice

This project analyzes pharmaceutical reference pricing initiatives currently underway in the US as they extend into new patient populations and therapeutic categories. ”Reference Pricing as a Purchasing Strategy to Promote Cost-Effective Drug Choice“ examines the extension of economic incentives to broader employer and labor union populations, compared to those previously studied. While drug reference pricing has focused primarily on retail patient-administered drugs (‘therapeutic reference pricing’), the project also will study the application of economic incentives to physician-administered (infused) specialty drugs. Reference pricing is an insurance benefit design under which consumers have access to the low-cost drugs in each therapeutic category for nominal copayments, but must pay the full difference in price if they and their physicians select more expensive therapeutically equivalent products.  Patients needing a more expensive drug for appropriate clinical reasons are exempted from the additional out-of-pocket payments.  This project is funded by the Laura and John Arnold Foundation.

Reference Pricing for Drugs in the US and Germany

Reference pricing has been applied to categories of drugs featuring multiple identical (generic) or similar drugs in Germany and in some other European nations.  Purchasers limit their payment to the price of the cheapest, or one of the cheapest, drugs in the category, leaving the patient responsible for paying the difference between the purchaser contribution limit and the price of more expensive alternatives.  Needless to say, patients facing reference pricing usually ask their doctors to prescribe the cheaper alternative, and pharmaceutical manufacturers often reduce their prices to the purchaser’s contribution limit.

BCHT has published a major study of drug reference pricing in the United States and has ongoing projects extending this area of research both in the US and in Germany.

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Reference Pricing for Surgical Procedures

Impact of Reference Pricing on Surgical Complications and Costs

Beginning in 2010 and 2011, the California Public Employees' Retirement System (CalPERS) established reference pricing (providing full coverage up to a defined contribution limit while requiring the patient to pay the difference between this limit and the actual price paid) for five high-cost procedures based on the state-wide distribution of prices, available information on quality, and the geographical availability of services. These procedures include hip replacement surgery, knee replacement surgery, arthroscopic surgery, cataract surgery, and colonoscopy. For reference pricing to be fully effective, individuals should not face a quality difference in the services they receive based on the type of facility in which they receive services. To ascertain the existence of quality differences and related questions, this study evaluates the impact of the CalPERS reference pricing initiative on surgical complications, consumer cost sharing and insurer payment. The study uses 2009-14 data from the nation’s largest private health insurer, Anthem Inc.,  and is jointly funded by CalPERS and the Agency for Health Care Research and Quality (R01 HS022098).

INTERACTIVE MAP: Potential Savings from Reference Pricing for Colonoscopy Procedures by HRR

(click here or on map to left)(link is external)(link is external)(link is external)

Hover over a Hospital Referral Region (HRR) on the map to see the projected savings

along with the key predictive market parameters used. 

HRR Map Data Table

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Potential Impact of Expanded Reference Pricing Programs National Price Variation and Potential for Spending Reductions

In response to rising health care costs, many employers and insurers have implemented programs to change how consumers select health care providers. Underlying these programs is the wide variation in prices charged for the commercially insured population. Of particular interest is the reference based payments program (RBP) implemented by the California Public Employees’ Retirement System (CalPERS) for outpatient surgical services in 2012. We have documented that this program leads to substantial changes in consumer behavior and delivers financial savings to CalPERS. In this project, we use a nationwide database of medical claims provided by the Health Care Cost Institute (HCCI) to estimate the potential savings if an analogous program were to be implemented in other geographic markets. For each local market, we identify the degree of price variation and estimate the effectiveness of RBP programs. For colonoscopies, we estimate that RBP can lead to an 8.5% savings per procedure. This study is funded by the Laura and John Arnold Foundation.

Reference Pricing for Colonoscopies in California

In 2012, the California Public Employees’ Retirement System (CalPERS) implemented a Reference Pricing program for outpatient colonoscopy services. The program uses targeted financial incentives to encourage patients to receive care from less expensive providers. Reference Pricing is a form of defined contribution health benefits, where plans pay a fixed amount or limit contributions toward the cost of a specific health care service, and members pay the difference in price if a more costly health care provider or service is selected. Earlier work has shown that the program reduced medical spending by $5.5 million over two years.

Can Similar Savings be Realized Across the Nation?

Based on the success of the CalPERS program, an important question is if similar programs will work equally well in other markets or is the CalPERS experience unique to California? To answer this question, we identified the market-characteristics that drive the effectiveness of the program across different markets in California. We then used data from the Health Care Cost Institute (HCCI), along with companies providing data to it—Aetna, Humana, and UnitedHealthcare—to identify market characteristics across the country. We mapped the savings associated with the drivers identified in California to all markets in the United States to estimate where Reference Pricing programs might have the largest impact.

How Are Health Care Markets Defined?

Health care is highly localized in the United States. To analyze trends, it is necessary to organize service providers into groups. One such grouping, “Hospital Referral Regions” or HRRs, maps regional health care markets for tertiary medical care that generally requires the services of a major referral center.