Reference Pricing: A Small Piece of the Health Care Price and Quality Puzzle

Research Brief, Number 18
Publisher: Washington, DC: National Institute for Health Care Reform
Oct 01, 2014
Chapin White and Megan Eguchi

Key Findings: 

  • Using an inclusive definition, all shoppable services accounted for about one third of total spending if both inpatient and ambulatory services are included, and estimated savings from applying reference pricing to those shoppable services was 4.8 percent of total spending.
  • Elective knee and hip replacements, the archetypal shoppable procedure, were the most common type of inpatient stay in the claims data but only accounted for 1.6 percent of total spending. The potential savings from reference pricing would be relatively small—0.2 percent of total spending. All other shoppable inpatient stays accounted for 27.2 percent of inpatient spending and a larger, but still modest, share of total spending (6.4%). Reference pricing savings for other shoppable inpatient stays was estimated to be 0.6 percent of total spending.
  • In the autoworker claims data, spending on shoppable services occurred primarily in hospital outpatient departments and physician offices (18.0% of total spending) and in imaging and laboratory facilities (9.2% of total spending). Although the prices of individual ambulatory services are generally far lower than the price of an inpatient hospital stay, ambulatory services collectively are much more common and more substantial from a spending perspective.
  • Hospitals in the simulations were designated as high-value providers for inpatient care based on a combination of quality metrics from the Centers for Medicare & Medicaid Services and the prices and volume of shoppable inpatient stays in the claims data. The case mix–adjusted average price per stay for shoppable stays was 38 percent lower at designated hospitals than at non-designated hospitals ($8,118 vs. $13,096). 

As purchasers seek strategies to reduce high health care provider prices, interest in refer­ence pricing—or capping payment for a particular medical service—has grown signifi­cantly. However, potential savings to health plans and purchasers from reference pricing for medical services are modest, according to a new analysis by researchers at the former Center for Studying Health System Change. In this analysis, private insurance claims data from 2011 for about 528,000 active and retired non-elderly autoworkers and their dependents were studied. In 2011, the California Public Employees’ Retirement System (CalPERS) adopted refer­ence pricing for inpatient knee and hip replacements. Using quality and price information, CalPERS set an upper limit of $30,000—the reference price—for hospital facility services for a knee or hip replacement. CalPERS designated certain in-network hospitals as meet­ing the reference price, and patients using designated hospitals are responsible only for the health plan’s usual cost-sharing amounts. However, if patients use a non-designated hospi­tal, they are responsible for both usual cost sharing and any amount beyond the $30,000 reference price. Although reference pricing for inpatient services has some potential to steer patients to hospitals with better quality metrics, only limited savings—a few tenths of a percentage of total spending—are possible from applying a similarly narrow reference pricing to other privately insured populations. If reference pricing were applied to a much broader set of so-called “shoppable” inpatient and ambulatory services, potential savings would be somewhat larger—roughly 5 percent of total spending. The potential savings from refer­ence pricing are modest for two reasons: shoppable services only account for about one third of total spending, and reference pricing only directly affects prices at the high end of the price distribution. When considering reference pricing, employers and health plans need to weigh potential savings against increased plan complexity and financial risk to enroll­ees, along with the analytical and financial resources needed to create and manage the program.