Opinion
VIEWPOINT
Terry Shih, MD Center for Healthcare Outcomes and Policy, University of Michigan, Ann Arbor. Justin B. Dimick, MD, MPH Center for Healthcare Outcomes and Policy, University of Michigan, Ann Arbor.
Is Reference Pricing the Next Big Thing in Payment Reform? With increasing national interest to simultaneously lower costs and improve quality, payers are exploring innovative policy initiatives targeted at health care payment reform. The majority of these initiatives shift financial responsibility from the payer to the provider (ie, hospitals and clinicians): bundled payments and accountable care organizations both involve negotiating a lump-sum payment from the payer to be appropriated at the discretion of the provider. Health care systems are incentivized to provide efficient care, as they keep any money they do not use and must provide extra resource utilization at a loss. Although most are familiar with some of these payment reforms, many surgeons have not heard of the latest innovation (and perhaps the most promising to date): reference pricing. Under this policy, patients (rather than providers) share the burden of financial responsibility. Early demonstrations of reference pricing have resulted in large savings in health care spending. In this context, surgeons must become familiar with reference pricing and its implications, as the policy will likely grow in scope in the near future.
What Is Reference Pricing?
Corresponding Author: Terry Shih, MD, Center for Healthcare Outcomes and Policy, University of Michigan, 2800 Plymouth Rd, Bldg 16, Office 100N-07, Ann Arbor, MI 48109 ([email protected]). jamasurgery.com
Reference pricing is an alternative to traditional deductibles intended to make patients more conscious to differences in hospital prices. In the traditional model for procedural care, the patient is responsible for an initial deductible or co-payment, and insurance covers the remainder, regardless of the price of the procedure. To make patients more sensitive to prices for less expensive health care (eg, pharmaceuticals or primary care), insurers have imposed higher deductibles. However, this strategy will not influence patient choices for procedural care where costs far exceed the deductible. Though hospital prices may vary greatly, it is all the same price for the patient. Reference pricing seeks to make the patient sensitive to variability in hospital prices. In this policy design, the insurer sets a reference price to be paid for a specific service. The patient may then use any provider, but the patient is financially responsible for any excess difference in cost between the reference price and provider’s price. Typically, the reference price is set high enough so that many providers are still available below the reference price but low enough that patients are responsible for a substantial amount for high-priced providers. This policy creates a strong incentive for patients to choose a low-priced provider.
Reference Pricing in Practice Reference pricing has been used extensively for pharmaceuticals in national health systems. Under the pro-
gram, a reference price is set at the cheapest drug for therapeutically equivalent medications within the same class. Patients can still purchase higher-priced medications but must pay the difference. The program was first implemented in Germany in 1989 and has been widely adopted in many European countries, Canada, and New Zealand. Evaluation of pharmaceutical reference pricing has shown reduction in drug expenditures, with no deleterious effects on health or health care utilization.1 The attractive results of these programs have piqued interest in reference pricing for procedures, with 2 prominent demonstrations in the United States. Safeway, a national chain of grocery stores and longtime innovator in health insurance, noticed largescale variation in prices for colonoscopy within a region. For example, the price for colonoscopy in San Francisco, California, ranged from $848 to $5984.2 In 2009, the company, which self-insures 40 000 employees, set a reference price of $1250 and distributed a list of all facilities that offered colonoscopy below the reference price. Safeway has expanded reference pricing to laboratory and imaging tests as well as ambulatory procedures such as arthroscopy, herniorrhaphy, cholecystectomy, and cardiac catheterization. Most relevant to surgeons, reference pricing has recently been expanded to big-ticket surgical procedures. The California Public Employees’ Retirement System (CalPERS), which covers 1.3 million employees, retirees, and dependents, noticed wide variation in the prices of hip and knee replacements charged by hospitals. In 2011, CalPERS implemented a reference price set at $30 000 with a co-payment of $3000. In addition to the copayment, patients were responsible for any costs over the $30 000 reference price. Importantly, CalPERS identified 41 hospitals as “value-based purchasing design” (VBPD) centers that offered the procedure below $30 000, were geographically dispersed, and had acceptable quality.3 The program accounted for $3.1 million in savings in 2011. Market share at VBPD hospitals increased from 48% to 63%. Volume at non-VBPD hospitals fell by 34%, leading to price cuts to remain competitive (34%). CalPERS has since expanded its reference pricing program to colonoscopy, cataract surgery, and arthroscopy.4
Implications of Reference Pricing Reference pricing may be introduced by multiple payers for a variety of procedures in the near future. As providers on the front lines, surgeons must understand the implications of this expanding policy. In this context, the following are a few considerations (Table). JAMA Surgery December 2014 Volume 149, Number 12
