Price Shopping Could Cut Employer Health Costs By 20%, But There's A Catch



Away from the noise in Washington, there’s a quiet movement to improve healthcare and lower costs—and it’s making progress. The movement is led by employers and other large purchasers of health benefits, like unions and retirement plans, which cover the majority of Americans. Starting with this post, I will periodically profile the pros and cons, as well as some of the more influential and promising strategies used by these purchasers. Today I will focus on a strategy called “reference pricing.”

Reference pricing is a strategy for managing health benefits pioneered in the U.S. by two of the country’s most effective purchasers, CalPERS, the nation’s largest public pension fund, and Safeway, the American supermarket chain. The strategy caps the amount the purchaser will reimburse for an identified procedure or test, typically at the midpoint price charged by providers in the region. If the covered patient stays below the cap, they are charged their usual copay. But if they choose a more expensive provider, they pay the amount that exceeds the cap. For example, a purchaser might cap what it will pay for a colonoscopy at $2,000. If the patient goes to a provider that charges $3,500, the patient will be charged the $1,500 difference.

Pros: Lowers CostsFinally

Reference pricing dramatically cuts costs. In a recent overview of the research in the respected peer-reviewed journal Health Affairs, researchers report that two things happen when the strategy is deployed. First, covered employees are motivated to price shop, and many shift to lower-priced providers. Second, high-priced providers come back to the negotiating table and lower their prices. The researchers estimated that if all employers implemented reference pricing for just eight procedures, the U.S. would save nearly $20 billion, or almost 20% of the cost of those procedures.

Pitfall One: May Encourage Unneeded Procedures, Exhibit A: Maryland

Elegant as this strategy has been, there are two potential pitfalls that could undermine or even reverse the cost advantage. First, as the Health Affairs researchers points out, reference pricing does nothing to reduce unnecessary utilization of the procedures, and may even incentivize that troubling problem. There is significant precedent for cost control strategies increasing volume. For example, since the 1970s the state of Maryland has capped the prices charged for each service delivered at hospitals, but still found no decline in the state’s overall hospital costs relative to the rest of the country. Why? Analysts concluded that with price limits imposed on each unit of service, hospitals simply provided more units of service. Reference pricing could have a similar impact.

Pitfall Two: Bad Quality Is Never a Bargain, Exhibit B: MRIs

Differences among providers in quality can eliminate any cost advantages. Some purchasers assume they can get around this problem by targeting reference pricing only for procedures that don’t vary in quality. When quality is all the same, decisions can pivot on price alone. Unfortunately, no such procedures exist; extreme variation is the hallmark of our healthcare system.

For example, a common procedure targeted for reference pricing is Magnetic Resonance Imaging (MRI). Variation in price among MRIs can be tenfold, and most of us assume they are basically the same procedure delivered in different places.

In fact, not all MRIs are alike, a point made clear in a riveting new study in the peer-reviewed Spine Journal. The unusual study design involved a “secret shopper” scenario in which a 63-year-old woman with lower back pain obtained 10 different MRIs over a period of three weeks, all from different imaging centers in her region.

The results: each of the 10 centers reported a different set of diagnoses and different treatment plans, for a total of 49 different findings about this one woman’s back. Some centers missed a problem they should have detected, and others found a problem where none existed. Treatment recommendations also varied, with some likely to accomplish nothing and several so risky they would likely have made the patient’s situation far worse.

Though the researchers didn’t report on the price charged for each of these MRIs, they told me in general they found that price does not predict the accuracy of the diagnosis.

So picking an MRI provider without regard to quality increases the chances of a wrong diagnosis, which in turn leads to a variety of treatments and procedures that may be equally wrong or even harmful. The purchaser may get a lower price for the MRI, but the far more expensive treatments that cascade from that decision could eclipse any savings. It’s never a bargain to ignore quality.

What’s Next?

Purchasers should still pursue reference pricing and try to incorporate considerations of utilization and quality to the extent they have the data. Never assume any procedure is like a commodity, largely the same quality everywhere.

When purchasers exert influence on the marketand encourage consumers to do the same, as they accomplish with reference pricingthe market responds productively. Reference pricing encourages providers to compete for your business by proving the superiority of their quality and the appropriateness of their pricing. That’s market competition long overdue in healthcare and worth pursuing, with eyes open to the pitfalls.

Read the full article here.


Julian Yao