Reference-Based Pricing for Procedures Presents Possibility of Savings, Plenty of Questions
Economics Feature — December 2017
Tex Med. 2017;113(12):43-47.
By Joey Berlin
On paper, it's an intriguing way to lower costs for both physicians and health plans, and it could reduce premiums for patients. It also could enable doctors to wrestle more contract-negotiating leverage out of the hands of the market's dominant health plans ― and in some cases, contracting with them might not even be necessary.
Those tantalizing possibilities exist with reference-based pricing ― along with some other possible consequences such as lower physician payments.
In reference pricing, a payer or employer sets a standard, maximum price that it will pay for a specific service or procedure. Patients are responsible for any costs above the reference price.
When patients know the exact dollar figure at which their responsibility kicks in, the argument for reference pricing goes, they can then shop around for care and find less-expensive treatment options. It's already being used in Texas and has generated millions in savings elsewhere when applied to hospital charges.
That ability to shop, though, can introduce issues with care.
Dallas oncologist Lalan Wilfong, MD, leads quality and value-based care programs at Texas Oncology, which has dealt with reference-priced plans for services such as labs and imaging. With those patients, he says, questions sometimes emerge about quality and care continuity ― such as when patients, prompted by reference pricing, go to an imaging center unfamiliar to a Texas Oncology physician. Sometimes, Dr. Wilfong said, "you end up doing imaging at centers that you're not as comfortable with using."
"It can be a little challenging if patients are having to go to different centers to get their imaging done," Dr. Wilfong said. "Sometimes you lose that continuity of the same people reading your scans and then being able to review response to therapy from one scan to the next, if they're moving to different places."
Still, reference pricing ― caveats and all ― offers promise in a health care environment in which rising costs continue to confound all the players involved.
Pros and Cons
In a report to TMA's Council on Socioeconomics earlier this year, Texas Medical Association staff presented a number of considerations on reference pricing. The report noted the recent increase in the number of health plans that employ narrow networks and provide limited or no coverage to patients seeking out-of-network care.
"Plan consolidation, increasing premium prices, and reduced competition in the health insurance marketplace have limited the availability of competing, broad network plans," the report said. It noted that market domination by managed care plans with networks has resulted in several problems:
- Added costs for health plans to build and maintain networks, process claims, and credential physicians, which lead to higher insurance premiums;
- Higher costs to physicians and other providers for contracting, credentialing, and filing claims; and
- The belief among most Texas physicians that having a viable practice requires contracting with the biggest health plans in the market. That perceived obligation gives the health plans more leverage in contract negotiations.
Reference pricing offers an opportunity to address some of these issues. The Urban Institute explained in an April 2016 report that reference pricing can "apply to services that vary substantially in price, yet are commonly perceived to have little variation in quality," such as lab services, imaging, colonoscopies, and drug prices.
To arrive at the set amounts in a reference pricing plan, the report explained, a payer analyzes the range of prices it's paying for those services and determines "what it believes to be a reasonable price that won't create unintended negative consequences." Geography is also a factor to consider because health care prices vary in different areas.
"An adequate number of providers must be at or below the established price to ensure that enough patients have access to the targeted service or procedure," the Washington, D.C.-based think tank said in the report. "If the price is too low, patients may have a hard time finding a provider at or below the reference price." On the other hand, the report said, "if the price is too high, reference pricing will have little to no effect on spending."
According to the TMA staff report, "Networks and contracts may be used to assure access, but network participation is not necessary because the same price is paid in and out of network." Some reference-pricing schemes, however, might require network participation.
Potential benefits of reference pricing, according to TMA's report, include:
- Overhead costs for plans and practitioners are reduced because the need to negotiate contracts and credential practitioners to build and maintain networks is eliminated.
- Large groups don't have a particular advantage in negotiating leverage because in-network and out-of-network physicians are paid the same.
- Patients easily can determine their out-of-pocket costs ahead of care.
- Physicians not bound by contracts can make their own decisions about accepting assignment, filing claims, and collecting from their patients.
