Reference pricing, contracting strategy put lid on cardiac, imaging costs

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Payers and employers seeking strategies for lowering costs for nonemergency procedures, such as cardiac surgery and imaging tests such as colonoscopy, may want to consider two insurance benefits designs, based on a report in the September issue of Health Affairs. Reference pricing and centers-of-excellence contracting offer two different approaches for motivating beneficiaries to choose low-cost, high-quality care, according to the authors.

James C. Robinson, PhD, and Kimberly MacPherson, MBA, both of the Berkeley Center for Health Technology at the University of California, Berkeley, described two innovative models that have been put in place by employers for treatments such as nonemergency cardiac surgery, valve replacements and angioplasty. Their descriptive analysis is based on 55 interviews with employers, health plan personnel, hospitals and regulators.

With reference pricing, the insurer sets a reference price for a procedure or service which it is willing to cover with no added copays or coinsurance costs. If the beneficiary chooses to use a provider whose fees exceed the defined contribution, then he or she must pay the difference. “The reference price design highlights variability in price to the patient who--in many plan designs--is the one making the choice among alternative facilities.”

Centers-of-excellence contracting borrows its concept from organ transplantation programs in the U.S. as well as medical tourism, Robinson and MacPherson wrote. The transplantation network funnels patients in need of a specialized procedure to centers with demonstrated high-quality outcomes. Medical tourism involves accredited centers in other countries that offer low-cost procedures that meet U.S. quality standards.

With the centers-of-excellence strategy, insurers and employers negotiate with providers who are willing to offer a discount on services for a higher volume of patients. Lowe's, for instance, contracted with the Cleveland Clinic in 2010 to provide nonemergency cardiac procedures to its employees. The authors pointed out that the clinic’s regional market was stagnant, making it willing to accept lower prices for increased volume.

Patients have the option to receive care elsewhere but are responsible for copays and coinsurance. Those who choose the Cleveland Clinic face none of those costs and have travel costs for the patient and one companion covered as well. The contracting relationship also has expanded to include spine procedures to alleviate back pain.

The grocery store chain Safeway selected a reference pricing strategy for advanced imaging as part of an overall initiative to shift beneficiaries into a consumer-driven health benefits design after research showed prices for exams such as colonoscopies could vary by as much as $5,000 in a region. It now sets a price limit and makes a list of facilities that charge less than the reference price as well as a separate list of physicians at those facilities. Patients decide if they want to foot the bill for services that exceed the limit. After success with imaging, Safeway decided to extend the design to lab tests.

“Costs are controlled more effectively if the reference-price level is set at a low level and the number of centers-of-excellence hospitals is small because this stringency channels more volume to preferred providers,” they wrote. “But stringency can stimulate resistance from excluded providers, which may argue they provide higher quality than chosen providers, are essential community institutions or pursue mission-related activities such as research and teaching.”

Both strategies potentially make the patients more cost-conscious. Depending on the design, they may increase awareness of both price and quality of care. What they don’t do, the authors emphasized, is reduce utilization.

“Reference pricing and centers-of-excellence contracting exert their influence on cost primarily by reducing the average price of tests and treatments, not by reducing utilization,” they wrote. “They do not focus on the difficult question of whether a particular intervention is appropriate but rather on whether that intervention should take place.”