Does Reference Pricing Reduce Costs of Diagnostics for Payers?

July 28, 2016 - Health insurers and consumers can benefit from seeking reference pricing when it comes to choosing specific diagnostic tests among a set of different laboratories. Researchers from the University of Southern California and the Brookings Institution published a study in JAMA Internal Medicine that shows employers and payers who used reference pricing when seeking diagnostic tests actually lowered the average price for these procedures by nearly one-third - 31.9 percent - after three years of use.

The research shows that $2.57 million less dollars was spent in the experimental group that used reference pricing than that of the control groups, which is huge news for the health insurance industry.

The way reference pricing works is by showing exactly how much money insurers would reimburse a provider for a laboratory test, medication, or other service while the rest of the cost must be covered by the patient. The study illustrates how consumers can save on their healthcare spending by using reference pricing. Patients would have more interest in choosing services that are closer to the reference price of payers so that their out-of-pocket expenses would be reduced.

Essentially, this would benefit providers as well because they will be more likely to be fully reimbursed by both payers and patients if their prices are competitive. The healthcare market would also gain much more transparency and capability to compete effectively between different laboratories.

“There’s no reason to believe the quality of the tests varies across labs,” lead author James C. Robinson of the University of California, Berkeley, told Reuters.

The way this study was conducted includes looking at laboratory pricing among employees at a large grocery company called Safeway before and after the employer adopted this reference pricing policy. The researchers also compared their findings to a large national insurance company that did not use reference pricing.

Even after the first year of implementation, the average cost per test declined from $27.72 to $18.90 among Safeway employees, reports Reuters. However, the members from the national insurer - Anthem - had no such decline in the price of their diagnostic tests.

The study found that the total cost for out-of-pocket spending for consumers in the experimental group was a little over $1 million less over a three-year time span. This means that payers themselves were able to save about $1.5 million on the costs of diagnostic tests. For instance, the researchers discovered that the price for a simple metabolic test ranged anywhere from $6.15 to as much as $44.00.

“Reference pricing can’t be used across all types of healthcare,” Robinson told the news source. For instance, urgent care and other medical tests performed in hospitals may not be the right avenue for reference pricing, explained Robinson.

“While being treated for cancer, we don’t expect the patient to shop the market,” Robinson noted.

However, the majority of medications and diagnostics are not related to emergency situations.

“It’s often a good idea for consumers to let the insurer work harder for them as a purchasing agent through approaches like reference pricing,” Paul B. Ginsburg of the Brookings Institution in Washington, D.C. told the source.

However, the lack of cost transparency on the side of providers may be standing in the way of reducing healthcare spending among payers and consumers, explained Ginsburg.

“The biggest problem is the lack of awareness that there’s a reference price in effect,” said Ginsburg.

This type of information would incentivize patients to choose the less expensive diagnostic tests. The only problem standing in the way is the complete lack of transparency found in the healthcare industry, as most patients are never given information regarding the prices of the services they’re requesting.

For example, a brief from the Pioneer Institute found that the price transparency calls from the Affordable Care Act (ACA) are subpar since 54 acute care hospitals surveyed in the report stated being inadequately prepared for offering pricing data to their patient base. While the ACA does call on hospitals to have clear pricing information for their services available to the public, many providers still struggle to meet these objectives.

Reference pricing seems to fit into the world of healthcare strategies that payers have formed through tiered networks, high-deductible health plans, and narrow provider networks. The study reports that reference pricing is a more “aggressive” form of tiered networks, which cover more of the costs among preferred providers and less among others.

As the healthcare industry continues to strive toward value-based care payment strategies and move away from fee-for-service reimbursement in an effort to reduce healthcare spending, payers across the country may benefit from incorporating reference pricing in their payment contracts with diagnostic laboratories.

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