Reference Pricing: A Small and Mighty Solution to Bend the Health Care Cost Curve

Abstract

There is no single antidote to the problem of rising health care costs. One strategy that has proven its effectiveness is reference pricing (RP). RP is an insurance benefit design mechanism in which a “reference” price is set for a specified service or procedure, which the health plan sponsor uses to cap its contribution. The beneficiary is responsible for any amount above the defined contribution. RP seeks to address the huge, unexplainable price variations that exist for medical procedures and services. This paper argues that RP can be structured to reap its price-saving potential, but it requires proper regulatory oversight to ensure it does not negatively impact the quality, affordability, and access to care. If implemented in a systematic and cautious manner, it can become an indispensable tool for employers and health plans, especially when combined with payment reform strategies. Section II of this paper defines RP and explains its origins in the consumer-driven health care movement. Section III highlights RP’s application in the international market for pharmaceuticals and domestic market for medical services and procedures. Section IV explores the Departments’ May 2014 FAQ, the comments in response to that FAQ, and the subsequent October 2014 FAQ. Section V evaluates the standards the Departments’ issued to evaluate RP programs and discusses certain features and limitations of RP that must be understood and monitored by its regulators to prevent limiting consumers’ access to affordable, high-quality care.