Federal trade regulators have proven their willingness to go after hospital consolidation. Now, they're raising some new concerns about an up-and-coming insurer strategy.
Reference pricing, the practice of setting a maximum price for elective services and procedures, is one of several emerging strategies to incentivize provider efficiency and valuable consumer choices. It's not a bad idea, but it has a number of problems, argue Federal Trade Commission economists Keith Brand, Christopher Garmon and Martin Gaynor, in a post on the agency's website.
"Reference pricing can be a powerful tool," they acknowledge, that lets patients "vote with their feet" and encourages providers to improve their value proposition. Indeed, large insurers from CalPERS to Independence Blue Cross are applying reference pricing to important clinical areas like orthopedics and proton beam cancer radiation therapy.
"However, we believe some important points are missing from the existing discussion of reference pricing," write Brand, Garmon and Gaynor.
For one thing, they argue, the prevailing hypothesis that reference pricing can shift market power from the supply side to the payment side doesn't seem likely: "reference pricing does not and can not create provider competition or change a provider's market power."
In a market with one main provider of hospital services, or one giant health system with extensive pricing leverage, reference pricing wouldn't work for patients, they argue.
Suppose a health insurer introduces a reference pricing plan in this market and sets a reference price for, say, knee replacements, that is well below the hospital monopolist's price. Given that there are no other choices available for knee replacements, reference pricing cannot make patients choose lower-priced 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. Reference pricing has not changed the monopolist's underlying market power.
For another thing, they ask: Is there a big difference between reference pricing and narrow networks?
While reference pricing advocates argue that it can be a good alternative to narrower provider choices, the effect may be the same they argue.
A health insurer could create a narrow network plan and incentivize providers to reduce their prices while improving their quality performance in exchange for receiving a steady flow of patients. Or a health plan could create a reference pricing contract for key services "and set a relatively low reference price that would mimic the incentives and utilization of the narrow network plan," they write.
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. Lost in the discussion is the possibility that some patients may prefer to delegate the responsibility for selecting low-price, high-quality providers to their insurance company instead of shouldering the burden of evaluating the relative price and quality of various providers.
In either case, Brand, Garmon and Gaynor conclude, there is a trade off between price and provider choice.
Health plan designs that meet the real need for affordability have to "harness the power of provider competition to lower prices and improve quality, but only if meaningful provider competition already exists," they write.
Whether or not the FTC's economists believe their peers in the enforcement division should take a good look at discouraging reference pricing isn't clear. Given the limited nature of many reference pricing arrangements, that doesn't seem likely.
The FTC will probably keep following the issue, as insurers and providers try to evolve the arrangement and even apply it more broadly.
Reference pricing's supporters remain optimistic based on early trials.
A pilot for knee and hip surgeries that the California Public Employee Retirement System developed with WellPoint saved $55 million in 2011.
"It's had a huge competitive impact for CalPERS," George Lenko, WellPoint's National Network Initiatives director, said last year.