Model gets attention of high priced hospitals

Although reference-based pricing (RBP) has long been a tool in pharmacy benefit management, its potential in medical services is just now emerging. WellPoint has tested the model in a limited scope and will begin offering RBP on a broader scale to group employer plans in 2014.

George Lenko, program director for national network management, says the RBP  model builds out on price, quality and patient experience.

“It’s helping patients be consumers and use market forces to get more rational pricing and quality-things that people see in other realms,” Lenko says. “In retail and other services, this is how business is being done, but in healthcare, it’s still kind of new.”

In a pilot program for the California Public Employees’ Retirement System (CalPERS), WellPoint designed a RBP model for hip and knee replacement. First, market prices were analyzed, then a reference price was determined. The key to the reference price, Lenko says, is to set a threshold that aligns with a sufficient number of providers to ensure access. In other words, a particularly low reference price would exclude too many providers and limit member choice.

In the CalPERS model, the reference price was set at $30,000 for knee and hip replacement. Any member choosing a facility with a higher price point would be responsible for paying the difference.

Although local facilities ranged in price from $15,000 to $110,000 per procedure, WellPoint did not see any evidence of higher quality among the higher priced providers. The $30,000 threshold allowed WellPoint to create a sufficient list of qualifying facilities for members to choose from and discourage them from opting for high-cost sites.

Two things happened in pilot: hip and knee replacement prices dropped by 19% in one year; and outcomes remained the same.

“It’s not like the highest cost sites are the highest quality sites,” Lenko says. “And many high-quality sites are at the lower end of the threshold, so the opposite is true as well.”

Other applications

RBP can be used for a variety medical services. In a similar pilot among Kroger grocery store employees, imaging services were limited to a reference price.

“For CAT scans and MRIs, they set a threshold of payment at $800,” he says. “At that point, there are many commonly available services so if a member goes to a higher priced site like hospital-based, outpatient imaging at twice the price, they are exposing themselves to that liability. If you talk about a difference in price that is not correlated to a difference in quality, it makes sense to buy at a lower price.”

To alert members of the reference prices and their choices, WellPoint and plan sponsors used either proactive outbound calls to the ordering physician or member, or broader web-based communication. WellPoint’s online transparency tools-which have been growing since 2006-display member choices and out-of-pocket costs.

Lenko says RBP models are best suited for high-cost services when the plan has advance knowledge of an upcoming event, such as a planned imaging scan or joint replacement. Even more so, RBP aligns ideally with bundled payment arrangements.

“Where all services are bundled into one price, you can be sure all services are covered and that also includes the ‘warranty’ work,” he says.

However, Lenko cautions that medical homes and accountable care organizations have a different take on how members relate to providers, and it makes more sense to interact with the provider than the member to drive value in pricing.

“The ACO will do what it can to keep care in their system, and that discourages choice,” he says.

Providers on alert

RBP has potential to bring prevailing market prices down as well. The transparency data can cue high-end providers to reduce their prices not just to draw in more business but also to maintain favorable reputations.

“As we started down the path of more transparency, in some instances there was wariness from high-cost providers that we were exposing them as high-cost,” Lenko says. “There’s always been that potential that transparency would yield market power to drive down prices. We only had anecdotal evidence it was working, but it was not as powerful as we thought it would be. As we ramped up transparency, we saw the effect more and more.”

He says some California providers did bring their joint replacement prices down to stay under the $30,000 target. CalPERS is a large book of business that most hospitals wouldn’t want to lose out on.

The potential for RBP is increasing as more prices are being made public.  Lesko says it’s a good alternative to narrow-network models because it maintains broader access and more consumer choice.

 And member engagement is paramount for plans that are implementing the RBP model.

“As long as you have good transparency, good information, good navigation and high engagement, it’s doable,” he says. “If you don’t have those things, you run the risk of member abrasion. Members need to they have limitations and have to be able to find care alternatives."