Reference Pricing Cuts Costs for Employers, Employees

Nicola M. Parry, DVM

August 01, 2016

When patients have access to price information, employers' use of a reference pricing program leads patients to choose lower-cost laboratories, thereby reducing costs for both employer and employees.

James C. Robinson, PhD, from the University of California, Berkeley, and colleagues used claims data from a large, national grocery firm to investigate the associations among reference pricing, patient choices, and prices paid for in vitro diagnostic tests. They published the results of their observational study online July 25 in JAMA Internal Medicine.

"Both patients and the firm experienced significant savings," the authors write.

In the United States, employers' implementation of reference-based benefits has led to significant changes in consumers' decision-making choices, as well as in spending for healthcare services.

In the reference pricing model, insurers provide payment up to a certain price threshold, and the patient pays the difference between this hard cap and the actual price charged.

"Reference pricing does not target the decision to seek care but rather the decision of where to seek care," the authors say.

Safeway, the national US grocery firm, implemented a reference pricing policy for laboratory services in March 2011 in an effort to improve employees' understanding of the costs, and cost variability, of these services. The firm focused the reference pricing model on established tests that were performed for nonurgent healthcare needs. For each test, Safeway set the maximum amount it would pay at the 60th percentile of the range of test prices in each region. The firm also gave employees access to test prices at all laboratories.

Dr Robinson and colleagues collected claims' data from Safeway for tests performed on employees from January 2010 through December 2013. To account for trends in prices during this time that were not related to reference pricing, they also analyzed claims' data from the Anthem Inc insurance company. The authors restricted their analysis to tests that were covered in both the Safeway and Anthem data; in total, there were 2.13 million claims from 285 types of laboratory tests, making up 63% of all laboratory claims from Safeway. The final analysis included 344,413 laboratory tests used for Safeway employees and 1,781,640 tests used for Anthem enrollees.

Safeway employees were 25.2% less likely than Anthem enrollees to choose a higher-priced laboratory, and initiation of the reference pricing program further decreased this probability by 23.6% after the first year, 22.1% after the second year, and 18.6% after the third year.

Implementation of the reference pricing program led to a 31.9% reduction (95% confidence interval [CI], 20.6% - 41.6%) in the average cost per test by the third year of the program. During the 3 years, the program reduced spending on the 285 tests by $2.57 million (95% CI, $1.59 - $3.35 million), benefiting both the employer and its employees.

Employees' average out-of-pocket costs decreased by $3.58 (34.2%) after the first year, $4.37 (40.1%) after the second year, and $4.58 (41.5%) after the third year. This amounted to an overall reduction in out-of-pocket costs of $1.05 million (95% CI, $0.73 million - $1.37 million) during the 3-year period. Safeway's spending per laboratory test also decreased by $6.82 (30.0%) in the first year, $6.32 (28.3%) in the second year, and $7.11 (31.1%) in the third year. This amounted to an overall reduction in employer spending of $1.70 million (95% CI, $0.92 million - $2.48 million).

"Combined employee and employer savings per year ranged from $0.87 million in 2011 to $0.86 million in 2013, with a cumulative savings of $2.57 million," the authors write. "This amounts to a 35% reduction in spending on laboratory tests compared with what would have been spent in the absence of reference pricing," they conclude.

In an accompanying invited commentary, Paul B. Ginsburg, PhD, from the University of Southern California, Los Angeles, emphasizes that these results represent a valuable addition to those of previous studies investigating ways to contain healthcare costs.

He notes that such large cost reductions are possible as a result of the significant variation in negotiated prices for laboratory tests: "The price for the most commonly prescribed laboratory test, the basic metabolic panel, ranges from $6.15 at the 25th percentile to $44.00 at the 75th percentile."

However, Dr Ginsburg adds, the success of reference pricing programs also depends on the patients, who must choose the lower-priced laboratories, often instead of those at their physicians' clinics. In addition, because many patients are challenged to investigate services and compare providers' prices, this can therefore be a problem when employers use reference pricing programs to reduce spending.

According to Dr Ginsburg, reference pricing is more flexible than other tiered networks because providers are organized into tiers for a particular type of medical service. But this approach cannot be used for all services, and he stresses that it works best for those that are most standardized and where variation in quality is less of a concern.

As a consequence, "other cost containment approaches, including other network strategies, are needed to successfully contain health spending and lower costs for nonshoppable medical services," Dr Ginsburg concludes.

This study was supported by the Robert Wood Johnson Foundation. The authors and the editorialist have disclosed no relevant financial relationships.

JAMA Intern Med. Published online July 25, 2016. Article abstract, Commentary extract

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