The biggest problem with American health care financing going forward is cost. For the same common procedure, American providers charge much more (purchasing power parity adjusted) than other OECD providers.
we pay higher prices for the same care? Among prescription drug costs, we pay far more than any other country, at least 20% more than Canada and over 60% more than New Zealand. For the same MRI’s and CT scans, we also pay more: $1,080 is the commercial average cost for an MRI in the U.S. as compared to $599 in Germany; at CT of the head costs $510 on average in the U.S. versus $272 in Germany. For a hip replacement, we again pay the most: $1,634 among public payers and $3,996 among private payers, versus $1,046 and $1,943 respectively in Australia. And physicians’ incomes are the highest: $187,000 on average among primary care doctors in the U.S. versus $93,000 in Australia; and $442,000 among orthopedic surgeons in the U.S. versus $154,000 in France.
Reference pricing is a cost controlling payment strategy. It works when an insurance company looks at its contracts with providers and see that 75% of the providers who meet quality standards charge no more than X for a given procedure or bundle of procedures. The insurance company then says that X is the most that it will pay for the procedure. If a patient goes to a doctor that charges no more than X, the insurance company pays full benefit. However if a patient goes to a provider who charges more than X, the insurance company pays full benefit up to X, but after that, the patient/member is on the hook the remainder.
Reference pricing works well for elective, non-urgent procedures that are well defined and common. For instance, reference pricing has been tried by CalPers for hip and knee replacements. Other common procedures where reference pricing could be useful would be vasectomies, ACL replacements, lapband, gastic bypasses and anything else which has a significant amount of flexibility in the scheduling. The goal is to drive people to use less expensive providers in order to get high cost providers to drop their prices.
This is similar to tiering and steering that we discussed last month as it is a strong nudge to get people to go to lower cost providers as there is minimal evidence that shows high cost providers are noticably higher quality providers.
I think tiered networks will be more common on the Exchanges this fall as well as more common for employee sponsored plans as they produce cost savings while at least maintaining the illusion of unlimited choice.
Reference pricing, from a member point of view, acts similarly to a tier network but at the procedure level instead of the provider level. It is a bit more complicated that a true tier and steer network model.
The reason why the past 470 words are important is the Obama Administration last week issued a clarification on reference pricing for Exchange policies. Reference pricing will be allowed, and it the amount that members/policy holders have to pay over the reference price will be attributed to the out of network out of pocket costs. This is important because in-network out of pocket is limited to deductible, copayments and co-insurance to no more than $6,350 for a single person in a policy year.
Your health insurance plan slaps a hard limit on what it will pay for certain procedures, for example, hospital charges associated with knee and hip replacement operations. That’s called the reference price.
Say the limit is $30,000. The plan offers you a choice of hospitals. If you pick one that charges $40,000, you would owe $10,000 to the hospital plus your regular cost-sharing for the $30,000 that your plan covers.
And that extra $10,000 doesn’t count toward your plan’s annual limit on out-of-pocket costs.
That’s crucial because under the health care law, most plans have to pick up the entire cost of care after a patient hits the annual out-of-pocket limit, currently $6,350 for single coverage and $12,700 for a family plan. Before the May 2 administration ruling, it was unclear whether reference pricing violated this key financial protection for consumers…
I think this is a good thing on the proviso that any reference pricing scheme is extremely clearly disclosed, and pricing is amazingly transparent. We need systems of No on medical care, and reference pricing is one of the stronger systems of No that has a demonstrated history in both the United States and overseas of reducing costs without compromising quality.