Reference pricing may be biggest threat to hospitals in transparency battles

Hospitals have resisted price transparency in small and large ways. That makes sense, because being opaque about what you charge presents specific business advantages--such as the ability to charge whatever you want, particularly in the case of patients who lack insurance and have virtually no bargaining power.

As I noted a couple of weeks ago, price transparency is slowly taking place in the hospital sector. But reference pricing could become a threat to price opacity, and possibly the greatest threat to opacity of them all.

Reference pricing is a pretty clear-cut practice. Based on extensive market research, a payer or group purchaser affixes a certain price to a procedure that it will pay a hospital, and no more than that. If patients wants their procedures at more expensive facilities, they are on the hook for all the costs.

A fairly remarkable example of this was recently undertaken by the California Public Employees Retirement System, or CalPERS, which purchases healthcare benefits for more than 1.3 million people, to cut the costs for joint replacement surgeries.

Joint replacements have increased in the U.S. in recent years, no doubt due to the aging population. But prices are exorbitant; some hospitals in California charge as much as $110,000 for the procedure.

Working in conjunction with Anthem Blue Cross of California, CalPERS set pricing for joint replacement surgeries at $30,000. It provided its enrollees a list of "high-value" providers that were underneath the price cap and scored well in quality.

The results were eye-opening. The average price for a replacement surgery fell from more than $42,000 to little more than $27,000 within two years. Fifteen hospitals were eventually added to the high-value list after they cut their prices, likely due to competitive pressures, according to the Agency for Healthcare Research and Quality.

Since the Obama administration recently gave the go-ahead for other insurers and purchasing groups to implement reference pricing, expect to see more initiatives like CalPERS and similar results.

However, that does not mean reference pricing will universally take hold. A single consumer buying insurance on a health insurance exchange simply cannot name his or her  price at a local hospital (although perhaps this is a service a Priceline-like company could market in the future). And if health insurers are able to reap such savings and don't pass them on to their enrollees or employee groups, reference pricing will not cut any costs out of the healthcare system at all.

Nevertheless, it remains an interesting concept in terms of keeping hospital pricing and costs under control. I suspect hospital leaders will have their eyes on its evolution just as much as the payers.- Ron (@FierceHealth)

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