The limitations of reference pricing

The California Public Employees Retirement System's (CalPERS) knee-and-hip experiment--which saved $5.5 million in two years by capping hip and knee replacement procedures--shows an understanding for how consumers' knowledge of the price of care affects insurer and provider-focused initiatives, according to a Health Affairs blog post.

To focus more on consumer needs, CalPERS implemented reference pricing. However, as the post points out, there have been situations throughout the industry where reference pricing acts as a substitute, as opposed to a complement, to insurer and provider incentives.

When it comes to provider rates, most consumers choose the lower-cost option. But changes in consumer choice often result in reductions in prices and payments, which in turn causes payments by insurers to decline as consumers shift to providers who charge less.

Yet reference pricing has caused actual price reductions, not just slowdowns in the rate of price growth, which is how the markets should work, the post notes.

According to the post's authors, reference pricing should only be used on procedures that are deemed "shoppable" for consumers. Meaning, patients have the appropriate time to make choices based on both price and performance.

Additionally, reference pricing should not be used for emergency procedures. Rather, it should be applied to complex conditions. CalPERS, for instance, does not include revision surgery after a failed joint replacement in its reference pricing. 

CalPERS' reference pricing strategy considered all the available quality measures. While industry execs have been quick to judge reference pricing in the past, Health Affairs notes that none of its critics' preferred cost-reduction strategies, such as bundled payments, have better measures of quality.

For more:
- here's the blog post