Health Insurance Reference Pricing

Health Insurance Reference Pricing

On May 2, 2014, the Obama administration released a document named “Frequently Asked Questions about the Affordable Care Act Implementation” which gave the go ahead for a new approach to cost control called “reference pricing”. If implemented correctly, experts believe that this cost control strategy could encourage consumers to choose less expensive treatments and that would in turn reduce healthcare spending. Additionally, health insurance reference pricing may boost provider competition and encourage providers who are overcharging for services to lower their prices.

What is Health Insurance Reference Pricing?

A reference price is essentially the maximum amount an insurer or an employer will pay for a service or treatment. To determine the reference price, providers are surveyed on how much they charge for specific treatments and services. If you receive a medical service that costs over the designated reference price for that specific service, you must pay the difference in cost out-of-pocket. Furthermore, that difference does not count toward your out-of-pocket limit.

Currently a small portion (~10%) of large employers are using some form or reference pricing, such as Safeway and California’s Public Employees’ Retirement System (CalPERS). Mercer, a benefits firm, said that ~22% of employers are considering implementing reference pricing. CalPERS pioneered reference pricing and decided to implement the strategy due to observing unwarranted wide cost discrepancies for surgeries such as hip and knee replacements. For example, hospital prices for the same hip or knee replacement surgery varied from $15,000 to $100,000, and higher prices did not correlate with better quality. However, health insurance reference pricing is not suitable for all medical services and treatments - only services where prices vary greatly but quality generally is the same should be considered. Besides hip and knee replacements, other services that may be considered include imaging tests such as MRIs, colonoscopies, and surgery for cataracts.

One analysis estimated that CalPERS saved approximately $5.5 million from 2011 to 2012 after implementing reference pricing for hip and knee replacement surgeries. The vast majority (more than 85%) of savings were attributed to hospitals lowering their prices to meet the $30,000 cap. However, more research is necessary to determine if these savings are passed onto consumers.

How Does Health Insurance Reference Pricing Affect Me?

Due to the complexities of setting up reference pricing, experts say most Americans who receive employer-sponsored insurance will not be immediately impacted. Furthermore, the green-light from the Federal government does not immediately affect those who purchase insurance through or their state’s exchange. Additional restrictions would apply to coverage sold to individuals and small businesses that purchased plans through health insurance marketplaces.

However, consumer advocates are concerned that implementing health insurance reference pricing will further complicate an already complex healthcare system, and consumers who are not aware of this new strategy may be surprised with large bills that they must pay out-of-pocket. Due to the lack of price transparency for medicare services and care provided at hospitals and other heathcare facilities, it is important to discuss with your doctor costs before you undergo a major procedure so there are no surprises on your bill. You can also utilize consumer advocacy resources such as to estimate how much consumers in your area pay for specific medical and dental services and procedures that you are considering undergoing. Prior to the May 2nd ruling it was unclear whether or not health insurance reference pricing violated the annual out-of-pocket limit stipulated by the Affordable Care Act. The Obama administration welcome comments and suggestions regarding health insurance reference pricing and out-of-pocket limitations to be sent to by August 1st. They are particularly interested in “standards that plans using reference-based pricing structures should be required to meet to ensure that individuals have meaningful access to medically appropriate, quality care.”


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