- Payments are easier for people with high-deductible plans with health savings accounts because collecting directly for funds that don't meet the deductible wouldn't necessarily require filing a claim.
While that all might sound great, there are several potential drawbacks to reference pricing. The TMA staff reported those could include:
- Plan reference prices might be low because many plans set prices by using a multiple of Medicare payments.
- Patients with reference-priced plans are likely to price-shop, seek discounts for prompt payment, and may attempt to negotiate, which may drive standard charges down.
- If a plan's allowables are low, it may require the physician to balance bill, which may lead to consumer resistance.
"In a competitive market, if reference pricing successfully incentivizes consumers to make cost-effective decisions about a service, it may draw some consumers away from higher-priced providers and toward lower-priced providers," the Urban Institute report said. "The threat of lower patient volumes could lead to price negotiations between the payer and providers in the market, which could lead to lower prices. However, providers may raise prices for other services to make up the difference."
Patient Engagement Concerns
The extent that reference pricing is being used in Texas commercial plans is unclear. Blue Cross and Blue Shield of Texas declined a request for an interview, and a Blue Cross spokesperson said "only a handful" of its members and employers have reference-based pricing contracts. Other health plans Texas Medicine contacted either didn't respond to the interview request or didn't make anyone available.
Little Elm internal medicine physician John Flores, MD, a member of TMA's Council on Socioeconomics, says reference pricing represents "a totally different model than we're used to."
"It definitely opens up some options for some of our patients who have the ability to do that. Whether they're going to be able to have the infrastructure to utilize that, that's the [question]. Some of these patients I have barely make it to my office," Dr. Flores said. "[And now] they're going to be the ones who are going to call different hospitals and figure out, 'OK, this procedure's this much at this hospital.'
"How are they going to decide [whether it's] appropriate to have it done there, and are they going to know the quality? One thing is transparency, and another thing is transparency that means something. So I think that's what you run into."
Dr. Wilfong says patients' engagement in their health care is important, but he's also skeptical of whether they'll make the right choices, saying it's hard for them to understand truly what high-quality health care is. For example, he says, a patient choosing a physician to perform a colonoscopy often bases that choice off word of mouth or his or her own experience. But a patient may not know anything about that physician's colonoscopy withdrawal time, which correlates with the ability to detect colon polyps.
"I think that's where as physicians and societies, we have to be able to show patients what that quality is and hold ourselves accountable to meeting those quality metrics, so that when patients do [have] the price transparency, they can pick good quality providers," Dr. Wilfong said. "But we have to do a job of educating them. It's not like you can just say, 'I'm going to give you a thousand bucks; go figure out where to have your colonoscopy.' We have to do a lot more work as a health care community to give them the tools they need to make those decisions."
As it will be for many Texas physicians, the reference-pricing concept is new to Udaya Padakandla, MD, a Dallas anesthesiologist with the national group U.S. Anesthesia Partners. Dr. Padakandla, who mostly works with cardiac electrophysiologists, says reference pricing could potentially apply to some high-volume procedures, such as when a cardiologist implants a pacemaker or a defibrillator.
His first take on reference pricing is that health plans are "banking on the fact that these high-volume procedures is where they get to save a lot of money ― not only a procedure that's done 10 or 20 times a year, but something that's done every day."
Dr. Wilfong says for aspects of care with little variability in quality, reference pricing "may be an appropriate way of looking at controlling costs [while] making sure that the quality of care is the same." For instance, the difference in quality among labs that run a patient's complete blood count [CBC] shouldn't be significant, Dr. Wilfong says, and "it may make sense to have reference pricing for those things."
But even with relatively simple lab work, the continuity-of-care issue concerns him. Texas Oncology collects its own patient CBCs because it needs to know a patient's blood count the same day the patient receives a chemotherapy infusion. Reference pricing could cause a patient to find a cheaper deal elsewhere.
"For the patient, it makes a lot of sense for us to be able to do those in house so we can get that information right then. The patient can get their labs, get their infusion in the same location, and not have to travel and not have to go from one place to the next," Dr. Wilfong said. "There would be some concern about reference pricing if it interfered with the ability to provide that continuity of care."
