Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits

A new approach called “reference pricing” in health insurance may help control health costs, but the savings could depend on how health care providers and individuals react, according to a new analysis by EBRI.

This analysis examines reference pricing, a form of defined contribution 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.
Reference pricing for hip and knee replacement, colonoscopy, magnetic resonance imaging (MRI) of the spine, computerized tomography (CT) scan of the head or brain, nuclear stress test of the heart, and echocardiogram were examined because these services have fairly uniform protocols, and they are less likely to experience variation in quality, both of which make price comparisons easier for patients.
Potential aggregate savings could reach $9.4 billion if all employers adopted reference pricing for the health care services examined in this paper. The $9.4 billion represents 1.6 percent of all spending on health care services among the 156 million people under age 65 with employment-based health benefits in 2010.
Savings from reference pricing materializes through the 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. Any increase in prices among providers below the reference price would reduce the potential for savings.
Reference pricing for knee and hip replacements would result in savings averaging $10,367 per knee or hip replacement among the cases that were above the reference price, and would account for about 40 percent of the aggregate savings. While the incidence rate of hip and knee replacements in the population of people with employment-based coverage is relatively low, the costs are relatively high. In contrast, stress tests of the heart accounted for only 2 percent of the aggregate potential savings. While incidence rates ranged from 14 to 20 percent between 2008 and 2010, only $87 per case would be saved from reference pricing. Colonoscopies, CT scans of the head or brain, and echocardiograms each accounted for between 15–20 percent of aggregate potential savings, while MRIs of the spine accounted for about 10 percent of the potential savings.
Plan sponsors should consider a number of issues as they weigh adopting reference pricing, including how the reference price is determined and how providers may react. Communication to plan members is also key to effective use of reference pricing.

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M. Christopher Roebuck is president and CEO of RxEconomics, LLC. This article was written with assistance the Defined Contribution Concept in Employment-Based Types of Cost Sharing for In-Network, Physician-Office Figure 4, Hip and Knee Replacement: Median Prices and 33rd to 67th Percentile Ranges, by HRR, 2010 ..................... 9 Hip and Knee Replacement: Stress T MRI* of the Spine: est of the Heart: the providers not refer plan the WA. ence hi spons 201 gh be pric -c lo 3. iost w n o g. r’s th provide Un e or re der hfer ealth RP, r es’ nc services plan’s e employ price paymen rers are aised co inuld dee their t for pay d a o prices. fspec thi he gh ful ific er Cll early, healt qua cost lity. below h th car e n e e th s t ee effe rvice rect fere or is nce tprovi hat pri rd ec er. fere e. Alter Ance nd, n pric in ative cio ng ntrast ly, woul some to d r wha form esutlt is of in from EBRI’s research and editorial staffs. This Issue Brief was conducted through the EBRI Center for Research on Figure 10 th Visits (In Addition to Any General, Annual-Plan Health Benefits Reference prices in this study were set within each HRR at the 67 percentile of the distribution of total allowed Median Prices and 33rd to 67th Median Prices and 33rd to 67th Median Prices and 33rd to 67th Percentile Ranges, by HRR,** 2010 Percentile Ranges, by HRR,* 2010 Percentile Ranges, by HRR,* 2010 typical high cost e sharing r spendi with co cng, o-insuranc uld but be timpos hat e—u assumes e nder d belo wh w all ich tpro he a RP. v patient iders For belo ’s ex cost ample, w th shar e re pati ing ferents e is nce limit co price ed uld by be woul a re ny quir d OO rais eP d e maxim to prices pay uto co m— -in the patient s urance referenc cost ofe 10 pric sharing perce e. As n is t Health Benefits Innovation (EBRI CRHBI). The authors wish to thank Brian Agnew, Timothy Brown, and James Mean Referen Dce ed u Pct riice ble , b ), b y T y P yp la en o T f He ypea , l2013 th Service, 2010 Figure 5, Colonoscopy: Median Prices and 33rd to 67th Percentile Ranges, by HRR, 2010 .......................................... 9 April 2014 • No. 398 $700 amounts Nichols, Third, the Lfor e im n M al plementatio l . claims "Can Defi processed nned of RP Contri m for ay bution each prom of Health pt the providers hIenalth sura c se nce urre rvices R ntly educe ube nder low Co study. st the Growt refTh erenc his ?" approach EBRI e point Issue to allow inBrief, cre ed ase for nopric . re 24 giona es 6 ( to Emp l a loyee $6 $25,000 ,500 not mentione or 20 capped percent d afor b ove, up services toRobi thenson subject refer and ence to Bro pric RP. we n, Ifa 2 a nd 013, patient then saw the selects no diff ev e idenc ra ence health e bet of servi suc wee h n ce provi allo or we provider der d b cha ehr ag with vior es an in a d cost Cali the for th re nia at ferenc is afgr ter e eater price, CalP tERS h an were Robinson for useful comments. By Paul Fronstin, Ph.D., Employee Benefit Research Institute; and M. Christopher Roebuck, Mean Reference Price Health Service Copay Co-insurance No Cost Other Type of variation “shado Bene w-price” fit in rResear eference at or ch n Institut pr ear ices, the e, but re Jfere une also nce 20 mean 02 pri ).c t e, that part re icularly ferenc e ifpr pati ices ents were are high insen er sitive when to hivariations gher-priced in providers prices at or acco bel uo nw ted 33rd-67th Percentile Range Median Price 33rd-67th Percentile Range Median Price the they adopted re to fer use e re nce fer a e provider price, nce prici then char ng hfor e ging or knee she prican is es d responsible abo hipv e replac the re ement for fere pan y sc. ing e Also pr the ice. , shado entir CalP ew ERS di pricin ffer impos ence. g may e d Rboth onot binson be a dabl e aduct nd e tM o ib a occur le cPherson andimmediately 20 (20 perc 12) ent as Ph.D Figure ., 6, RxE MRI cof onomics the Spine: Hip Median and knee Pric repl es ac and ement 33rd to 67th Percentile Ranges, $28,227by HRR, 2010 .................................. 