Reference Pricing tweak for Medicaid

Reference pricing is a common payment reform for commercial insurance.  Common, non-urgent, deferrable procedures are prime candidates.  Hip replacement is the classic example in California.  There, CalPers sets a flat fee for hip replacement.  If a covered individual chooses a hospital that has a price below the benchmark, CalPers pays the full benefit minus any normal cost-sharing.  If the hospital price is above the benchmark, the individual pays normal cost sharing plus the gap between the reference price and the total price.

It is a scheme that delivers pain to non-preferred behavior.  Behavior has changed.  Hospitals over the benchmark reduced their prices and people shifted hospitals.

It works partially because employer sponsored insurance has built in expectations of high deductibles and co-payments and more importantly, employer sponsored coverage is for people who have some income and probably some assets that can cover a one time expense.

Reference pricing as it is currently built is problematic for Medicaid.  Medicaid covers people who don’t have significant assets nor income.  Furthermore, Medicaid is strictly limited in the out of pocket costs it can impose on individuals.  Non-waivered Medicaid may have only de minimis cost sharing. Waivered Medicaid limits cost-sharing to no more than 5% of a family’s income.  Traditional reference pricing can’t work if the total incremental cost of going to a high cost provider is capped at an extremely low level.

However, there is a potential tweak that could make this alternative payment system work well for Medicaid as well as incorporate my argument for three way gain sharing.

Medicaid can not use paid as a tool for cost minimization.  However, it is possible for Medicaid to use gain as a motivator.

What if Medicaid used reference pricing but inverted the incentive structure?

For instance, a Medicaid managed care organization could have a network of fifty hospitals.  Twenty of the hospitals have agreed to take a reference priced bundle for knee replacement surgery that is slightly more than the median bundle payment for knee replacements but less than the regional average knee replacement bundled price.  So far, this is the same scheme as commercial reference pricing.

The difference is motivating factor.  A commercial plan would make a member pay more if they went to a high cost provider.  Under my plan, the Medicaid beneficiary would receive a bonus check for a good choice.  The check would be a portion of the difference between the bundled reference price and the regional average price for the knee replacement.  For instance if the bundled price for a Medicaid knee replacement is $15,000 and the regional average price is $18,000, the patient could get a check for $1,000 for choosing a low cost, high quality facility.  If the patient chooses to have their surgery at a high cost facility, they would not receive a bonus check.  The check, in an ideal scenario, would not count against Medicaid eligibility income limits for the next re-determination period.

The goal is the same, move people to low cost but highly effective facilities and either make high cost facilities lower their prices in order to compete, or significantly reduce the number of procedures performed at high cost facilities.

There are a couple of potential problems with this scheme.  The first is that Medicaid tends to pay low, so a hospital may only allocate a fixed number of slots for a certain procedure to Medicaid.  This is not a problem for commercial payers as commercial tends to pay much higher rates.  If the gain sharing system brings down total system costs, the average payments to participating reference priced providers could increase. We saw that providers were willing to accept more Medicaid patients when primary care payments increased to Medicare levels, so increasing surgical reimbursement for select providers on select service bundles would also lead to more availability.

Secondly, the political optics are a tough sell.  The scheme may save the entire system money while delivering the same care at the the same or higher quality at lower costs.  That is very attractive from a health wonk point of view.  Health wonks are not a decisive voting block.  The scheme would be easy to demonize on a thirty second ad as poor people would get checks for having surgery while middle class taxpayers have to pay their deductible and perhaps more for the same surgery.  Building and sustaining political support would be difficult.  This is a scheme that would have to be run in a very Blue state that is open to healthcare experimentation.

What other problems do you see with this idea?


8 replies
  1. 1
    RSA says:

    I suspect this won’t be a major issue, but if Medicaid covers repeatable elective procedures with a wide range in prices, then there’s an incentive to get a procedure done just for the money, rather than health reasons. By analogy to people who might visit a blood bank to get whatever they’re paid.

  2. 2

    @RSA: I will concede that a check could give an incentive for a marginal case to get surgery. But surgery sucks, and if the check is only is capped at say $1,000 then the number of people who have marginal need for surgery who think that surgery + recovery time +impairment is worth a fairly small sum of money should not be too large.