Working Out West
For all the concerns physicians may have, analyses and real-world results bolster an economic case for reference pricing. Consider the California Public Employees' Retirement System (CalPERS), which began saving more than $7 million a year when it implemented a reference-pricing program for hospital charges in 2011, according to David Cowling, PhD, chief of CalPERS' Center for Innovation.
CalPERS first launched its program after its self-funded PPO, Anthem Blue Cross, researched the average cost for hip and knee replacements in hospitals, according to a 2014 story in California Healthline. Anthem arrived at a maximum price of $30,000 for those procedures. In 2012, CalPERS expanded reference pricing to colonoscopy, cataract, and arthroscopic surgery procedures. In the CalPERS program, a facility's network status and participation in reference-based pricing determine a patient's coinsurance.
For the first two years of reference-pricing for the hip and knee procedures, CalPERS saved about $5.5 million, according to California Healthline, and its average cost for the procedures fell by 26 percent. CalPERS saved $5 million per year on the other three types of reference-priced procedures over the first two years, Dr. Cowling told Texas Medicine. Its overall savings has been about $7.5 million per year, he says.
Facilities offering the hip and knee replacements that weren't in the reference-based pricing program reduced their prices, creating a "market effect," Dr. Cowling said.
"Our members did change where they went and what facilities they chose. However, still about a third of them were going to non-reference-based pricing facilities, but we saw this huge decrease in prices for those facilities," he said. "I like to frame that as a market story. The impact there was the market changed the prices."
The key to it working, Dr. Cowling says, is that "the member still has a choice to go to any of the facilities within the network. And the reason it works is that we give them this choice, but there's still this reference price, which caps the amount of the cost. And then the last part is that we've chosen procedures [for which] there's not a lot of quality differences between the procedures themselves across facilities."
An April 2014 analysis by the Employee Benefit Research Institute examined the use of reference pricing for hip and knee replacements as well as several other procedures. The analysis found that if all employers adopted reference pricing on those procedures, potential aggregate savings could reach $9.4 billion. (See "Projecting Savings.")
Dr. Flores says reference pricing presents "an option," and "options are better to have than not having an option. We're left dealing with high-cost premiums right now, and a lot of times they don't cover what we think they're going to cover. [We have] high-deductible plans where sometimes a patient can't afford to get anything done."
But what it will come down to, he says, is whether physicians have any negotiating clout against hospitals and health plans.
"The patient is the one, ultimately," Dr. Flores said, "who's going to be left high and dry if this doesn't pan out."
Joey Berlin can be reached by phone at (800) 880-1300, ext. 1393, or (512) 370-1393; by fax at (512) 370-1629; or by email.
An April 2014 analysis by the Employee Benefit Research Institute examined the effect reference pricing could have using commercial health care utilization data from January 2008 through December 2010. The analysis derived reference prices for six medical services: hip and knee replacement, colonoscopy, magnetic resonance imaging of the spine, computerized tomography (CT) scans of the head or brain, nuclear stress test of the heart, and echocardiogram.
Some of the findings:
- If all employers adopted reference pricing for these services, potential aggregate savings could reach $9.4 billion, a decrease in employer spending of 1.6 percent.
- Reference pricing for hip and knee replacements above the reference price would net a savings of $10,367 per procedure, accounting for about 40 percent of the potential aggregate savings.
- Colonoscopies, echocardiograms, and CT scans of the head or brain each account for between 15 percent and 20 percent of the potential aggregate savings.
The savings would result from physicians and providers bringing their prices down to the reference price, as well as patients choosing physicians and providers at the reference price and paying the difference between that price and the charge allowed through cost sharing.
"While the incidence rate of hip and knee replacements in the population of people with employment-based coverage is relatively low," the report explained, "the costs are relatively high." It cautioned that the savings "would likely not materialize if providers currently charging below the reference price increased their prices to the reference price or near it."
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