11 Only Only Sharing Cost Sharing 33rd-67th Percentile Range Median Price the for a refer dispro ence $6 po 00rtionate price, and shar if prices e of services are set pro exogeno vided within usly (B a rekke, n HRRHolmas and lower , and wh Straum en low eer-pr , 2011). iced Ho provi wever, ders lower-pric did. This ed refer co-insuranc providers to R P wou $5 e as 5,000 up la d “r hav to everse ae $3,000 to rene deductibl out-of-poc gotiate e,” contra wh ket er e maximum cts. the plan eve spon nso wr hen pays provi the dfirst ers be part low of the th e RP allo were wed us ch ear d. ge To atnd he the degre pae tient that Col Po rino ms ar cy C opyare 1,463 th Office of Attorney General Martha Coakley. "Examination of Health Care Cost Trends and Cost Drivers: Pursuant to G.L. a providers approach may was similar continuto e to th at chestablishe arge lower d pr by ices CalPERS, to be com whip ch etit also ive,set espec thei ally refeirenc f patients e pric e have at t h co-i e 67 nsur pe ance rcenbelo tile ( w Rob the inson $2,000 MRIHM of O the spine 96% 3% 1% 23 7 1% Any Figure views 7, C ex T S pcan ressed of the in this Head report or Brai are n: thM oe sdian e of tPr he ica es uth and ors 33r and d should to 67th not Perc be entil ascrib e Ra enges, d to the by o HR fficers, R, 2010 trustees, ................ or 11 pays patients the are rema reinder. quired to pay co-insurance, they will likely be more engaged, and providers will be less likely to raise c. 6D, &8." Boston, MA, 2013. b CT s PPO can of the head o 82 r brain 15 2 297 1 refer and The Reference Pri Brow pote encential n, pric 2 0 e. savings 13). How per ever, ca c se ing for Health Care Services: A New Twist on CalPERS is much set lower a singl for et hre efer other ence he pr alth ice ser across vices all bec geogr ause aph the ic cost regions of tho in sC e alifornia. services is much $500 prices Introduction other spo closer nsors to of the EBRI, referenc Employee e price. Be Ifnef low-price it Researc d provide h Institut rs increase e-Educatio pri n ces and to Rth esearc e refe h rence Fund pric (EBRI-ERF), e or near or it, th pot eir ent staffs. ial $45,000 c POS 89 4 4 3 Stress test of the heart 171 RP lower Figure is not than 8, an Str tha e all-encom ss t of Test knee of passing the and Heart: hip substitut replacements. Median e foPrices r copayments However, and 33rd a or ggr to co-i 67t egate nsuranc h Per sav centile ings e. It ar ca Ranges e n still be used substantial , by HRR, alongsi 2010 bec de ause traditiona ....................... incide l cost nce -rates 12 Neither EBRI nor EBRI-ERF lobbies or takes positions on specific policy proposals. EBRI invites comment on this savings the Defined Contribution Concept in Employment will not materialize. d -Based Between the late 1970s and HDHP 2010/,S the O percen 22 tage of worke 55rs with only 22 a defined contributio 0 n retirement plan increased Okike, Kanu, et al. "Survey Ec Finds hocardi Fe ogr w aOrth m opedic Surgeons Know The Costs 433Of The Devices They Implant." Health Fourth, patients that value high-priced providers may choose to pay the higher cost sharing. Sample sharing range from arran 10–27 gements percent, within rather a health than pla thn e for 1–2 different percent h for ealth knee servic and es hior p replac provid ement ers. Whe s. n utilized, RP typically is $1,500 research. ALL PLANS 74% 20% 6% 1% $400 So urce: EB RI estimates derived from Truven Health A nalytics M arketScan® from 16 percent to 69 percent (Fronstin, 2012). While many employers did not set out to shift the cost of retirement Affairs $3 33, 5,000no. 1 (January 2014): 103-109. Health Benefits Figure 9, Echocardiogram: Median Prices and 33rd to 67th Percentile Ranges, by HRR, 2010 ................................... 12 appli Of course, ed to ver communication y specific tyC pe o to m s m pla of erc services— n ial mem Databas bee rs those (cis opy key rig wit ht to © h 201 su an 0 bstantial ef Trfective uven Healt variati impl h A na ementation o lyn ticin s, all pric right e, s of rbu es RP. erv t with ed). Indivi very dual littl s e will diff ne erenc ed e in Specialty EBRI Employee Benefit Research Institute Issue Brief (ISSN 0887 ?137X) is published monthly by the Employee Benefit Research Institute, Shown in Figure 2 are the total numbers and incidences of health services provided to patients in the study from 2008 planning onto workers, defined contribution plans allowed employers to exercise more control and predictability over The effectiveness of RP could also be limited in geographic regions where there are few providers (or just one) with a In all cases, the average savings per case outweighs the overall loss per case that would occur if providers below the 1100 13th St. NW, Suite 878, W HM ashi Ongton, DC, 200 94 05 % -4051, at $300 4% per year or is 0% included as part of 2% a membership subscription. Periodi- quality comparabl By Paul or e Fronstin, el se in ffairly ormation uni Ph.D., form on prices care Employee -de anlivery d quality protocols. Benefit in order Resea to make rch Institute; and M. informed decisions regard Christopher ing provider selection. Roebuck, Lists of through 2010. The dataset contained 5,000–6,300 hip and knee replacements; 35,000–38,000 colonoscopies; 34,000– Pauly, Mark V. "The Economics of Moral Hazard: Comment." American Economic Review 58, no. 3 (June 1968): 531- most or all $3 o00 f the costs associated b with providing retirement benefits to employees (Nichols, 2002). As a result of those signific Figure calsant 10, pos ma Mean tage rket rate Refer pai pod wer. e innce Wa Pl sh Price, an ingto sponsors n, by DCType , and m aay of dditio H also e nal alth m be ail Ser ing he si v oice ffi tant ce , s2010 . to POuse ST ............................................................... MAS RP TER in : geogra Send adphi dres c s regions changes whe to: EBRI re I the ssuree Br ar iee ........... f, fe 11w 00 15 $25,000 PPO 80 15 2 2 reference price increased prices to the reference price. However, because 33 percent of the cases were by definition doctors and hospitals, either in preferred networks, or with prices at or below the RP, can today be more easily C Ph.D., op13t yright Inf h SRxE t. NWc , onomics S ormation: uite 878, W ashi This ngtonre , Dport C, 200 is 05 copyright -4051. Copy ed right by 20 the 14 by Em Eploye mployee e Be Ben nef efit iR t e R se ese arcarch h InstiInstitut tute. All rie ght (EBRI s rese) rv . ed. It may No. 3 98. be c 36,0537. 