Would reference pricing hold down health costs?News added by Benefits Pro on July 14, 2014

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By Amber Taufen

The California Public Employees Retirement System saved $5.5 million dollars on hip and knee replacement surgeries between 2010 and 2012, about 30 percent of their costs – and some health care experts believe reference pricing, the strategy used to achieve that end, is a potential solution to the out-of-control health care spending in the United States.

As defined by the World Health Organization, reference pricing “is not a form of price regulation; it is a means of limiting expenditure” by looking at market equivalent pricing “and setting a reimbursement tariff (called reference price).”

Michael Abrams, a managing partner at Numerof & Associates in St. Louis and co-author of the 2013 book Healthcare at a Turning Point: A Roadmap for Change, believes reference pricing can provide more transparency for patients, which is ultimately a positive shift in the industry, but he says there are limits to its applications.

“Reference pricing is not the silver bullet,” he notes. “It’s not appropriate or suitable for everything in the realm of health care; it doesn’t do anything to change the incentives for unnecessary utilization; and it’s really best-suited for big-ticket items that tend to be relatively standardized, where the technology and procedure is stable, well-understood and largely the same wherever you go. There are numerous opportunities to use it, but it doesn’t work for everything.”

And although data about health care spending is becoming increasingly accessible, whether through releases by the Centers for Medicare and Medicaid Services or the pending 2015 tool from the Health Care Cost Institute, Jennifer Searfoss, JD, CMPE, chief executive officer, Searfoss Consulting Group, says the data vital to true reference pricing can still be difficult to access.

“There will be more information available next year, but right now, most of the information available is charge amounts,” she explains. “And that’s not the amount that the private health plans have negotiated down to, which is what you need to know. It has to be part of your tools.”

Traditionally, provider organizations have been reluctant to release those numbers.

“I think pressure will be brought to bear in the future on providers to discuss their quality and outcomes,” says Abrams, “and I think that’s all good, but in the short term, reference pricing calls for a level of disclosure about what hospitals charge. And in a lot of places, you’re going to have trouble making that disclosure happen.”

Payers also have access to that data, but although reference pricing can be a money-saving strategy for them, too, they might be reluctant to deploy measures that could upset providers.

“Insurance companies have a certain investment in keeping calm relationships with their network partners,” he explains. “Some don’t really want to roil the waters -- especially where some of those partners might have near-monopolies over a market area, they don’t want to upset those partners. So reference pricing is something that some payers are going to be reluctant to do, even though they stand to save money.”
However, there is an industry trend toward increased transparency and cost control that insurance providers can’t ignore, and eventually the need to manage premium increases could override the desire to maintain the status quo.

“On the other hand, there’s a lot of attention being given to premium increases,” says Abrams, “and the more those increases hit the newspapers and make the headlines, the more incentive there will be for insurers to do things that can help keep those premium increases down. And reference pricing is one of those things. So I think the pressure is going to grow on payers to take these kinds of steps, and I think their willingness to do so is also increasing.”

Meanwhile, even though insurance providers might be reluctant to fully participate, reference pricing remains an enticing option for employers.

“It’s typically the large, risk-based employers that are experimenting with reference pricing,” says Searfoss, “but that doesn’t mean that smaller employers don’t have room to play with this area, too. For example, is there a way to piggyback onto a program that the health plans are already administering for a larger employer? And there are other types of programs where employers can pool their resources together and come up with unique solutions.”

Abrams adds that if employers are aware of reference pricing agreements in their area, they might be able to take advantage of that information by negotiating directly with providers.

“If some of the larger payers in the market are able to introduce their own bundled-pricing initiative, smaller employers can benefit from the transparency that results, and they can go to those providers and say, ‘You’re doing this procedure for this company for this much – can you do that for us?’”

New strategies bring new opportunities for brokers, too.

“One of the challenges in implementing a reference pricing initiative is communicating effectively with employees,” Abrams says. “There are all kinds of implications. Communicating those details and what new exposure individuals might be liable for is critical, or you might wind up with some very upset people. To the extent that brokers can provide support in communicating the details of a reference-pricing plan to employees, they are delivering greater value to the business.”

Brokers also can help provide resources for patients on a case-by-case basis and nip any potential issues in the bud.

“If a patient calls up a hospital and asks how much a certain procedure will be, they might not get a clear-cut answer,” he notes. “So when brokers can facilitate transparency – like with a list of the provider organizations that have agreed to do the procedure in question for the price you have set – they are adding value.”

The increased attention to reference pricing and fast pace of industry change means that if an employer (or broker) is going to seize the opportunities present, the time is now.

“Right now is the time to push for experimentation,” Searfoss advises. “I think in the next three years, there will be a great deal of standardization, and the ability of small employers to experiment is going to disappear.”

Originally published on BenefitsPro.com
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