A new examination of reference pricing published as two posts in Health Affairs Blog on March 5, 2015 recommends a go-slow approach to a health insurance cost containment tool that has gained an increasing following. David Frankford, Professor of Law at Rutgers Law–Camden, and Sara Rosenbaum, Harold and Jane Hirsh Professor of Health Law and Policy at the Milken Institute School of Public Health at the George Washington University, underscore the need for caution based on the extremely limited conditions under which reference pricing has been tested to date, as well as the potential for the strategy, when poorly used, to significantly impair access to necessary health care. 

In their analysis, Frankford and Rosenbaum, co-authors of the text book Law and the American Health Care System  (Foundation Press ( 2nd edition)  discuss the fundamental purpose of reference pricing – to enable people to more easily shop for health care by creating a special group of “designated” providers within a plan’s network that have agreed to abide by the reference price for a particular procedure. Patients who use these designated providers get the benefit of deeper discounts and lower cost sharing, while those who receive care from network providers that don’t have a special designation would pay higher costs. Under federal standards issued by the Obama Administration, however, these added costs from failing to seek care from a designated provider would not count toward the maximum amount that patients can be required to pay by their insurer in any given year. 

“Reference pricing is a cost-containment strategy whose time has not yet come,” said Professor Frankford. “Enforcement agencies should limit its use to a few simple procedures until more is known about its impact on plan members, although they should immediately rule that its higher out-of-pocket costs fall within the annual limits Congress imposed in the Affordable Care Act.

The analysis describes the modest level of testing of a reference pricing approach that has taken place to date. They note that the relatively favorable results seen when the California Personnel Retirement System (CalPERS) introduced the approach for a handful of procedures would not be the norm for most employers and health plans because of the unique circumstances surrounding the CalPERS experiment. They also describe the potential risks that reference pricing carries. These risks include the possibility of discrimination against the sickest patients (by leaving certain providers such as specialized cancer centers off designated provider lists in order to discourage enrollment by people with cancer), very high administrative costs, a high degree of patient burden and confusion, and the negligible overall impact that even a well-designed reference pricing scheme would have on the cost of coverage. Finally, the authors note, the implications of reference pricing are to further constrain the ostensible size of already-narrow provider networks by limiting patients as a practical matter to only the least costly network members. For this reason reference pricing as a widely used cost containment strategy should proceed only following federal and state regulatory safeguards aimed at ensuring that plan networks provide adequate access to appropriate care and protecting patients against high annual out-of-pocket costs, while mitigating the potential for using reference pricing as a means of discouraging enrollment by sick patients.

At Rutgers, Professor Frankford teaches courses and seminars on antitrust, bioethics, health care law, health care fraud, and health care transaction.  Professor Rosenbaum teaches health services and law, health reform and law, and health policy and the regulatory process at the George Washington University’s Milken Institute School of Public Health and Law School.

 Go Slow On Reference Pricing: Not Ready For Prime Time: http://healthaffairs.org/blog/2015/03/09/go-slow-on-reference-pricing-not-ready-for-prime-time

Go Slow On Reference Pricing: Why The Federal Agencies Have It Wrong On Regulations: http://healthaffairs.org/blog/2015/03/09/go-slow-on-reference-pricing-why-the-federal-agencies-have-it-wrong-on-regulations