00 MRIs $1,0o 00f the spine; 49,000–53,000 CT scans of the head or brain; 39,000–64,000 stress tests of the heart; and POS 90 5 3 2 experiences, employers have been talking about using a defined contribution approach in their health benefits for a few providers if they are concerned about changing plan design in such a way that affects worker recruitment and The above goal th e of r eR fe Prence is to reduce, price an or d 6 at 7 least percent limo it, f the healt cases h care we spendi re below ng by the t he refere employer, nce pric while e, aggregate at the same savings time wo crea uld ting be a d disseminated than in the past through mobile apps and websites. used without permission, but citation of the source 18 is require 56 d. 22 5 77,0 Figure 00–83, 11, Pot 000 ential echocardio Gains a gn rams. HDHP d Losses /Incid SO in en Scte udy rates Sam per ple 1, from 000 in Referenc dividuale s Pric in 201 ing, 0 2010 were ............................................ 2.25 for hip and knee .. 15 decades now (Fronstin, 2001). retention. RP could, however, be used to encourage patients to travel to lower-priced providers when facing high-cost, $200 $15,000 more negativ en ega (i.e., ged overall health costs care cwould onsumer. be high Copayments er) in the limit stud patien y sample ts’ financial if RP was exposur adoptee d tfor o the colonosco cost of p treatment y, and MRI beca of use the ALL PLANS 72% 20% 6% 2% Robinson, James C., and Kimberly MacPherson. "Payers Test Reference Pricing And Centers Of Excellence To Steer Figure 11 AT A GLAN CE replac ements; 13.07 for colonoscopies; 11.89 for MRIs of the spine; 17.26 for CT scans of the head or brain; 13.90 for non-emergency local services. So urce: Kaiser/HRET Survey of Emplo yer-Spo nsored Health B enefits, 201 3. there spine, is if usually providers no belo connectio w the n re between ference pri the ce total raisecost d price of a s to healt the h ref servic erence e and price. its co payment. Similarly, co-insurance Recommended Citation: Paul Fronstin and M. Christopher Roebuck. “Reference Pricing for Health Care Services: A Figure Patients 12, Aggregate To Low-Pr Potential ice And H Savings igh-Quality The Em from plo Pr yRefere ee oviders." Benefi nce t Research Institut Pricing, Health Affairs by Select 31 e , no. (EB Healt RI) was founded in 1978. Its 9h ( S Sep erv te ice, mbe 2010 r 20................................ 12): 2028m -2i0 ssion is to 36. 15 Potentiala Gains and Losses in Study Sample from Reference Pricing, 2010 stress Employers tests hav of the e been heart; interes and ted 27.35 in afor nd echocard have tried iog to rams. implement the “defined contribution” concept for health benefits in $500 Health maintenance organizatio n. $100 contribute to, to encourage, and to enhance the development of sound employee benefit shields Conclusio patientn s from health b care costs because once a patient reaches his or her OOP maximum, they incur no New Twist $5 on ,0 00 the Defined Contribution Concept in Employment-Based Health Benefits.” EBRI Issue Brief, no. 398, April Preferred provider organizatio n. a number of different ways. Those that provided health coverage with a health reimbursement arrangement (HRA) Plan sponsors are interested in RP because there may be substantialA va ggr riation egate in prices that are not expl Aggraine egate d by Who we are c In the ? cas This e of anCT alysis scan ex of amines the hea refd e programs and so ror ence brain, pricstress ing, und public policy a test form of ofthe defi heart, ned through objective contri and echo bution cardiogram, hea resear lth ch and benaggregat e educati fits, where on. EBR e savings plan I is the only sponsors would still Point of service. Robinson, additional costs. James Moreover, C., and Tim alo though thy T. Brow liablen for . "Incr a de eases ductib In le , Consumer patients ar Ce o st still Sharin insulate g Re d direct from cost Patieshar nt Volumes ing for healt And h 2014. Refer Basic e demogra nce pricing phics is rec for e th ivin e s g tudy more sample attent Total N a io u re n mb an show erd consi n iA n v d Fi e eration gure rage 3 to and day Po ar te because e ntcompar ial Gain of ed gr to owing A demo veraplan ggraphics e s ponsor P o iten n th tinter ia e l Lo popula est ss in tion d (starting in 2001) or a health savings account (HSA) (starting in 2004) contributed money to an account that workers differences in quality or outc Homes. igh-dedprivat uc A tirec blee, nonprof he eal nt th study plan w it it, nonpar hfoun savind gstisan that optio, nhi Washington, DC-b . gh-priced hospitals ased organi performed zation com worse mitted exclusivel than low-pric yed to be positive pay in a fi the xed study amount samor plelimit even their if pro contri viders butions below towar the re d fer the ence cost price of a specif raised ic pric health es to care the servic referee, nce and pric health e. plan Reduce Hospital Prices For Orthopedic Surgery." Health Affairs 32, no. 8 (August 2013): 1392-1397. services that $0 exceed the deductible. Th ofe C lo awer ses the P level oten tof ial pat Gain ient cost ($ mi sharin llions)g, the Pogreater tential Lo th ss e likelihood ($ millio th ns at ) insured Health Service managin with employm g -$ hea 5,000 e lth nt-based care costs. healThis