News Release

Despite Buildup, Reference Pricing Savings Modest for Medical Services

Applying Reference Pricing to a Broad Set of ‘Shoppable’ Inpatient and Ambulatory Services Might Save 5 Percent of Total Spending While Adding Significant Complexity for Patients

Despite heightened interest in reference pricing—or capping payment for a particular medical service—potential savings to health plans and purchasers are modest, according to a new study from the nonpartisan, nonprofit National Institute for Health Care Reform (NIHCR).

Conducted for NIHCR by the former Center for Studying Health System Change (HSC), the study used 2011 private insurance claims data for 528,000 active and retired nonelderly autoworkers and dependents to simulate potential savings from applying reference pricing to a broad range of shoppable inpatient and ambulatory services.

In 2011, the California Public Employees’ Retirement System (CalPERS) adopted reference pricing for inpatient knee and hip replacements. Using quality and price information, CalPERS set an upper limit of $30,000—the reference price—for hospital facility services for a knee or hip replacement. CalPERS designated certain in-network hospitals as meeting the reference price, and patients using designated hospitals are responsible only for the health plan’s usual cost-sharing amounts. However, if patients use a non-designated hospital, they are responsible for both usual cost sharing and any amount beyond the $30,000 reference price.

According to the NIHCR study, only limited savings—a few tenths of a percent of total spending—are possible from applying CalPERs’ narrow reference pricing program to other privately insured populations. If reference pricing were applied to a much broader set of so-called “shoppable” inpatient and ambulatory services, potential savings would be somewhat larger—roughly 5 percent of total spending, according to the study.

“The potential savings from reference pricing are modest for two reasons: Shoppable services only account for about a third of total spending, and reference pricing only directly affects prices at the high end of the price distribution,” said Chapin White, Ph.D., a former HSC senior researcher now at RAND; and lead author of the study with Megan Eguchi, M.P.H., a senior programmer analyst at Mathematica Policy Research.

“When considering reference pricing, employers and health plans need to weigh the potential for savings against increased plan complexity and financial risk to enrollees, along with the analytical and financial resources needed to create and manage the program,” White said.

Researchers first identified the top medical services in terms of total spending in the autoworker plan and then defined “shoppable” services, meaning the service can be scheduled in advance, multiple providers in a market perform the service and price data are available for the different providers. Any service provided within three days of an emergency department visit was treated as non-shoppable, even if the type of service was considered shoppable.

Two types of reference pricing were analyzed—one for inpatient hospital services and another for ambulatory services, including hospital outpatient services, professional services, and laboratory and imaging procedures. To simulate reference pricing for inpatient hospital care, certain hospitals were designated as high-value providers based on prices, quality and volume of services. For ambulatory services, service-specific reference prices were simulated, without designation of facilities or providers.

The study’s findings are detailed in a new NIHCR Research Brief—Reference Pricing: A Small Piece of the Health Care Price and Quality Puzzleavailable here.

Key findings include:

  • Using an inclusive definition, all shoppable services accounted for about a third of total spending if both inpatient and ambulatory services are included, and estimated savings from applying reference pricing to those shoppable services was 4.8 percent of total spending.
  • Elective knee and hip replacements, the archetypal shoppable procedure, were the most common type of inpatient stay in the claims data but only accounted for 1.6 percent of total spending. The potential savings from reference pricing would be relatively small—0.2 percent of total spending. All other shoppable inpatient stays accounted for 27.2 percent of inpatient spending and a larger, but still modest, share of total spending (6.4%). Reference pricing savings for other shoppable inpatient stays was estimated at 0.6 percent of total spending.
  • In the autoworker claims data, spending on shoppable services occurred primarily in hospital outpatient departments and physician offices (18.0% of total spending) and in imaging and laboratory facilities (9.2% of total spending). Although the prices of individual ambulatory services are generally far lower than the price of an inpatient hospital stay, ambulatory services collectively are much more common and more substantial from a spending perspective
  • Hospitals in the simulations were designated as high-value providers for inpatient care based on a combination of CMS quality metrics and the prices and volume of shoppable inpatient stays in the claims data. The case mix-adjusted average price per stay for shoppable stays was 38 percent lower at designated hospitals than at non-designated hospitals ($8,118 vs. $13,096).

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The National Institute for Health Care Reform (NIHCR) is a nonpartisan, nonprofit 501 (c)(3)organization created by the International Union, UAW; Chrysler Group LLC; Ford Motor Company; and General Motors. Between 2009 and 2013, NIHCR contracted with the Center for Studying Health System Change (HSC) to conduct high-quality, objective research and policy analyses of the organization, financing and delivery of health care in the United States. HSC ceased operations on Dec. 31, 2013, after merging with Mathematica Policy Research, which assumed the HSC contract to complete NIHCR projects.