EXECUTIVE SUMMARY

Reference pricing can save billions of dollars in healthcare costs. This model has proven to be successful at steering consumers to lower-cost providers, such as ASCs.

  • Not all patients are cost-sensitive, but of those who are, ASCs’ lower costs/high quality is appealing.
  • The California Public Employees Retirement System (CalPERS) implemented reference pricing in 2012. CalPERS uses cost-sharing to encourage people to shop for better prices.
  • Reference pricing looks at cost variation for any given procedure and considers whether the variation is due to quality.

Reference pricing, as it was implemented in California, reduces medical spending as people choose lower-price surgery centers.1

“We found that there was a modest reduction in prices for ambulatory surgery centers, but not for hospital outpatient departments,” says Timothy T. Brown, PhD, associate director of research at Berkeley Center for Health Technology and associate adjunct professor of health economics at the University of California, Berkeley. If reference pricing, as it is used in California, were expanded nationally, it potentially could save nearly $20 billion, Brown says.

“For ASCs, the size of the price drop depended on the procedure in question and the proportion of local patients in the reference pricing program,” Brown says. “The price drops [related to ASCs] applied to all private insurers studied, whether or not they implemented reference pricing.”

Many patients shifted from hospital outpatient departments to ASCs. Reference pricing changed patients’ decisions for every procedure studied, Brown explains. The price drops were concentrated among ASCs. Patients who used hospital outpatient departments valued hospitals more and were less sensitive to high prices.

“Thus, ambulatory surgery centers would lower prices due to competition for the price-sensitive patients, whereas hospital outpatient departments did not need to compete with each other as much, since the remaining patients are likely not as sensitive to price differences across hospitals,” Brown says.

The advantage to reference pricing, when payers give enrollees incentives to choose a lower-cost provider, is that it gives consumers direct incentives to comparative price shop.

“When faced with reference pricing, consumers do shop,” Brown says. “The savings to employers and insurance companies from reference pricing are relatively large.”

Another advantage is that reference pricing does not require any renegotiation of existing prices. “There are insurers and consulting organizations that can set up reference pricing for both shoppable medical procedures and shoppable pharmaceuticals.”

Since Brown and his colleagues published the reference pricing study in late 2017, this trend has gained some momentum.

“This has been done with a number of different kinds of medical procedures, starting with pharmaceuticals, as well as with ambulatory surgery centers,” Brown says. “The main take-up has been in California.”

The California Public Employees Retirement System (CalPERS) implemented reference pricing in 2012. CalPERS uses cost-sharing to encourage people to shop for better prices. After starting with hip and knee procedures, CalPERS has added cataracts, arthroscopy, colonoscopy, endoscopic procedures, and pharmaceuticals.

“We did a website piece on colonoscopy and looked at what the savings would be for employers and insurers across the country — depending on variation of prices, and in most cases you would save money,” Brown explains.

Reference pricing looks at cost variation for any given procedure. It addresses whether the variation is due to quality, which usually is not the case, Brown notes. “ASCs are happy. They’re getting more business. The losers are the hospitals that charge really high prices,” Brown explains. “It cuts off the top end variation, the really expensive providers that are not providing additional value for the higher price. Reference pricing moves people from high-price distribution to a more reasonable range. People have to decide whether they want to go to a hospital or to an ASC and save money. A lot of people make the choice to save the money.”

REFERENCE

  1. Whaley CM, Guob C, Brown TT. The moral hazard effects of consumer responses to targeted cost-sharing. J Health Econ 2017;56:201-221.