Summary: In an effort to limit health cost increases, some economists suggest that the answer is reference pricing — an insurer sets a price that it regards as the “reference” and business is conducted from that price. Apart from the obvious question of who sets the price, there are a raft of other issues, as pointed out in this nice Federal Trade Commission blog post by Keith Brand, Christopher Garmon and Martin Gaynor, from the federal Bureau of Economics.
“One innovation that has received a great deal of attention recently is reference pricing. Reference pricing is a type of health benefit design that gives consumers seeking health care services an incentive to shop around for the best deal. Under a reference pricing insurance plan, the health insurer sets a ‘reference price’ for certain elective treatments and procedures (e.g., knee replacement) that represents the maximum amount the insurer will pay for the treatment or procedure regardless of the health care provider selected by the patient. If the patient selects a provider who has negotiated a price with the insurer that is at or below the reference price, the entire price is covered by the insurer and the patient owes nothing. If the patient selects a provider whose price is higher than the reference price, the insurer will pay the reference amount, leaving the patient responsible for the difference….
“Some of the advocates of reference pricing seem to imply that reference pricing will increase competition between providers …If a monopolist faces no competition, reference pricing cannot create an incentive for it to lower its price for fear that business will be lost to competitors.
“Other advocates of reference pricing argue that it is an ‘appealing alternative’ to the so called ‘doc shock’ of narrow network health plans….
“We believe there is little difference between the price reduction and quality improvement incentives associated with narrow network health plans compared with reference pricing health plans. A health insurer could create a narrow network plan to give providers an incentive to reduce their prices and improve their quality in exchange for inclusion in the network and the increased patient utilization associated with this inclusion. Alternatively, the health insurer could create a reference pricing health plan and set a relatively low reference price that would mimic the incentives and utilization of the narrow network plan. The only difference between the two plans is that, in the former, providers compete in price and quality to be included in the network, while in the latter, providers compete directly for the patients. …
“If consumers desire lower-price health insurance options, these can be achieved with benefit designs, like narrow networks and reference pricing, that harness the power of provider competition to lower prices and improve quality, but only if meaningful provider competition already exists.” Keith Brand, Christopher Garmon, and Martin Gaynor, Reference pricing is not a substitute for competition in health care | Federal Trade Commission.