7 things to know before you adopt reference pricing

Reference pricing — the capping of what employers will pay for certain medical procedures — is expected to grow now that the Obama administration has sanctioned this tactic, something that groups representing large employers have long advocated.

But now that employers can set caps on such procedures as hip and knee replacements, carpel tunnel surgery, colonoscopies and more, how should they integrate it into their plans?

Kaiser Health News has come up with guidelines designed to give employers the cost-containment advantages they seek while protecting employees from unwittingly making themselves liable for thousands in personal expenses because they didn’t understand the rules of this new game. Here’s what it came up with:

1. How reference pricing works: It’s all about surveying and setting a fair maximum price per procedure. KHN notes that reference pricing got a huge boost when CalPERS did research on what different California hospitals were charging for the same surgery, and discovering a range from $15,000 to $100,000 for the same procedure. The California state workers’ union has saved millions of dollars through its reference pricing program. The key is to do good research (i.e., use a large enough sample), set a standard for a quality outcome, and then see where most of the good outcome hospital prices fall. An employee doesn’t have to stick to the cap, but they are on the hook for the difference in cost.

 

2. What the Obama administration agreed to: Specifically, “large or self-insured employers [can] use reference pricing in designing health plan benefits,” KHN wrote, adding that employers can also establish reference prices for generic drugs. Again, employees can opt for a more expensive drug, but they pay the cost difference.

3. Now that they have reference pricing, will employers use it? Yes, probably about a third of large employers either already use it or will soon. KHN cites a Mercer study that found that 10 percent already use reference pricing, and another 22 percent said they were considering it. Paul Fronstin of the Employee Benefit Research Institute told KHN other employers have been considering but were concerned that it might be ruled illegal. Now, he said, that segment will jump in.

4. Does the cap on consumer costs included in the Patient Protection and Affordable Care Act protect employees from liability for the amount spent over the reference price? No, KHN says. “The health law caps what consumers can be required to pay annually toward in-network care through deductibles or other cost-sharing to $6,350 for an individual, or $12,700 for a family. But costs incurred by workers who choose providers that charge more than the reference price will not count toward that limit,” it reports. It’ll be the same as going out of network for these consumers, it says.  And employers should communicate this to employees very clearly.

 

5. What sort of savings can employers expect from reference pricing? Plenty, when large employers apply it to high-cost, often-performed procedures. As employers gather more information about more regular medical procedure costs, they will be able to set reference prices for more areas where costs can vary widely. KHN says there’s no point in spending time and money on reference pricing for things like trips to the ER, because the cost savings won’t be large enough to warrant the investment. And there have to be consequences for those who spend more or it will fail, it says. “Because the approach relies on market pressure, it also would not work well in areas with only a few medical providers, or where price and quality information is not made available, either by the providers or the employers using reference pricing.”

6. Are employers settling for lower quality outcomes by setting a reference price? Not at all, according to KHN. It says there are plenty of studies that show very little relation of cost to quality of the outcome. But the reference price selected should include a quality/outcomes component because, of course, employers want employees to receive good treatment so they can return in good health to the job.

7. Is the administration done with reference pricing guidance? Not even close. KHN says the administration has requested comments on the subject, to be filed by Aug. 1, “including suggestions for standards to ensure ‘meaningful access to medically appropriate, quality care.’”

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