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archsurg.jamanetwork.com/ by a Florida International University Medical Library User on 06/06/2015
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Opinion Viewpoint
Table. Challenges for Reference Pricing Challenge
Potential Solution
Patients may be directed to inferior-quality centers
Include only procedures where highquality centers are numerous and easily identifiable
Quality measures for ambulatory procedures may be unreliable or poorly defined
Use patient-centered outcomes, measured directly or through clinical registries, to determine quality
Patients and payers may have difficulty finding providers because hospital prices are not readily apparent
Encourage hospitals to have greater transparency of hospital pricing
High-risk patients may have decreased access to necessary procedures
Adjust reference price for high-risk patients, using risk-adjustment techniques
First, we should carefully consider which procedures to include in reference pricing agreements. Reference pricing works best where large differences in prices do not translate to similar differences in outcomes. Good candidate procedures are elective procedures with large variations in costs, but little variation in quality. It is not appropriate to direct patients to cheaper providers if they provide inferior care. Furthermore, complex procedures requiring referral to tertiary centers would be poor candidate procedures. Requiring patients to travel long distances for treatment and follow-up could compromise quality of care. Reference pricing has worked well for diagnostics and pharmaceuticals where clinical equivalence can be easily measured; however, identification of procedures with numerous low-cost, high-quality surgical centers could be more challenging. Second, we should identify appropriate quality measures when evaluating providers. In the CalPERS demonstration, many quality domains were used to identify VBPD facilities: volume thresholds, process scores, participation in quality reporting systems, and performance metrics captured with administrative data (mortality, ARTICLE INFORMATION Published Online: October 15, 2014. doi:10.1001/jamasurg.2014.392. Conflict of Interest Disclosures: Dr Dimick is a consultant and equity owner in ArborMetrix Inc, which provides software and analytics for measuring hospital quality and efficiency. No other disclosures were reported. Funding/Support: Dr Shih is supported by grant 5T32HL07612309 from the National Institutes of Health and Dr Dimick is supported by grant R01AG039434 from the National Institute on Aging.
1220
readmissions, and length of stay). However, patients may be more interested in other quality measures: functional status, return to work, and patient satisfaction. These important patient-centered outcomes should be accurately measured and incorporated, especially for many ambulatory procedures that have important outcomes not captured in administrative data. This may require participation in clinical registries or more direct measures of patientcentered outcomes. Third, we must move toward greater transparency of hospital pricing. In a recent qualitative evaluation of the CalPERS demonstration, lack of transparency caused problems for patients and payers. 4 Patients had difficulty finding appropriate providers when the policy expanded because hospital prices are not readily available to patients. Payers had difficulty setting a reference price and identifying VBPD hospitals. These hurdles could be overcome with more transparency in price information. This may require surgeons encouraging administrators to share this data. Finally, we must ensure that reference pricing does not lead to decreased access to surgical care for high-risk patients. Thus far, prices have not been adjusted for age, comorbidities, or severity of disease. As providers and hospital systems face standardized prices, an unintended consequence of the policy may be perverse incentives to avoid high-risk patients who are more likely to have complications with increased costs for care. This may result in referral of high-risk patients to distant tertiary centers, with difficulty maintaining the close follow-up. Prices for procedures may need to be adjusted for high-risk patients. Reference pricing has emerged as a promising innovation to control medical costs. Surgeons must understand the policy and its implications to thoughtfully engage in the ongoing dialogue of health care payment reform.
Role of the Funder/Sponsor: The funders had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication. Disclaimer: The views expressed herein do not necessarily represent the views of the US government. REFERENCES 1. Lee JL, Fischer MA, Shrank WH, Polinski JM, Choudhry NK. A systematic review of reference pricing: implications for US prescription drug spending. Am J Manag Care. 2012;18(11):e429-e437.
2. Robinson JC, MacPherson K. Payers test reference pricing and centers of excellence to steer patients to low-price and high-quality providers. Health Aff (Millwood). 2012;31(9):2028-2036. 3. Robinson JC, Brown TT. Increases in consumer cost sharing redirect patient volumes and reduce hospital prices for orthopedic surgery. Health Aff (Millwood). 2013;32(8):1392-1397. 4. Lechner AE, Gourevitch R, Ginsburg PB. The Potential of Reference Pricing to Generate Health Care Savings: Lessons From a California Pioneer. Washington, DC: Center for Studying Health System Change Research Brief; 2013:30.
