Reference pricing exposes cost variation, but doesn't save money

Although the practice of reference pricing helps emphasize the wide variation in medical costs, it doesn't actually decrease healthcare spending, according to a new report from the National Institute for Health Care Reform.

NIHCR simulated the impact of reference pricing for claims data on 528,000 consumers in 2011 by applying the price capping method to about one-third of those claims. It determined that reference pricing would only decrease costs by 5 percent, excluding the amount of money needed to actually operate the system.

The report also showed that NIHCR determined that reference pricing leads to complicated health plans that easily confuse consumers. That's partly because reference pricing success depends upon consumers' ability to compare prices and choose the lowest costs.

What's more, insurers have to invest significant analytical and financial resources to establish a reference pricing system.

Reference pricing is about "zeroing in on a piece of the health spending puzzle that is critical, the unreasonably high negotiated prices paid by health plans … but it's not going to get you there if you need to save a lot of money," report co-author Chapin White told Kaiser Health News.

The reference pricing method became a more common approach to lowering costs after the California Public Employees' Retirement System (CalPERS) saved $5.5 million in two years by capping hip and knee replacement procedures. The average price for those surgeries fell 26 percent, amounting to a $9,000-per-procedure savings, FierceHealthPayer previously reported.

But the report authors suggest that instead of using reference pricing, insurers should be investigating how providers determine their charges and work to negotiate better rates. "Health plans should never have entered into contracts with hospitals where they pay more than $30,000 for inpatient hip and knee transplants," White said.

To learn more:
- here's the NIHCR report
- read the Kaiser Health News article