th bene paper fits ha in s 20 shown 10 from that the if Cu RPr rw ea ns t P ado opu pla ted tion for Su alrl vie ny di (CP viduals S). Twith he stud emy ployment sample -ba unde sed r- public policy research and education on economic security and employee benefit issues. and their dependents could use to pay for health care services. These account-based health plans are forms of defined hospitals on measures of re-admissions and patient safety, such as postsurgical death rates and blood clots (White, $0 members must pay the difference in price if a more costly health care provider or service is selected. Report Availability: This report is available on the Internet at www.ebri.org Hip and knee replacement 6,343 $10,367 $21.7 -$8,056 $34.2 individuals will make inefficient health care consumption choices—a concept known as “moral hazard” (Pauly, 1968). RP EBRI’s membership includes a cross-section of pension funds; businesses; trade associations; health represented benefit insdividuals for the six ages he alth 25–34 care an ser d ov vices er-represent analyzed ed in in thdivi e pa duals per, a employ ges 45er –54. spe Th ndin e stud g coyuld samp fall le abo also ut under- 1.6 percent HRR* contribution (Fronstin, 2004). More recently, there appears to be a trend toward private health insurance exchanges, Reschovsky, and Bond, 2014). The investigators also found that high-priced hospitals performed the same as low- Potential Aggregate Savings Figure 2 White, Chapin, James D. Reschovsky, and Amelia M. Bond. "Understanding Differences Between High- And Low-Price Colonoscopy labor un 36, ions; h 853 ealth care prov 772 iders and insur 9. e4 rs; government org -678 anizations; and service firms. 16.7 seeks to address this issue by sensitizing patients to the overall cost of health care. ($9. represe 4 bill nted ion iin n dividuals 2010). Ho inwe thver, e Mithose dwest savi and ngs South, would whlike ile ilty over-r not mat eprese erialize nted if in providers dividual s curre in thntly e West. charg ing below the where employers provide a fixed amount of money for workers to use toward the cost of health coverage (Fronstin, priced ? hos Refer pital ence s on pr 30-day icing for mo hip rtality and rates kneefor repla heart cement, attack colo s and ®noscopy, pneummagn onia. et The ic resonanc 30-day mortality e imaging ra(MRI te for ) heart of the fa spi ilure ne, MRI of the Source: spin EBRI e estimates derived from Tr3 uven 3,52 Health 8 Analytics MarketScan 433 Commercial Database 4.8(copyright © 2010 T-r3 uven 43Health Analytics, 7.7 Hospitals: Implications For Efforts To Rein In Costs." Health ® Affairs 33, no. 2 (February 2014): 324-331. Source: EBRI estimates derived Nu from mTb ruven er an Health dAnaly Inc tics id MarketScan ence o ® Commercial f HealtDatabase h Ser(copy vicright es b © 2010 y Y Tear ruven Health Analytics, Source: EBRI estimates derived from Truven Health Analytics MarketScan Commercial Database (copyright © 2010 Truven Health Analytics, all rights Based on the incidence rates in Figure 2 and the savings per case in Figure 11, potential aggregate savings could reach all rights reserved). reference price increased their prices to the reference price or near it. all rights reserved). reserved). 2012). This funding of benefits through private health insurance exchanges can also be considered a form of defined was theC computerized only T sc aquality n of the measur he tomography ad ore br for ain w (CT) hich 48 scan hi,6 gh-price 56of the d head hospitals 61 or 7 brai perform n, nuclear ed 9better .9stress tha test n low of- 1 -th pric 84 e heart, ed hospitals. and ech 6.0 Th ocardiogr ese findings am * Magnetic resonance image. EBRI’s work advances knowledge and understanding of employee benefits and their One The follo of the win benefits g * organiz Hospital o referral fations RP regions. relates provide to patient the fundin choice g for of EB pro RIv CRHBI: ider or health American care Ex service. press, AMembers meriprise,may Aon apply Hewitt, their Blue Cross * Hospital referral regions. 2008 2009 2010 $9.4 billion, if all employers adopted RP for the health care services examined in this paper (Figure 12). This assumes ** Hospital referral regions. Stress test of the heart 39,176 87 1.1 -35 0.9 contribution health plan. importance to the nation’s economy among policymakers, the news media, and the public. It are consistent were ex with amine those d because on variation these in services hospital hapricin ve fair g ly in un Massachuse iform protocols, tts (Off aice nd of they Attorney are less Gen likely eral to Martha experie Coa nce k ley, Lives = 3,213,139 Lives = 3,004,053 Lives = 2,818,672 Blue Shield Association, Boeing, Deseret Mutual, Federal Reserve Employee Benefits System, General Mills, Healthways, employers’ contributions toward payment for any providers or health care services. This helps plan sponsors avoid that all health care providers whose prices are currently below the reference price would remain below the reference Results Echocardiogram does this b 77,092y conducting 36and p 2 ublishing policy re 9.2 search, analysis, -139 and special reports on 7.2 What we do 201 Endnotes 3). Moreov variation er, in a qu recent ality, w both hite of paper N uwhich mber co of n make clude In cp d idrice enc that e com spendi Ratp e ariso ng Nu namong m s beasier er of the for In po ci pdatients. pulatio ence Ran t e wit hN employ umber oment-based f Incidence h Re aalth te restricting JP Morgan costs Chase, by Mercer, reducing anchoices d Pfizer. in moving to preferred or narrow networks. RP could, of course, also be coupled employee benefits issues; holding educational briefings for EBRI members, congressional and price. The $9.4 billion represents 1.6 percent of all spending on health care services among the 156 million people with Total Aggregate Potential By providing a defined funding amount, account-based health plans and private health insurance exchanges attempt to Health Service Cases (per 1,000) Cases (per 1,000) Cases (per 1,000) 1 benefits would fall by 3.5 percent—or $36 billion—if prices for 300 “shoppable” procedures were reduced to their See Slide 26 in http://benefitcommunications. 