JAMA Surgery December 2014 Volume 149, Number 12
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archsurg.jamanetwork.com/ by a Florida International University Medical Library User on 06/06/2015
jamasurgery.com
VIEWPOINT
Terry Shih, MD Center for Healthcare Outcomes and Policy, University of Michigan, Ann Arbor. Justin B. Dimick, MD, MPH Center for Healthcare Outcomes and Policy, University of Michigan, Ann Arbor.
Is Reference Pricing the Next Big Thing in Payment Reform? With increasing national interest to simultaneously lower costs and improve quality, payers are exploring innovative policy initiatives targeted at health care payment reform. The majority of these initiatives shift financial responsibility from the payer to the provider (ie, hospitals and clinicians): bundled payments and accountable care organizations both involve negotiating a lump-sum payment from the payer to be appropriated at the discretion of the provider. Health care systems are incentivized to provide efficient care, as they keep any money they do not use and must provide extra resource utilization at a loss. Although most are familiar with some of these payment reforms, many surgeons have not heard of the latest innovation (and perhaps the most promising to date): reference pricing. Under this policy, patients (rather than providers) share the burden of financial responsibility. Early demonstrations of reference pricing have resulted in large savings in health care spending. In this context, surgeons must become familiar with reference pricing and its implications, as the policy will likely grow in scope in the near future.
What Is Reference Pricing?
Corresponding Author: Terry Shih, MD, Center for Healthcare Outcomes and Policy, University of Michigan, 2800 Plymouth Rd, Bldg 16, Office 100N-07, Ann Arbor, MI 48109 ([email protected]). jamasurgery.com
Reference pricing is an alternative to traditional deductibles intended to make patients more conscious to differences in hospital prices. In the traditional model for procedural care, the patient is responsible for an initial deductible or co-payment, and insurance covers the remainder, regardless of the price of the procedure. To make patients more sensitive to prices for less expensive health care (eg, pharmaceuticals or primary care), insurers have imposed higher deductibles. However, this strategy will not influence patient choices for procedural care where costs far exceed the deductible. Though hospital prices may vary greatly, it is all the same price for the patient. Reference pricing seeks to make the patient sensitive to variability in hospital prices. In this policy design, the insurer sets a reference price to be paid for a specific service. The patient may then use any provider, but the patient is financially responsible for any excess difference in cost between the reference price and provider’s price. Typically, the reference price is set high enough so that many providers are still available below the reference price but low enough that patients are responsible for a substantial amount for high-priced providers. This policy creates a strong incentive for patients to choose a low-priced provider.
Reference Pricing in Practice Reference pricing has been used extensively for pharmaceuticals in national health systems. Under the pro-
gram, a reference price is set at the cheapest drug for therapeutically equivalent medications within the same class. Patients can still purchase higher-priced medications but must pay the difference. The program was first implemented in Germany in 1989 and has been widely adopted in many European countries, Canada, and New Zealand. Evaluation of pharmaceutical reference pricing has shown reduction in drug expenditures, with no deleterious effects on health or health care utilization.1 The attractive results of these programs have piqued interest in reference pricing for procedures, with 2 prominent demonstrations in the United States. Safeway, a national chain of grocery stores and longtime innovator in health insurance, noticed largescale variation in prices for colonoscopy within a region. For example, the price for colonoscopy in San Francisco, California, ranged from $848 to $5984.2 In 2009, the company, which self-insures 40 000 employees, set a reference price of $1250 and distributed a list of all facilities that offered colonoscopy below the reference price. Safeway has expanded reference pricing to laboratory and imaging tests as well as ambulatory procedures such as arthroscopy, herniorrhaphy, cholecystectomy, and cardiac catheterization. Most relevant to surgeons, reference pricing has recently been expanded to big-ticket surgical procedures. The California Public Employees’ Retirement System (CalPERS), which covers 1.3 million employees, retirees, and dependents, noticed wide variation in the prices of hip and knee replacements charged by hospitals. In 2011, CalPERS implemented a reference price set at $30 000 with a co-payment of $3000. In addition to the copayment, patients were responsible for any costs over the $30 000 reference price. Importantly, CalPERS identified 41 hospitals as “value-based purchasing design” (VBPD) centers that offered the procedure below $30 000, were geographically dispersed, and had acceptable quality.3 The program accounted for $3.1 million in savings in 2011. Market share at VBPD hospitals increased from 48% to 63%. Volume at non-VBPD hospitals fell by 34%, leading to price cuts to remain competitive (34%). CalPERS has since expanded its reference pricing program to colonoscopy, cataract surgery, and arthroscopy.4
Implications of Reference Pricing Reference pricing may be introduced by multiple payers for a variety of procedures in the near future. As providers on the front lines, surgeons must understand the implications of this expanding policy. In this context, the following are a few considerations (Table). JAMA Surgery December 2014 Volume 149, Number 12
