Research & Commentary: How Reference Pricing Could Boost Consumer Health Care Choices and Reduce Costs

Published May 15, 2019

For most patients, access to transparent health care prices remains more elusive than the Fountain of Youth. Under the status quo, third-party payers, such as health insurers or government programs, leave patients in the dark when it comes to the cost of their health care services. Therefore, patients have no incentive to shop for the best quality service or search for the best value, which would drive down health care costs while ensuring quality remains up to par.

Reference pricing is one method of rectifying this problem. It has already proven successful in the public and private sectors. Under a reference pricing model, health insurance providers and government health plans place a limit on what they will contribute toward the cost of a specified medical service or procedure. The median price point for the service in a specified geographic area determines this price limit. The insurer will then fully cover any costs up to this point, ensuring that this payment cap allows access to the service.

Consumers who choose a provider charging less than the price limit receive the standard coverage rate, with limited cost sharing. Although consumers do not receive the difference back, those who choose a provider charging above the limit are required to cover the entire difference. The payments above the limit do not count toward one’s deductible or annual out-of-pocket maximum.

In general, reference pricing programs are designed to encourage patients to choose the most effective providers at the best possible price. As a result, robust competition is injected into the health care system, thereby incentivizing providers to decrease costs and increase quality.

In a 2018 study, the American Academy of Actuaries examined the potential effect of reference pricing on health care prices. According to the authors, reference pricing could reduce service costs up to 28 percent.

Since 2011, California has implemented a reference pricing system. So far, the results have been positive. The California Public Employees’ Retirement System (CalPERS), one of the nation’s largest purchasers of employee health coverage, uses reference pricing for certain health care procedures for public employees. The program has generated buy-in from hospitals across the state, according to Governing Magazine. When CalPERS’ reference pricing program began, only 46 California hospitals were charging less than CalPERS’ $30,000 reference price for inpatient orthopedic surgeries, such as a hip or knee replacement surgery. By 2015, 72 hospitals charged less than the $30,000 figure.

One reform states should consider in addition to reference pricing is right to shop. Right to shop is a model similar to reference pricing where an insurer allows consumers to choose from a range of providers and prices and pays patients for choosing a lower cost provider. A right to shop proposal in Maine required insurers to provide a consumer with 50 percent of the savings once savings exceed $50.

Reference pricing could be a valuable tool for states seeking to reduce skyrocketing health care costs while maintaining a high-quality standard of care. State legislators should enact reference pricing (along with several other reforms) to ensure patients receive the best care possible at the lowest price.

The following documents examine reference pricing in greater detail.

Health Care Reform: A Toolbox for Patriots and Policymakers
In this chapter from the fourth edition of The Heartland Institute’s Patriot’s Toolbox, Heartland CEO Joseph Bast and Senior Policy Analyst Matthew Glans address health care reform and discuss how policymakers can make health care more affordable and higher quality without increasing state budgets or the national debt. Bast and Glans also say their proposals won’t violate the freedoms belonging to patients or health care providers.

Appropriate Use of Reference Pricing Can Increase Value
Ann Boynton and James C. Robinson write in the Health Affairs Blog about reference pricing, how it works, what its limits are, and the experience of a reference pricing scheme in California.

Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits
This analysis by Paul Fronstin and M. Christopher Roebuck examines reference pricing, a model in which health plan sponsors pay a fixed amount or limit their contributions toward the cost of a specific health care service. Under this model, health plan members must pay the difference in price if a more costly health care provider or service is selected.

Research & Commentary: New Right to Shop Health Care Mode Could Empower Consumers–commentary-new-right-to-shop-health-care-model-could-empower-consumers?source=policybot
In this Research & Commentary, Matthew Glans examines a right to shop proposal in Maine. According to Glans, the plan could dramatically improve how patients search for health care services.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Health Care News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lindsey Stroud, a state government relations manager at The Heartland Institute, at [email protected] or 312/377-4000.