Will reference pricing be abused?

The administration made news last week when it announced that it was receptive to the idea of allowing employer-sponsored health plans to adopt “reference pricing.”

If the administration presses ahead, plans could agree to pay a single, fixed rate—the reference price—for particular procedures, like knee-replacement surgery. Policyholders could then receive the procedure without any cost-sharing at any provider willing to accept that reference price. If a provider charged more than the fixed rate, however, the policyholder would be on the hook for the difference. (Check out Austin’s and my earlier endorsement of the strategy.)

The administration is worried, with some reason, that reference pricing could be used as “a subterfuge for the imposition of otherwise prohibited limitations on coverage, without ensuring access to quality care and an adequate network of providers.” A reference price that’s set too low could make it hard for insured patients to get medical care without paying through the nose. (Jonathan Cohn expertly explores the risks to consumers over at the New Republic.)

That’s why “network adequacy rules” are so important to reference pricing. They protect consumers by making sure that they can get access to needed services without unreasonable delay or excessive out-of-pocket spending, whatever health plan they happen to select.

Where do these rules come from? From the states, mainly. Most require managed care plans that sell plans in the individual and group markets to have adequate networks. Plus, on the exchanges—both state-established and federally operated—the ACA requires health plans to adhere, at a minimum, to network adequacy rules that HHS has adopted.

Significantly, however, none of these laws apply to employers that self-insure. For those employers, ERISA preempts state network adequacy laws and doesn’t replace them with a federal equivalent. The ACA does nothing to change that—with one arguable exception. For all health plans, self-insured and otherwise, the ACA caps workers’ annual out-of-pocket costs. The administration hopes to use the out-of-pocket cap as leverage to get self-insured employers to adopt network adequacy standards.

Here’s how. In its announcement, the administration asked whether amounts paid in excess of a reference price should count toward out-of-pocket caps. If so, reference pricing would be dead in the water—health plans would be on the hook for any costs above their policyholders’ caps. If not, however, reference prices could potentially be set so low that policyholders couldn’t get needed care without paying for most of it themselves.

The administration would like to chart a middle path. It’s inclined to adopt a rule that says that extra payments won’t count toward out-of-pocket caps—and that reference pricing is therefore OK—but only if the plan has “standards” in place “to ensure that individuals have meaningful access to medically appropriate, quality care.” In other words, network adequacy standards.

That sounds reassuring. But how will those standards be enforced? As a first cut, the administration will probably require employer plans to get accredited through a non-profit organization that, for a fee, will decide whether enough providers accept the reference price. (Accrediting agencies already supervise the adequacy of exchange plan networks.)

But that won’t be enough. As the National Association of Insurance Commissioners cautions, private accreditation should complement regulatory oversight, not replace it. Accrediting agencies, for example, may be too apt to accredit health plans in order to keep their business. The administration will have to make sure that employers aren’t using reference pricing to discourage their workers from getting expensive procedures.

That’s a tall order. Figuring out which providers in a particular region will accept a reference price isn’t as easy as calling them up. Providers may respond strategically, not sincerely. And that’s just the first step. Are the providers that accept reference prices taking new patients? How long is the wait? How far is too far to ask policyholders to travel for care? What if providers change their minds about accepting reference prices? These questions have to be answered not only for every health plan in every region, but also for every individual reference-priced procedure.

I don’t say this to deny the promise of reference pricing. To the contrary, I think the administration is right to give it a shot. But the federal government has no experience with enforcing network adequacy laws and I fear it lacks the resources to enforce them effectively. Should reference pricing take off, preventing employers from abusing it will present a formidable regulatory challenge.


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