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Driving hospital prices down through reference pricing

Written by Diane Archer

Until we have an all-payer system with uniform health care rates, we will have wildly varying and out-of-control hospital and doctor rates.  Some purchasers, however, are innovating to rein in or reduce some hospital and doctor rates on their own. The California Public Employees Retirement System, CalPERS is using “reference pricing” to force providers to compete on price and bring down health care costs.

Through reference pricing, CalPERS sets a cap on what it will pay for a range of services, limiting its expenses and requiring individuals to pay the difference between its payments and what providers charge. Reference pricing relies on individuals to be more informed about the costs of the services they receive and to seek out providers with lower rates in order to limit their out-of-pocket costs.

Supporters of reference pricing see it as a smart way to engage people in their health decisions. It also incents providers to bring down their rates if they want to attract more patients.

Opponents of reference pricing believe it places an unfair burden on people who may have low health literacy levels or who may choose doctors and hospitals with lower rates and, in the process, receive lesser quality care. Rather than burdening people with these decisions, opponents would like to see stronger government regulation of the health care market, the strategy of every other developed country. (Medicare is more efficient than private insurance.)

In a new paper for Health Affairs, Ann Boynton and James Robinson report that CalPERS is lowering costs and increasing value through reference pricing. They recognize that good quality data for comparing hospitals and doctors is limited at best, but they found that people receiving care through CalPERS’ reference pricing system had as good health care outcomes as others. At the same time, they appreciate the importance of incentivizing providers and insurers to bring down costs, with reference pricing complementing those incentives.

Boynton and Robinson make clear that reference pricing only works for services that are “shoppable,” where the patient has the time and ability to choose a hospital or doctor based on price. CalPERS recognizes that reference pricing cannot work for emergency services–although you should choose your hospital emergency room carefullyor bundled services, where people are unable to make choices about their health care services. Nor can reference pricing work when people have to travel long distances to receive lower-cost care. And CalPERS makes exceptions and pays more for care in higher-priced facilities where medically justified.

If you’re preparing for a trip to the hospital, click here to see what to bring.  And, before you or someone you love leaves the hospital, here are seven things you should do.

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1 Comment

  • This would be a fine idea, but for one fatal flaw. Hospitals currently do not, and will not until mandated by law, publish the cost of provided services. This information is on acneed to know basis, and the hospital and insurance industries feel they are the only ones who need to know.

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