• Academy Health: Reference pricing as an alternative to selective contracting

    A fascinating, new article on reference pricing by James Robinson and Timothy Brown appeared in the August issue of Health Affairs. The well-articulated market context caught my eye. I describe them and the paper’s results in a new AcademyHealth post. Do I have to beg you to click through? OK, I’m begging!


    • It sounds promising, but I must say, ever medical procedure I have ends up in a nightmare of confusing bills and the patient interface people are clueless. One hopes the insurance company will say who will meet their prices.

    • It worked, or seemed to, in California: the higher priced hospitals lowered their prices in response to greater demand by patients for the lower cost hospitals. I’d like to have CalPERS manage my health insurance! Unfortunately, I’m in the individual market, and who will help set the price for me? And I don’t mean just me, but the increasing number of insureds in the individual market. Frakt’s description of reference pricing uses “employer” as short-hand for the benefit manager. Who will be my benefit manager? The exchanges? The navigators? Heck, in my state (Florida) the Department of Health is even denying access by the navigators to the DOH facilities! Reference pricing may be an answer to the lack of transparency in pricing for health care services, but somebody has to set a price – CalPERS in the study.

    • A very promising development. Robert A., FYI there’s absolutely no reason why your insurer in the individual market couldn’t adopt a similar policy, simply saying ‘we will pay X for procedure/treatment Y, if you go someplace where it costs more than X then be sure to bring your checkbook.’ In some ways fixed-benefit policies (which I understand are NOT ‘qualified’ health plans under ACA) already do this, the policy by Assurant pegs its reimbursement to Medicare rates. You can see how it might work here: http://theselfpaypatient.com/2013/08/22/fixed-benefit-insurance-policies-an-alternative-to-comprehensive-insurance/

      The biggest problem is price transparency and a lack of ‘all inclusive’ prices for most hospitals (in primary care, there are far more options, although still a minority of doctors). But reference pricing, which can be implemented in a variety of ways, could force hospitals to move towards transparent, ‘all inclusive’ pricing models such as those offered by the Surgery Center of Oklahoma.

    • you write: “An important question is, how did hospitals respond to these shifts in patient volume.”

      this is indeed an important question. one wonders where the “high-price” hospitals made up the loss. did they cost-shift to other insurers? engage in more upcoding? apply for higher dsh payments? charge less for orthopedic surgery but more for cancer treatment? sic more aggressive bill collectors on deadbeat patients? maybe they cut back on nurses? or on cleaning and laundry?

    • It’s a poorly kept secret that hospitals are inefficient. Horribly inefficient. Grossly inefficient. That giant sucking sound are hospitals consuming all those health care dollars. There’s a reason why CONs are required to build or expand a hospital: hospitals can’t make wise spending decisions on their own. Yet, ACA looks to hospitals to create and manage ACOs, which are supposed to make the delivery of health care more efficient. The point of this comment isn’t to disparage hospitals (or ACOs), but to emphasize the enormous room for improvement and potential for efficiency and savings; lower prices don’t have to come at the expense of services or quality.

      • I largely agree with you, but I don’t think CON laws really help all that much. They actually can serve to prevent new entrants to the market, thereby locking in the incumbents who face little competitive pressure to weed out their inefficiencies. Specialty hospitals, owned by physicians, have generally in my observation been shown to be much, much more efficient than general hospitals. But because they compete on things other than price currently (because price competition between hospitals and surgery centers is largely absent), even in those states where CON laws don’t exist new entrants haven’t been able to do much to push incumbents into efficiency improvements.

        • I wasn’t defending CON requirements, but using the CON as a device for emphasizing the inefficiency of hospitals. State CON requirements vary. For example, Florida deregulated outpatient surgery centers in the 1980s, which resulted in the development of lots of them to compete with hospitals, which significantly improved efficiency. Georgia, on the other hand, still regulates outpatient surgery centers, requiring both a CON and prohibiting otherwise unrelated physicians from sharing ownership, the net result being few of them, little competition, and little or no improvement in efficiency.

          • Some excellent background, thanks!

          • While the surgicenters may be more efficient, I would love to see a real study done accounting for the different populations and the different procedures. Working at both, it is not so clear that there is a big difference. Kind of a difficult study to do I suspect.


            • Competition from surgery centers has made (i.e., forced) hospitals (to be) more efficient. For a busy surgeon, start time and turn-around time are very important, and for which hospitals are notoriously poor performers. A surgeon-owned outpatient surgery center better have good start times and turn-around times or the administrator will be looking for another job. In response to the competition, many hospitals have partnered with the surgeons (in various types of “co-management” arrangements) to improve the efficiency of the surgery departments. Now, my hobby horse: With consolidation and integration, competition is being effectively eliminated. Moreover, the compensation models used by most hospitals for employed physicians are designed so the physicians can’t reach the performance criteria for bonuses, which effectively neuters the physicians. Contrary to many advocates of health care reform, consolidation and integration may improve efficiency marginally at first, but over time will reduce efficiency. Be careful what you ask for.

    • At some point America will have to decide what part of a hospital is a public utility, to be funded by taxes so everyone has emergency care, and what part of each hospital is a private business that can come or go based on normal capitalist competition.

      This would be easier if we just had public vs private hospitals, and all Medicare and Medicaid spending went to the former. (This is more or less how Australia operates.)

      It would also be easier if the Congress had voted to pay for EMTALA care when it passed a mandate to provide that care.

      The government could also pay directly for medical education.

      Instead there are endless hidden cross-subsidies that will have to be unearthed and examined.

      If we exposed hospitals to pure price competition, many hospitals would go broke and many high paid jobs would disappear. This could harm the national economy so much that the cure would be worse than the disease.