Please ensure Javascript is enabled for purposes of website accessibility
(The Daily Record/Maximilian Franz)

Here’s why ‘reference pricing’ matters to you

If you’ve never heard the term “reference pricing,” you’re not alone. But you may start hearing it more often, so listen up.

Reference pricing is a (relatively) new cost-containment strategy that, according to some experts, might become the next big thing among large employers looking to reduce health insurance costs.

Reference pricing works like this: An employer puts a dollar limit on the amount it will pay for certain pricey medical procedures for its employees. Knee and hip replacements are good examples because the surgeries are widely available, but different providers charge considerably different prices, even though quality tends to be consistent.

So, to encourage employees to choose less-expensive providers, the employer sets a cap — the reference price — at, say, $30,000 for a given procedure. If an employee chooses a provider that does the surgery for $40,000, the employee must pay $10,000 out of pocket, even if the chosen provider is in-network.

That $10,000 (or whatever the difference is) does not count toward the employee’s out-of-pocket maximum, which is currently set at $6,350 for an individual and $12,700 for a family plan.

Because of that, the Obama administration recently determined that referencing pricing does not violate the provisions of the Affordable Care Act, which requires most plans to cover 100 percent of health care expenses after the policyholder reaches the out-of-pocket maximum.

For employers who are interested in reference pricing, the recent federal rule helps clear the way for them to try it out.

Confused? Relax.

Not only has the strategy not yet taken off among Maryland businesses, several industry insiders — including brokers, carrier representatives and health care providers — said they’ve never even heard of it.

In 2012, just 11 percent of employers with 500 or more workers were using some form of reference pricing, and another 16 percent were considering it, according to a study published this year by the Employee Benefit Research Institute.

That means your boss probably won’t adopt the strategy any time soon.

“But I do see employers going in this direction,” said Paul Fronstin, a senior economist with EBRI and one of the study’s authors.

Why? One reason is a desire to avoid the so-called Cadillac Tax, which in 2018 will slap a 40 percent levy on the highest-value insurance plans. If employers spend less on employees’ health care, they could avoid the tax, Fronstin said.

Extra-large employers will likely be the first ones to test the waters, Fronstin said, but adoption rates will probably rise slowly as businesses monitor the experiences of the handful of employers who do use reference pricing.

One of the most well-known groups already using the tactic is the California Public Employees’ Retirement System (CalPERS). After reference pricing was implemented, area hospitals began charging about 20 percent less for a knee replacement, according to the EBRI study.

That’s one of the main goals of reference pricing, but success isn’t guaranteed. High-cost providers may be reluctant to lower their prices unless they’re confident they’ll receive off-setting gains in volume.

Reference pricing may also have undesirable effects, Fronstin said. For example, providers who had been offering the procedure below the reference price may bump their prices up to the threshold.

Additionally, “[providers] with sufficient market power and/or strong patient relationships may be successful in standing their pricing ground,” the study notes. “Providers may move to increase prices of non-RP health services in order to fill the revenue hole resulting from the pricing impact of RP practices.”

And Dr. Nick Grosso, an orthopedic surgeon, said the whole concept of reference pricing is an oversimplification of the health care price-setting process.

A procedure’s total price tag includes many different costs: the surgeon’s fee, the operating room fee, the anesthesia, the physical therapy.

And the biggest chunk of the cost of a knee or hip replacement is the cost of the implant, Grosso said, adding that surgeons usually don’t have much control over that.

Hospitals can negotiate better prices with suppliers, he said, but the surgeons at one hospital might be negatively impacted by reference pricing if another hospital negotiates a better supplier contract.

Grosso also worries quality could be affected if providers are scrambling for ways to reduce the cost of a procedure.

“You don’t want hospitals going back to an older generation of the [implant] because it’s so much cheaper,” he said. “We don’t want cost pressures to get to the point where they’re going to cut corners that could impact patient care.

“Would some guys be tempted to lower their prices to compete? Probably. Would those be the surgeons you want to do your surgery? Probably not. I think we’ve gotten to the point where there’s not much more we can cut from our budgets.”