    Any system can be gamed, the question is what games are being played and are those games worth stopping? I think a fully sketched out plan could eliminate the egregious games

  3. 3
    MazeDancer says:

    Facility ability. Are there 50 hospitals that can do joint replacements well?

    While surgeon experience is the main determining factor in good outcomes, think it unlikely there are many equally experienced surgeons within reachable distance for the average consumer. And most consumers won’t know that joint replacement isn’t a commodity. Like, besides surgeon experience, the quality of the radiology, anesthesiology, and the rehab matter. And no matter how much they want that thousand bucks now, what about when their implant fails?

    Cost-cutting might be encouraged in unhealthy ways just to fund the rebates. Because if poor people can get them, everyone is going to say, me too!

    Hospitals might favor cheaper implants they got in deals to be able to pass along some checks, Or if gov makes up an ok list of implants, the politics of getting on that list are not necessarily going to produce good choices. And best implant for that person might not be on the list.

    It’s an interesting and creative idea, but anything involving money has lots of room for fraudish and political elements.

  4. 4
    RSA says:

    @Richard Mayhew: I think it’s a great idea, if the optics issue you describe can be overcome. I was just stretching for possibilities, even without knowing too much.

    On the optics, I’m thinking of other examples where the government gives poor people money. Maybe a check could be folded into an EITC refund? Now it’s probably really obvious how little I know.

  5. 5
    MomSense says:

    I think if the Medicaid recipients get $1000 or share of cost savings directly, the right wing howlers will descend upon the idea. Wondering about an HSA of some kind that might cover nutritional counseling, and other wellness things not covered by medicaid

  6. 6
    Richard Mayhew says:

    @MomSense: I hate the restricted gift card incentive plans for Medicaid. If you’re on Medicaid most likely you’re not doing great economically. The best way to help someone who is not doing well economically is to give unrestricted cash so that they can make the best decisions possible for themselves. A food stamps like gift card allows for re-allocation of food cash to other budget areas but it is inefficient.

    If that is the only way to make it work, then fine, but it is not in my top 5 work-arounds.

  7. 7
    Richard Mayhew says:

    @MomSense: Nutritional counseling if medically necessary would already be covered by Medicaid, and not all surgeries are tied to non-covered out of pocket expenses. It just leaves a very bad taste in my mouth.

    Maybe an HSA which would work really well in Indiana and probably Kentucky, not sure about a Blue state with non-waivered Medicaid. An HSA would allow for transition to commercial insurance and reduce out of pocket shock that would bump people back down into Medicaid eligibility, so that would be a good thing given potential political constraints. Big issue is Medicaid asset and income limitations on an HSA transfer as it counts as an asset for Legacy Medicaid….

    Got to think about this one….

  8. 8
    Fake Irishman says:

    Why not split the gains for those insured by employer insurance too to provide a carrot for them as well as a stick? But instead of cutting middle class people a check, just reduce their cost-sharing a bit for going to the preferred hospital. The reduction should be readily clear to the recipient to provide a readily apparent benefit. So instead of reducing coinsurance, which is murky (oh goody, I get to pay $500 instead of $900 in co-insurance) try perhaps waiving co-pays for any appointments associated with the surgery at the preferred center (Hey, I get “free” appointments). So that’s what, a pre-op and post-op appointment with a specialist ($50 co-pay apiece) and six physical therapy sessions ($25 co-pay) for $250 in highly visible share of the benefits to the person choosing the preferred hospital? Of course, this should then lower their out-of-pocket maximum too.

    The insurer still would save a lot of money, but would share some of those gains with the worker just like it does with the Medicaid recipient under your scenario. The adjustment merely alters the distribution of the consumer surplus gains of trade.

    This way it sort of works out to be partially refundable tax credit. A Medicaid patient gets a check cut for them, but the middle class patient gets a similar readily apparent discount on cost-sharing. It doesn’t negate the debate line or 30-second negative ad in itself (Sen. Jones voted to give money to poor people to get surgery while you pay for yours!) but it does provide a quick comeback to neutralize the attack and launch a devastating counterattack: (*happy music* Sen. Jones voted to give hard working middle class Americans discounts on medical care while saving taxpayers money! *cue scary music* But Sen. Smith wants to take those benefits away so big corporations can overcharge taxpayers!)

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