5 com/upload/downloads/Mercer_Survey_2013.pdf federal agency staff, and the news media; and sponsoring public opinion surveys on employee with narrow networks, which might then be used to negotiate lower charges with providers. Price Variation employment Gain,-based Loss health benefits in 2010. $56.1 $72.8 H ip and knee replacement 5,029 1.57 5,744 1.91 6,343 2.25 create more engaged shoppers of health care services and coverage. Another defined contribution approach is ? Potential aggregate savings could reach $9.4 billion if all employers adopted reference pricing for the health benefit issues. EBRI’s Education and Research Fund (EBRI-ERF) performs the charitable, median price (Coluni, 2012). Price variation motivated Safeway to adopt RP for colonoscopies (Robinson and References Colo Tnos otac l N opy umber of Lives 35,265 2,818,672 10.98 37,672 12.54 36,853 13.07 2 refer RP Figures mi eght nce 4–9 also pric diisplay ng serve (RP the to ). drive U varia nder tdown ion RP, in pla educa overall prn icin stiona pg o health ns for l, and ors the either scientif care six hea co pic func a st y lth s a if care fti hi ixe ons of the Instit gher d servic am -pount riced es exami or provi ute. EBRI limit n ded ers thieir n res -ERF this co pond ntributi is a tax-ex paper. by ons re For ducin empt organizatio toward presentatio g prices the .cost n nin of care services examined in this paper. The $9.4 billion represents 1.6 percent of all spending on health care See Exhibit 7.22 in http://kaiserfamilyfoundation.files.wordpress.com/2013/08/8465-employer-health-benefits-20132.pdf MacPherson, 2012). MRI of the spine 35,680 11.10 Figure Figure Figure 7 9 5 34,747 11.57 33,528 11.89 Table of Contents Hip and knee replacements account for about 40 percent of the savings. While the incidence rate of hip and knee Per Member Per Year Brekke, Kurt R., Tor Helge Holmas, and Odd Rune Straume. "Reference Pricing, Competition, and Pharmaceutical supported by contributions and grants. a these speci grap fic heal hs, th 230 care (of service. the 306) If HRRs a plan were member selected chooses because a healt they h car cont e ained provider at least or service 1,000 that indivi costs duals more, in 20he 10. or Inshe each Robinson services and Brown amon (20 g th 1e 3)1 found 56 millthat ion p the eopl introduction e under ag e o65 f RP wit for h employm knee and ehip nt-based replachea ement lth bene in CalP fits ERS in 20 result 10. ed in a CT scan of the head or brain 49,661 CT Scan of the Head or Brain: Echocardiogram: 15. Colonoscopy: 46 53,173 17.70 48,656 17.26 (PMPY) $19.91 -$25.82 replacements in the population of people with employment-based coverage is relatively low, the costs are relatively Introduction.................................................................................................................. ..................................... .4 3 rd th Expenditures: Theory and Evidence From a Natural Experiment." Journal of Public Economics 95, no. 7 (2011): See Shttp://academyhealth.org/files/2013/s tress test of the heart 64,023 unday/li.pdf 19.93 47,489 15.81 39,176 13.90 must shift figure from pay , the thi h m e gh-pr edif dian fere iced pric nce to e in is low-price depicte price. In d d 2 facilit as 0 1 a 2s , ies o 11 lid an perc black d aent 34. line o 3f perc and employers ent the dec varwit iati line h o n i5 n0 in prices 0 pric or more ing charge betwee workers d to n C th wer alP e 33 ERS e using an mem d some 67 bers per at type chi entile gh- of Median Prices and 33rd to 67th Median Prices and 33rd to 67th Median Prices and 33rd to 67th Percentile Ranges, by HRR,* 2010 Percentile Ranges, by HRR,* 2010 Percentile Ranges, by HRR,* 2010 So urce: EB RI estimates derived from Truven Health A nalytics M arketScan® Co mmercial Database (co pyright © 201 0 Truven Health high. In contrast, stress tests of the heart accounted for only 2 percent of the aggregate potential savings. While EBRI Issue Briefs is a monthly periodical with in-depth evaluation of employee benefit issues 624-638. 1 Echocardiogram 83,077 25.86 81,539 27.14 77,092 27.35 ? Savings from reference pricing materializes through the combination of 1) patients choosing providers at the A nalytics, all rights reserved). RP, Theory is repr anesente d and an $1 $1 oth ,5 ,6 Expectations d 00 00 eby r 16 the perc sha ent ....................................................................................................... ded were blueconsideri area. The ng to it. p of Well the -kno blue wn ba exam nd, the ples refore, of RP ref imlects pleme the ntations referenc inc ............................... elude pricthe e set Cali in forni each a 4 priced faciliti $4,5 e00 s. They also found that low-priced providers reduced prices by 5.6 percent, and that RP was responsible Data and Methods and trends, as well as critical analyses of employee benefit policies and proposals. EBRI 4 incid Soence urce: E B rate RI es st irange mates dd erifrom ved fro 14 m T rto uve20 n H eal per th c Aent nalytibetw cs M ark een etSc 2 an 008 ® C oan mm d e201 rcial D 0, at a only base (c $8 op 7 yrper ight ©case 2008–20 wou 10 ld Truv be en saved Heal thfrom Analyt iR cs, P all Our More information about HRRs can be found at http://www.dartmouthatlas.org/data/region/ reference price, 2) patients paying the difference between the reference price and the allowed charge through ® for Public HRR a accord 20. Employ 2 per ing c ees' ent to the R decre etirem stud ase e y nt scenario. in System hospital (Cal pric PERS) es for 33 knee k rd-67 nee th - Percentile an and d hi hip-re p Rang replacement. p e lacement Median program Aft Price er the (Ro RP b was inson intro anduced, d Brown, some 2013) and rights reserved). 