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Reference Pricing Can Incent Price Moderation

By Tom Weatherup/Monday, June 9, 2014

Tom Weatherup imageA recent article in Modern Healthcare discussed the idea of meaningful competition. “Ensuring meaningful competition” through increased transparency is a key component to re-engineering the U.S. healthcare system and resolving the issues of high costs and high utilization.

When large employee group health plans, like CalPERS, are able to access and analyze claims data, they can see (often for the first time) the wide variation in pricing that currently exists. Many of our large employer customers are shocked at the extremely wide range of all-in prices for the same service, such as colonoscopy or knee replacement, within a confined geographic area.  

Of course, in the current environment consumers tend to be price insensitive, due to the design of health benefits, and they can’t access marketplace pricing even if they were interested. Given the lack of price information, the CalPERS initiative of setting a reference price (for the allowed amount covered by the plan) for a subset of specific procedures is a reasonable approach to communicate what is considered “average” for a given service within the marketplace. An interesting, and perhaps unexpected, result of the CalPERS reference pricing initiative is that many high-priced providers have lowered their price to the reference price or near it. In retrospect, this is a reasonable response by providers when discovering that their price was inconsistent with the marketplace – especially in an environment where consumers now care about provider prices.

Tom Weatherup
Vice President, Client Service
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Categories: Employer