Report shows reference pricing could save employers $9.4 billion

About Joseph Burns

Joseph Burns (@jburns18), a Massachusetts-based independent journalist, is AHCJ’s topic leader on health reform. He welcomes questions and suggestions and tip sheets at

Image by Patty via flickr

Image by Patty via flickr

If all employers adopted reference pricing for certain health care services, the potential total savings could reach $9.4 billion, according to a new report from the Employee Benefit Research Institute (EBRI). This amount would be 1.6 percent of all spending on health care services among the 156 million people under age 65 who have employment-based health benefits in 2010, EBRI said.

The research was done by Paul Fronstin, director of EBRI’s Health Education and Research Program, and M. Christopher Roebuck, Ph.D., president and CEO of RxEconomics LLC. The report is available for download from the EBRI site.

Under reference pricing, an employer or any health care payer would pay a set amount for specific health care services, such as hip or knee surgeries. Then the employees or health plan members using those services would pay the difference in price if they chose a more costly health care provider or service.

In the report, “Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits,” Fronstin and Roebuck examined the effect of using 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. These services were chosen because providers doing these procedures or tests usually follow protocols, minimizing variations in quality. Comparisons of this sort are difficult when tests or procedures vary widely in price or quality, they explained.

“Savings from reference pricing materialize 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,” Fronstin and Roebuck wrote.

One important factor in the success of any reference pricing program is how employers and health insurers communicate the program to employees and plan members, Fronstin and Roebuck added.

The EBRI report is the second one in recent months to outline the potential cost-control benefits of reference pricing. An earlier report from the Center for Studying Health System Change (HSC) titled, “Potential of Reference Pricing to Generate Health Care Savings: Lessons from a California Pioneer,” showed that reference pricing for patients seeking hip and knee replacements helped steer patients to lower-price hospitals and motivated hospitals to reduce prices for these procedures.


Webcast: The cost of health care: Is transparency possible?

2 thoughts on “Report shows reference pricing could save employers $9.4 billion

  1. Norman Bauman

    To make a good choice, a consumer has to know the benefits and the costs of the procedure from different providers.

    It’s possible to find out the cost, but it’s difficult and sometimes impossible to find out the outcomes.

    Take total knee replacement. Surprisingly, we do 600,000 total knee replacements in the U.S., at an average cost of $15,000, but no one has ever done a randomized trial to find out what the difference in outcome is between TKR and best alternative treatment. (There is a Danish randomized trial now underway .)

    About 10 to 34% of patients are worse off than they were before — some of them confined to a wheelchair or bedridden, with severe, constant pain that can’t be relieved by opioids or any other treatment.

    This has also been reported in the newspapers, though inadvertently. If you read the story of Jane Brody’s TKR in the New York Times, and then look at the comments, you will see first-hand accounts of patients who are suffering those failures.

    But suppose I’m choosing between NYU and another institution, and I’m worried about winding up with severe pain, I can’t find out NYU’s results. I can’t even find out NYU’s prices.

    Suppose I did find out that NYU is one of those institutions with a (favorable) 10% failure rate, and suppose NYU charges $30,000 for that TKR. Suppose Joe’s Knee Replacement in Queens is one of those institutions with a 34% failure rate, and Joe charges $10,000. Under reference pricing, my insurer would pay me $10,000 for a knee replacement. If I want to go to Joe’s (and take an additional 24% risk of spending the rest of my life confined to a wheelchair with severe constant pain), my insurer will cover the $10,000 at Joe’s. But if I want to go to NYU, I have to pay the additional $20,000 myself. Right?

    Yes, reference pricing will save a lot of money. But won’t it drive people to the lowest bidder, even if they have the worst outcomes? Isn’t that bad?

  2. Norman Bauman

    Here’s an update–

    I just went around in circles a couple of times trying to get an answer out of NYU to the following question:

    Q: The medical literature reports that for total knee replacement, 15-20% of patients end up with moderate to severe permanent pain. You must keep statistics at NYU. Out of 100 TKR patients at NYU, how many ended up with moderate to severe pain?

    I wound up exchanging emails with a marketing person who was trying to be helpful and kept offering me what she had, but couldn’t give me the risk of one of the common, severe adverse outcomes at her institution. And NYU probably had outcomes equal to or better than than their competitors.

    Think about that. How can medical consumers make rational, efficient decisions in the marketplace if they can’t get basic, essential information about the major risks of the services they’re buying?

    If you have a marketplace in which competition is driven by price, and not quality, won’t you get a race to the bottom — won’t you get the cheapest services, even if cost-cutting leads to the worst service?

    If you believe that medical consumer choice in a free market is a credible policy, then I challenge you to call up an orthopedic surgery institution in your region* and ask them what percentage of their total knee replacement patients wind up with moderate to severe pain.
    *Not NYU, I’ve given them enough trouble

Leave a Reply