33rd-67th Percentile Range Median Price Notes is a monthly periodical providing current information on a variety of employee benefit Data for this study were derived from Truven Health Analytics’ MarketScan Commercial Database (copyright © 2008– Coluni, Data and Bobbi. MethSave ods .............................................................................................................. $36 Billion in U.S. Healthcare 33rd-67 Spe thn Percentile ding Th Rang rou egh Pric Med e Tra ian Price nsparency. Thomson ................................. Reuters, 2012. Ann 6 (again assuming that providers below the reference price did not increase prices). Colonoscopies, CT scans of the head $4,000 cost sharing, and 3) providers reducing their prices to the reference price. Any increase in prices among $1,400 topics. EBRIef is a weekly roundup of EBRI research and insights, as well as updates on Safeway’s colonoscopy and lab programs (Robinson and MacPherson, 2012). hospitals renegotiated contracted rates in the broader market (Lechner, Gourevitch and Ginsburg, 2013). Li, et al. 5 publications 2010 Truven Health Analytics, all rights reserved), which includes employer health plans. The MarketScan database Aggregate sp Arbor, MI.ending on emp loyment-based health insurance premiums (a proxy for spending on health care services) was or brain, and echocardiograms each accounted for between 15–20 percent of aggregate potential savings, while MRIs Sample ........................................................................................................................ surveys, studies, litigation, legislation and regulation affecting emplo .................................. yee benefit plans, while 7 Each service experienced wide variation in pricing within and across HRRs, with the exception of stress tests of the providers below the reference price would reduce the potential for savings. Figure 3 (2013) also examined RP for knee and hip replacement and found that after implementation, average costs declined $1,200 contains claims-level information on health care services utilization—such as inpatient and outpatient care and $576 billion in 2010 according to data in Tabl $3,500 EBRI’s Blog e 16 in supplements our regular publications http://www.cms.gov/Research-Statist , off ics-Data-and-S ering commentar ystems/S y on questions tatistics- of the spine accounted for about 10 percent of the potential savings. Figure 12 This heart, paper which e xmay amines be ex the plai thned eory by antd he e xrel peatively ctations low bepri hincd es Rch P, ar as ged well by as most the potenti providers. al savings, Mean reference both in the pric study es are sample shown $1,200 Study Sample Characteristics, 2010 Results ............................................................................................................................................................... 7 13 percent for hip replacements, 20 percent for knee replacements, and 23 percent for non-RP providers of hip Fronstin, Paul. "Defined Contribution rece Healt ived from h Be news nefits." reporters EBRI Issue , policy Brief, makers no. , an23 d others 1 (Em. EBRI ployee Fundamentals of Employee Benefit Research Institute, prescription drugs—as well as the associated billed, allowed, plan-sponsor-paid, and member-share amounts. Policy Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2011PDF.pdf ? Reference pricing for knee and hip replacements would result in savings averaging $10,367 per knee or hip and in Figu national re 10 ly, by from type o an f healt RP design h service. for the following health services: hip and knee replacement, colonoscopy, magnetic Aggregate Pote Stn udy tia S l am Sa plv e iM nea gs ns fromC R ure rent fe rP e opul ncat e ion PrS ic uin rveg y, Benefit Programs offers a straightforward, basic explanation of employee benefit programs in replacements. Importantly, quality was deemed to be better or equivalent—as measured by post-surgery complications, March $3 20 ,000 01). holders Price and Variatio their n ............................................................................................................... dependents less than 65 years of age were examined using data from January ................................. 2008 through 7 replacement among the cases that were above the reference price, and would account for about 40 percent of n = 2,818,672 109,527 3 resonance $1 ima ,000ging (MRI) of the spithe priv ne, cob at mputeri y e and Selepublic s zct H ed to emography a ectors lth S . The er vi (C EBRI Data ce T) , 2010 scan of book on Emplo the head or br yee Benefits ain, nuclear is a stress statistic test al of Issues to Consider infection rates, and hospital readmission rates. December 2010. Overall, the analytical dataset included 3.2 million individuals in 2008, 3 million in 2009, and 2.8 mil- $900 Gender Potential Savings in Study Sample .................................................................................................................... 7 reference work on employee benefit programs and work force-related issues. the aggregate savings. While the incidence rate of hip and knee replacements in the population of people with Potential Savings in Study Sample the heart, and echocardiogram. These services were chosen because they have fairly uniform protocols, which make $2,500 Fronstin, Paul. "Health Savings Accounts aT n od taOt l Nu her mbAcco er of unt-Base Cases Wd ith H ine alth Plans." EBRI Issue Brief, no. 273 (Employee Plan sponsors should consider a number of issues as they weigh adopting reference pricing. Male 48% 50% lion in 2010. In each of the three years, spending on the following six health services were studied: 1) hip (partial or Additio nally, RP may spur more providers to learn more about the cost of the health care services. Recent research has Potential employment Aggregate -based Savings covera ................................................................................................... ge is relatively low, the costs are relatively high. In contrast, stress ........................ tests of the he10 art price comparis $800ons easier for patients. Employment-Based Health Total Potential The Bene potential fit Resear savings ch Institut from adopti e, FS ee m ng ptem aleRPber is show 2004). in Fi 52% gure 11 by type of service 50% for 2010 for the 2.8 million people in the total) and knee (total) replacementContact EBRI , 2) colonosc oPublications, (2 py, 3) MRI of 02) 659-0670; the (lumbar-sacral fax publication ) spine (witho orders to ut contrast), (202) 775-6312. 