The Future of Self-Funding Health Insurance: Reference Pricing

Reference Pricing (RP) in health insurance plans has been gaining momentum for a couple of years now.  It is a form of defined contribution in health benefits, where plan sponsors pay a fixed amount or limit their contributions toward the cost of a specific health care service, and health plan members must pay the difference in price if a more costly health care provider or service is selected.

For example, instead of giving an employee a list of doctors and stating the employer will pay 80% of the cost of a procedure, RP tells the employee that it may go to any provider but that the employer will only pay 30,000 for a knee replacement.  It is then up to the employee to shop for his own provider.  To assist in the process, the employer may also provide the employee with a list of some surgeons in the area who have agreed to accept that listed price.  And the employer may also link the employee up to a health advocate that can help the employee shop for a provider.  

Most employers implementing RP are only using it for a limited subset of non-urgent procedures.  But massive future savings are possible as RP expands to all forms of care.

Reference pricing saves money through a combination of: 

1. Patients choosing providers at the reference price, 
2. Patients paying the difference between the reference price and the allowed charge through cost sharing, and 
3. Providers reducing their prices to the reference price.

Reference pricing for knee and hip replacements would result in savings averaging $10,367 perknee or hip replacement according to the below study.  

In 2012, 11 percent of employers with 500 or more workers were using some type of reference pricing.  Well-known examples of RP implementations include the California Public Employees' Retirement System (CalPERS) knee- and hip-replacement program (Robinson and Brown, 2013) and Safeway’s colonoscopy and lab programs (Robinson and MacPherson, 2012).

The goal of RP is to reduce, or at least limit, health care spending by the employer, while at the same time creating a more engaged health care consumer. Copayments limit patients’ financial exposure to the cost of treatment because there is usually no connection between the total cost of a health service and its copayment. Similarly, co-insurance shields patients from health care costs because once a patient reaches his or her OOP maximum, they incur no additional costs. Moreover, although liable for a deductible, patients are still insulated from cost sharing for health services that exceed the deductible. The lower the level of patient cost sharing, the greater the likelihood that insured individuals will make inefficient health care consumption choices—a concept known as “moral hazard” (Pauly, 1968). RP seeks to address this issue by sensitizing patients to the overall cost of health care. (Page 5 in below linked study.) 

Source: Paul Fronstin and M. Christopher Roebuck. “Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits.” EBRI Issue Brief, no. 398, April 2014.  Click here to read entire paper at EBRI. 

See also: Kaiser Health News: 7 Things You Should Know About The Next Big Benefit Change. Kaiser Health News staff writer Julie Appleby reports, "After getting a green light from the Obama administration earlier this month, more employers may begin to cap what they pay for certain medical treatments, such as joint replacements and drugs, potentially shifting more costs to workers. Done right, economists and policy experts say the move to “reference pricing,” as the approach is known, could slow health care spending by prompting consumers to choose less expensive providers or treatments— and leading providers to lower their charges. Still, consumer advocates warn that the approach is likely to make health insurance even more complex, and could expose unwitting consumers to thousands of dollars in out-of-pocket costs" (Appleby, 5/28).