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archsurg.jamanetwork.com/ by a Florida International University Medical Library User on 06/06/2015
1219
Opinion Viewpoint
Table. Challenges for Reference Pricing Challenge
Potential Solution
Patients may be directed to inferior-quality centers
Include only procedures where highquality centers are numerous and easily identifiable
Quality measures for ambulatory procedures may be unreliable or poorly defined
Use patient-centered outcomes, measured directly or through clinical registries, to determine quality
Patients and payers may have difficulty finding providers because hospital prices are not readily apparent
Encourage hospitals to have greater transparency of hospital pricing
High-risk patients may have decreased access to necessary procedures
Adjust reference price for high-risk patients, using risk-adjustment techniques
First, we should carefully consider which procedures to include in reference pricing agreements. Reference pricing works best where large differences in prices do not translate to similar differences in outcomes. Good candidate procedures are elective procedures with large variations in costs, but little variation in quality. It is not appropriate to direct patients to cheaper providers if they provide inferior care. Furthermore, complex procedures requiring referral to tertiary centers would be poor candidate procedures. Requiring patients to travel long distances for treatment and follow-up could compromise quality of care. Reference pricing has worked well for diagnostics and pharmaceuticals where clinical equivalence can be easily measured; however, identification of procedures with numerous low-cost, high-quality surgical centers could be more challenging. Second, we should identify appropriate quality measures when evaluating providers. In the CalPERS demonstration, many quality domains were used to identify VBPD facilities: volume thresholds, process scores, participation in quality reporting systems, and performance metrics captured with administrative data (mortality, ARTICLE INFORMATION Published Online: October 15, 2014. doi:10.1001/jamasurg.2014.392. Conflict of Interest Disclosures: Dr Dimick is a consultant and equity owner in ArborMetrix Inc, which provides software and analytics for measuring hospital quality and efficiency. No other disclosures were reported. Funding/Support: Dr Shih is supported by grant 5T32HL07612309 from the National Institutes of Health and Dr Dimick is supported by grant R01AG039434 from the National Institute on Aging.
1220
readmissions, and length of stay). However, patients may be more interested in other quality measures: functional status, return to work, and patient satisfaction. These important patient-centered outcomes should be accurately measured and incorporated, especially for many ambulatory procedures that have important outcomes not captured in administrative data. This may require participation in clinical registries or more direct measures of patientcentered outcomes. Third, we must move toward greater transparency of hospital pricing. In a recent qualitative evaluation of the CalPERS demonstration, lack of transparency caused problems for patients and payers. 4 Patients had difficulty finding appropriate providers when the policy expanded because hospital prices are not readily available to patients. Payers had difficulty setting a reference price and identifying VBPD hospitals. These hurdles could be overcome with more transparency in price information. This may require surgeons encouraging administrators to share this data. Finally, we must ensure that reference pricing does not lead to decreased access to surgical care for high-risk patients. Thus far, prices have not been adjusted for age, comorbidities, or severity of disease. As providers and hospital systems face standardized prices, an unintended consequence of the policy may be perverse incentives to avoid high-risk patients who are more likely to have complications with increased costs for care. This may result in referral of high-risk patients to distant tertiary centers, with difficulty maintaining the close follow-up. Prices for procedures may need to be adjusted for high-risk patients. Reference pricing has emerged as a promising innovation to control medical costs. Surgeons must understand the policy and its implications to thoughtfully engage in the ongoing dialogue of health care payment reform.
Role of the Funder/Sponsor: The funders had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication. Disclaimer: The views expressed herein do not necessarily represent the views of the US government. REFERENCES 1. Lee JL, Fischer MA, Shrank WH, Polinski JM, Choudhry NK. A systematic review of reference pricing: implications for US prescription drug spending. Am J Manag Care. 2012;18(11):e429-e437.
2. Robinson JC, MacPherson K. Payers test reference pricing and centers of excellence to steer patients to low-price and high-quality providers. Health Aff (Millwood). 2012;31(9):2028-2036. 3. Robinson JC, Brown TT. Increases in consumer cost sharing redirect patient volumes and reduce hospital prices for orthopedic surgery. Health Aff (Millwood). 2013;32(8):1392-1397. 4. Lechner AE, Gourevitch R, Ginsburg PB. The Potential of Reference Pricing to Generate Health Care Savings: Lessons From a California Pioneer. Washington, DC: Center for Studying Health System Change Research Brief; 2013:30.
JAMA Surgery December 2014 Volume 149, Number 12
Copyright 2014 American Medical Association. All rights reserved.
Downloaded From: http://archsurg.jamanetwork.com/ by a Florida International University Medical Library User on 06/06/2015
jamasurgery.com