4) CT scan found that only about one-fifth of doctors correctly estimated the cost of an implantable device (Okike, et al. 2014). acc $2 o,0 u00 nted for only 2 percent of the agg Co re vg ea ra tge e p P oo te pu nlt aia tion l sa v i ngs. Whil th e Sa in vcide ingsnce rates Pe ranged rcentagefrom of 14 to First, how is the reference price Agedetermined? CalPERS set the reference price for knee and hip replacement at $30,000, Issues to Consider ............................................................................................................................................. 10 study sample. As mentioned above, the reference price was set at the 67 percentile by HRR. Subscriptions to EBRI Issue Briefs are included as part of EBRI membership, or as part of a of the head or brain (without contrast), 5) stress test of the heart (including test, supervision, and interpretation), and Health Service (millions) ($ billions) Savings Physicians Orders/ generally do not have Und an er inc 18 entive to learn 26% the prices of the services 26%they recommend to their patients. In 20 perc $600ent between 2008 and 2010, only $87 per case would be saved from reference pricing. Colonoscopies, Fronstin, Paul. $600 "Private Health Insurance Exchanges and Defined Contribution Health Plans: Is it Déjà Vu All Over which was higher than the prices charged by about two-thirds of the hospitals in the preferred provider organization $199 annual subscription to EBRI Notes and EBRI Issue Briefs. Change of Address: EBRI, Conclusion .................................................................................................................... Hip and knee replacem 18 en –24 t 8% 0.4 9% $3.6 .................................... 39% 13 6) echocar$1 dio ,500 gram (transthoracic without spectral or color Doppler). These services were chosen because they have fact, Theory and Expectations contractual agreements may even prevent them from obtaining such information. However, if an increasing CT scans of the head or brain, 1100 13th St. NW, Suite 878, Washington, and echocardiograms each accounted DC, 20005-4051, (202) 659-0670; fax number, for between 15–20 percent of aggregate If RPAgain? was ado " EBRI pted Issue for knee Brieand f, nohip . 37replac 3 (Employ ements, ee Bsavin enefit gs Res wou earch ld aver Institute age $10,367 , July 201 per 2). knee or hip replacement among (PPO) network. The ramifications of this decision are complex: If reference prices are set high, patients will have many Subscriptions Colonoscopy 25–34 8% 2.0 15% 1.6 17 fairly uniform delivery protocols, and they are less likely to experience variation in quality, both of which make price (202) 775-6312; e-mail: subscriptions@ebri.org Membership Information: Inquiries number of patients are presented with an RP plan design, providers and their administrators may move to alter their potential savings, while MRIs of the spine accounted for about 10 percent of the potential savings. $400 When Refer the 33 ences hperc ealth ............................................................................................................................... ent plan of tenrollees he cases u th sat e traditio were abov nal health e the re care ferese ncrvices, e price. pati This ent s a cost vings sharin woulg d is materializ typically e in thtr ......................... hoe ugh form the of 13 providers to choose from that are 35–44 below the RP, the 17% potential for savings will 16% be minimized, and fewer providers will MRI of the spine 1.9 0.8 9 $1,000 regarding EBRI membership and/or contributions to EBRI-ERF should be directed to EBRI comparisons easier for patients. Kanavos, Panos, and Uwe Reinhardt. "Reference Pricing For Drugs: Is It Compatible With U.S. Health Care?" Health contracts to allow for a broader communication of prices in order to be more competitive. RP will work only if 45–54 23% 19% copayments combination o orf : co-insurance, once any deductibles have been met. Copayments are fixed payments that, once set, do have an incen C $3T 00 tive scan to oflo th wer e he prices. ad or brIf ai n ref erence prices are 2.7 set low, patients will have 1.7 fewer provider18 s to choose from that President Dallas Salisbury at the above address, (202) 659-0670; e-mail: salisbury@ebri.org Endnotes .......................................................................................................................................................... 14 ? Plan sponsors should co 55 nsider –64 a number of issues 17% as they weigh adop 15% ting reference pricing, including how the Affairs 22, no. 3 (May 2003): 16-30. consumers have accurate information about provider prices. S $2t00 ress test of the heart 2.2 0.2 2 not vary with the price of the health care service being used. Conversely, co-insurance is a percentage of the health- are at or belo $500 w the RP, unless provider prices fall. Artificially low reference prices may also trigger consolidation among To derive reference prices for each health service examined, the sample was divided into 306 hospital referral regions Region ? Patients choosing providers at the reference price, reference price is determined and how providers may react. Communication to plan members is also key to Editorial Bo Echo ard: ca Dallas L rdiogram . Salisbury, publisher; Stephen Blakely 4,. editor 3 . Any views expressed in this p 1.5 ublication and those o 16 f the authors should service cost. In 2013, 74 percent of workers had copayments for primary care and 72 percent had copayments for providers, which would increase negotiating power among providers. If providers are unable to reduce the cost of Northeast 22% 20% (HRRs). HRRs were defined by the Dartmouth Atlas Group and represented regional health care markets, which not be ascribed to the officers, trustees, members, or other sponsors of the Employee Benefit Research