Column 81 Reference Pricing: A new way to try to reduce health care costs

In my experience, nothing is less transparent than the pricing of health care services.   It sometimes feels like it would be easier to get the direct phone number to a live tech support person or even the combination to Fort Knox, than to know what a particular procedure will cost. 

Granted some of this is due to all the independent variables that go with treating this fantastic machine that we call the human body.  There can be a lot of difference in an individual's physical state that can cause the process to be different for each person- and therefore the charges to be different.   

One goal of the Affordable Care Act (aka Obamacare) was to reduce the cost of medical care.  Most of us have not seen much in that category yet.  Long term projects like supporting medical education costs to expand the doctor pool and outcomes research to help us find out if we are getting the best "bang for our buck" are still a long way out.  Electronic medical records are the foundation of collecting the data for the outcomes research project and that roll out is rocky, to say the least.

Historically, most plans established an "out of pocket maximum" for the insured.  The ACA now requires that most all eligible expenses apply to the "OOP max" so at least the insured is protected from surprises for their own share of costs.  But that does nothing to address the actual cost of care.

The actual cost of care and its variability is not a new issue. In 1989 we formed a health care coalition for North State employers because we were so concerned about the wide variance in prices.  In fact, one large self-insured group was sending heart surgery patients to Sacramento, putting up the family at the Red Lion and still saving $25,000 per procedure over having the procedure in Redding.

I find it somewhat amusing that in 2011 CalPERS (California Public Employees Retirement System) finally took action to address this issue.  They began using Reference Pricing for certain elective procedures.  For example they said they would pay no more than $30,000 for hip or knee replacement.  They had found charges varying from $15,000 to $100,000 for the same procedure within their group.  

In essence they have now put the responsibility back on the consumer to "shop" for elective procedures. This could be a booby trap for consumers," Carmen Balber, executive director of the advocacy group Consumer Watchdog in California told Kaiser Health News. Before a CALPERS patient has one of these procedures, they will be advised to find out the cost of the procedure.  If it is less than $30,000 they are not given the difference, but if it is more than $30,000 they will pay the difference out of their pocket.

I suppose this is capitalism as it applied to health care.  The insured is put in a position where they know their budget and now must apply their own cost:benefit analysis to the choice. The funny part is that it's not really new.  Early in my career, plans incorporated an RVS (Relative Value Schedule) that assigned a unit value to surgeries.  The plan would only pay up to a limited number of units for a particular surgery.  

A UC Berkeley analysis found that CalPERS saved an estimated $5.5 million during 2011-12 from the joint replacement surgery program, with more than 85 percent of the savings coming from hospitals lowering their prices to meet the cap.  The average savings was just under 20%.  Wouldn't it be nice to see a 20% reduction in premiums?


Reference pricing is also allowed in Rx benefits.  You will see this when the standard for a particular drug is set at the price for the generic version of the drug.  You can still purchase the brand name drug, but you will be responsible for the difference in price between generic and brand name. Note that there are circumstances where the individual's physician can appeal the use of the brand name drug if they deem it to be the best treatment of the patient.

It is important to note that this approach applies to elective procedure, not emergency situations where the patient has little control or opportunity to "shop".

This approach will not immediately effect Individuals or small group plans, but it appears to be the wave of the future.