Understanding Federal Guidance on Reference Pricing: A New Primer from Georgetown’s Center on Health Insurance Reforms

The cost of a routine surgery, such as hip or knee replacement, can vary widely between providers with no seeming correlation between cost and quality – a phenomenon many health policy experts have been describing for the past several years. However, last week, the Blue Cross Blue Shield Association published a report that shed some light on just how much costs vary. The study found that even within a single metro area, charges for knee or hip surgeries sometimes vary by tens of thousands of dollars. While the report suggests empowering consumers and employers with pricing information to become more informed healthcare purchasers, some employers are taking a different tack and capping the amount they will pay for certain procedures at a reference price.

We recently released an issue brief on reference pricing for the Robert Wood Johnson Foundation’s State Health Reform Assistance Network. The brief provides some background and an overview of the federal guidance on this pricing method, an exploration of its use by one large self-funded group, and some policy considerations for regulators evaluating reference pricing products going forward.

Reference pricing is a model where an insurer may maintain a broad network of providers under a health insurance plan, but sets a cap for reimbursement for particular services. If an insurer sets the reference price for a service, covered individuals who receive that service from a provider who accepts the reference price would pay only the plan’s standard cost-sharing. However, individuals who receive the service from a provider who charges more than the reference price would be responsible for both the usual cost-sharing and the difference between the reference price and the provider’s charge for the service. Reference pricing may reduce costs for insurers and purchasers of health care services in a number of ways. Enrollees are encouraged to seek providers with prices at the reference price or lower and providers are encouraged to lower their prices to the reference price to attract those enrollees. Furthermore, costs are lowered for the insurer when the patient pays the difference between the reference price and the allowed charge.

Reference based pricing has been used with success in some large group plans, including California Public Employees’ Retirement System (CalPERS), as discussed in the brief. CalPERS began using reference prices for elective knee and hip replacements several years ago, and according to one study has saved money itself and for its members, through lower cost-sharing.

While reference pricing has shown potential to save money for both insurers and enrollees, it is both potentially confusing for consumers and appears to be untested in the small group and individual markets. Furthermore, federal guidance on the method is limited to the application of out-of-pocket maximums (annual cost-sharing limits imposed by the Affordable Care Act) to a plan that uses reference pricing, and provides that insurers who use reference pricing need not apply costs above the reference price to the out-of-pocket maximum if the insurer meets certain provider access requirements.

The federal guidance only applies to fully-insured large group plans and self-funded small and large group plans. However, it addresses key issues that may affect consumers in the small group and individual markets as well. For example, under the federal rule, plans should not apply reference pricing when the enrollee would not have adequate time to make an informed provider choice, such as in an emergency. In addition, the guidance requires an exception process when a provider who accepts the reference price cannot be accessed in a reasonable amount of time, and an exception when quality may be sacrificed if the patient sees a reference price doctor. The federal rule also notes that plans should ensure access to an adequate number of quality providers. Finally, the federal rule addresses transparency by providing that insurers should supply information on the pricing structure and exception process.

The federal rule applies only to fully insured large group plans and self-funded plans using reference pricing, and primarily addresses how to apply the out-of-pocket maximums under those plans.  However, since reference pricing is permissible in both the fully insured individual and small group markets, state regulators may want to consider what protections might be necessary to prevent confusion and minimize provider access problems for consumers in those markets. For more information on this topic, check out the issue brief.

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.