Institute, the EBRI Education and Lechner, Amanda E., Rebecca Gourevitch, and Paul B. Ginsburg. "The Potential of Reference Pricing to Generate Health RP may not necessarily have desirable effects on provider prices, however. effective use of reference pricing. Total Aggregate Potential $0 Figures ? Patients $0 paying the difference between the reference price and the allowed charge through cost sharing, and Midwest 15% 23% specialist office visits, while one-fifth of workers had co-i4nsurance for office visits (Figure 1). Co-insurance is much more services subject to RP, they may increase prices of other services. Plan sponsors will also need to consider whether Research Fund, or their staffs. Nothing herein is to be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation, $0 generally require the services of a major referral center. Within each HRR is at least one city where both major Care Savings: Lessons from a California Pioneer." HSC Research Brief No. 30 (Center for Studying Health System Savings $9.4 100% 2 South 29% 35% or interpretative rule, or as legal, accounting, actuarial, or other such professional advice. www.ebri.org Figure common 1, for Perc hosp entage ital ad of missions: Covered Workers About 60 With percent the Fol of lwo owrkers ing Ty had pes co-i of Cost nsurance Shari for ng for hospital In-Networ admissions k, Physician in 2013. -Office Co- reference prices are set locally, regionally, or nationally. A national or global reference price is easier to communicate, First, high-cost So urchealt e: EB R hI es car tim eat providers es derived fro may m Tr uv be en rH eealt lucta h Ant naly tto ic s reduce M arketS pric can® e C s ounless mmercial th Dey atabas expect e (copy of right fsetti © 2010 ng gains in volume, cardiovascular ? Providers surgica redu l proce cing their dures pr aic nes d ne to uthe rosurgery reference are pric perform e. ed. HRRs sometimes cross state boundaries. For this Change), December 2013. West 34% 22% Visits Truv(I en n HAddi ealth tion A nalytto icsAny , all right Ge s neral, reserved). Annual Plan Deductible), by Plan Type, 2013 ........................................... 8 insurance is typically subject to an out-of-pocket maximum, ®whereas copayments are not. but will not alloSource: w for EBRI variatio estimates ns derived in prici from Tn ruven g aHealth cross Analy regions tics MarketScan that ® Commercial are inde Database pendent (copy right of © eith 2010 e r Truven practic Health eAnaly patt tics, erns all or quality. Source: EBRI estimates S derived ource from : EBT R ruven I estHealth imates Analy deri tics ved MarketScan fro m TruvCommercial en Health A Database nalytics (copy Mark right etSc © 2010 an® Truven Health Analytics, and study, those individ witu EBR hals suf I Issu wer ficie e e nt Brief asm sig is arket rned egister po to ed in the U. wer an HRR and/or S. bas Patent and T strong ed upon pati r adem their ®ent ark trhree Office. elation -d Iigi S ships SN: 0887 t ZIP may cod ?13be e 7X/90 (ZI successful P3) 0887 of ? 13 res 7X/90 $ . in id s en tandin ce 50+. usg in 50 tg heir the pricin ZIP- g Source: EBRI estimates derived from Truven Health Analytics MarketScan Commercial Database (copyright © 2010 Truven Health Analytics, all rights rights reserved). all rights reserved). Comme rcial Database (co pyright © 201 0 Truven Health Analytics, all rights reserved). More Among researc the 67 h perc is * Hospital needed ent referral of to c regions. abe ses tter belo un w derst the a refer nd tence he impli pric ce, ation if providers of varyinwere g refer to ence increa prices. se their prices to the reference * Hospital referral regions. ground. Providers may move to increase prices of non-RP health services in order to fill the revenue hole resulting from code-to-HRR crosswalk provided by the Dartmouth Atlas Group. ZIP3 was the finest level of geographic information * Hospital referral regions. reserved), and Current P o pulation Survey, M arch 201 1 Supplement. Figure 2, Number and Incidence of Health Services by Year ..................................................................................... 8 price, an average of $8,056 more would be paid per case. In aggregate, spending would be $21.7 million lower among the pricing impact of RP practices. © 2014, Employee Benefit Research Institute ?Education and Research Fund. All rights reserved. ebri.org A ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org ebri.org monthl ebri.org Issue Brief • April 2014 • No. 398 ebri.org Issue Brief • April 2014 • No. 398 ebri.org Issue Brief • April 2014 • No. 398 ebri.org Issue Brief • April 2014 • No. 398 ebri.org Issue Brief • April 2014 • No. 398 Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri Issue Bri y research e e e e e e e e efffffffff report • • • • • • • • • April April April April April April April April April fr2014 2014 2014 2014 2014 2014 2014 2014 2014 om th e • • • • • • • • • EBRI No. No. No. No. No. No. No. No. No. 398 398 398 398 398 398 398 398 398 Education and Research Fund © 2014 Em ployee Benefit Research Institute 12 11 15 9 8 14 13 10 6 4 7 3 2 5 1 1 1 1 1 1 6 6 6 6 6 6 11 11 11 11 11 11 16 16 16 16 16 16 21 21 21 21 21 21 26 26 26 26 26 26 31 31 31 31 31 31 36 36 36 36 36 36 41 41 41 41 41 41 46 46 46 46 46 46 51 51 5151 51 51 56 56 56 56 56 56 61 61 6161 61 61 66 66 66 66 66 66 71 71 71 7171 71 76 76 76 76 76 76 81 81 81 8181 81 86 86 86 86 86 86 91 91 91 9191 91 96 96 96 96 96 96 101 101 101 1010 1 1 101 106 10 10 6 6 106 106 106 111 111 111 1111 1 1 111 116 116 11 11 6 6 116 116 121 121 121 121 121 121 126 126 12 12 6 6 126 126 131 131 131 131 131 131 1313 6 6 13 13 6 6 136 136 141 141 141 141 141 141 1414 6 6 14 14 6 6 146 146 1515 1 1 151 151 151 151 1515 6 6 15 15 6 6 156 156 161 161 161 161 161 161 1616 6 6 16 16 6 6 166 166 171 171 171 171 171 171 1717 6 6 17 17 6 6 176 176 181 181 181 181 181 181 186 1818 6 6 186 186 186 191 191 191 191 191 191 196 196 196 196 196 196 201 201 201 201 201 201 206 206 206 206 206 206 211 211 211 211 211 211 216 216 216 216 216 216 221 221 221 221 221 221 226 226 226 226 226 226