In an effort to coax health plan participants to use price-shopping behavior when deciding on where to have a procedure, more insurers are starting to roll out a system known as “reference pricing.”

With reference pricing, the health insurer imposes a limit on the amount it will pay for a particular procedure – a limit that is reasonable and allows access to care for patients. The price is usually a median or average price in the local market.

When a health plan participant selects a provider that charges less than the cap, they will receive the standard coverage with little or no cost-sharing.

But, if they decide to use a provider that charges more than the cap, the participant will have to pay the entire difference out of pocket. These excess payments do not count towards the patient’s deductible or the annual out-of-pocket maximum.

Use of reference-based pricing rose from 11% to 13% among large employers in 2015, according to a study by Mercer Benefits.

Proponents of reference pricing say that it can reduce health care spending because it encourages people to shop for better deals and, eventually, encourages hospitals to lower their prices.

Organizations that have implemented reference pricing report lower outlays for procedures.

CalPERS, the pension fund for California state employees, in 2011 began reference pricing and asked its preferred provider organization, Anthem Blue Cross, to research the average costs for hip and knee replacements among hospitals and develop a program that ensures sufficient coverage by those hospitals that meet a certain cost threshold.

The program set a maximum of $30,000 for these procedures.

The number of Anthem-CalPERS enrollees who chose a designated high-value hospital for their knee or hip replacement surgery increased from 50% between 2008 and 2010 to 64% in the first nine months of 2012, compared with little to no change among Anthem policyholders not enrolled in CalPERS.

Also, the average price for such procedures fell from more than $42,000 before the initiative to $27,148 in the first nine months of 2012.

The changes resulted in savings of about $5.5 million during the first two years of the reference pricing initiative, and the average cost to CalPERS for the procedures fell by 26%.

CalPERS says that after it implemented reference pricing, some of the hospitals that charged more than the payment limit significantly reduced their prices for the procedure.

These price reductions have increased; the number of California hospitals charging prices below the CalPERS $30,000 reference limit rose from 46 in 2011 to 72 in 2015.

Limits of reference pricing

To be clear, reference pricing cannot be applied to all procedures.

It should only be used for procedures or products that health plan enrollees can shop for, and when they have time to compare choices based on price and quality. This can include:

  • Scheduled procedures like the aforementioned knee replacements
  • Ambulatory surgical procedures
  • Lab tests
  • Imaging
  • Pharmaceuticals

What it should not be used for:

  • Emergency procedures
  • Unique components of care that the patient can’t select independently, like a lab test during a visit to a doctor
  • Complex medical conditions