But there’s more work to do to address the high cost of care for consumers.

Reference pricing can be a useful, if modest, tool to reduce costs for some types of non-urgent care. The Employee Benefit Research Institute defines “reference pricing” as a “form of defined contribution health benefits, where plan sponsors pay a fixed amount or limit their contributions towards the cost of a specific … service, and health plan members must pay the difference in price if a more costly health care provider or service is selected.” In 2011, the California Public Employees Retirement System established a reference pricing program for knee and hip replacement surgeries and generated $2.8 million in savings the first year. Most of the savings resulted from hospitals lowering their prices (rather than just making patients pay more). With workers and patients represented at the table, CalPERS selected these procedures because the cost variation was wide, quality measures were well-established, the use of these procedures among the CalPERS population was high, and the procedures were relatively uncomplicated — and consumers could mostly shop in advance. Not all procedures or products meet these tests. For example, emergency care should never be subject to reference pricing, and a more rare and complicated procedure like a heart transplant also would not meet this criteria.

A reference-based pricing program must include key consumer protections, so that the consumer can count on the quality of care. Consumers must not be asked to shop for urgent or emergent care, for complicated procedures, or when there is not agreement among health providers on what constitutes the appropriate treatment protocol. Consumers must also have accurate, readily available pricing information, as well as education about how to choose among providers so they do not suffer “surprise” bills of hundreds or thousands of dollars. There must be sufficient providers to ensure timely access to necessary care and geographic proximity of providers to consumers must also be required. Without strong consumer protections, a reference-based pricing program could be a guise for imposing otherwise-prohibited limitations on coverage — a cost shift to consumers masquerading as consumer-friendly cost control.

With 3.2 million Americans infected with hepatitis C, big ticket medications like Sovaldi and Harvoni could double annual U.S. drug spending. These specialty drugs could derail state budgets. It’s estimated that Sovaldi would cost Medi-Cal $51 billion to cover its infected population. That is more than a year’s state spending on K-12 education. Harvoni is even more expensive, coming in at $95,000 for 12 weeks of treatment.

While many specialty drugs have the potential to provide tremendous medical benefits, their skyrocketing costs must be kept in check. These drugs, which account for only 1% of prescriptions, already make up 25% of drug spending, and the costs are on the rise.

In the revamped era of health care, there needs to be laser-like focus on affordability. Uninsured rates are down 50% in California and people are getting the help they need to pay for premiums and out of pocket health expenses. The successes are notable but may not be sustainable if we do not rein in the cost of health care.

If we focus on overall health, trim inefficiencies and are smart about spending, we can improve the quality of care and reduce costs at the same time. Health plans have taken this challenge to heart and have invested in new tactics aimed at improving quality. Strategies like bundled payments — paying for a complete episode of care (like a hip replacement) rather than for each service and product involved in that surgery — can be more cost-effective than a piece-by-piece approach that allows the cost of innumerable tests and treatments to multiply. Accountable Care Organizations and pay-for-performance agreements are designed to encourage high-quality care delivery and discourage unnecessary care. And as individuals take on greater responsibilities for their health, it is imperative that we promote a transparent system so consumers can stay informed on the cost and quality of their health care decisions.

While health plans, employers and other stakeholders continue to focus on lowering costs, increasing efficiency and improving quality, we need everyone at the table to work toward long-term affordability. Health plans, doctors, hospitals and device and drug manufacturers must also join together to reshape our system to ensure patients receive the highest quality care, eliminating unnecessary and inefficient care, at the lowest cost. We must end the race to the highest price and invest in a path towards affordability.

Efforts to rein in costs should not be touted as promoting “value” unless the cost reductions are tied to high quality and positive health outcomes.

The CalPERS’ experience with knee and hip replacement surgery seems to indicate that an effective reference-based pricing program can be designed to control costs and result in better quality outcomes for consumers. The CalPERS program was successful because it was limited to just elective or “shoppable” procedures that were routine and non-urgent. CalPERS provided strong consumer education, and the program was transparent to members.

Providers will need extensive education so they, too, know who is a reference-priced provider. Without that, referrals may be made to specialists who don’t accept the reference price. This would compound the current problem of “surprise medical bills,” which consumers experience too often from out-of-network providers.

We believe only when consumers have complete information about their choices and have opt-out provisions can such programs be effective. CMS agrees with us. New guidance for the use of reference-based pricing in the large group market requires the program only to apply to non-urgent services and that cost and available provider information must be readily available to consumers.

We also are beginning to see price considerations drive access to some life-saving drugs. Some of these are being classified as “specialty” drugs, but no standard definition exists for what is considered a “specialty” drug. Each insurer can determine whether a medication is in the “specialty” tier, leaving consumers in the dark and applying high consumer cost-sharing to those in need of the medications. This can have a discriminatory impact, as has been raised recently in Florida litigation. Without standards and strong consumer protections, purchasers can create policies that disproportionately impact sick or disabled consumers. 

Ideally, the reference price sends a signal to providers about the price purchasers view to be reasonable, and makes consumers sensitive to the price of services, directing them toward more cost-effective providers. 

CalPERS has seen notable savings from its reference pricing program for hip and knee replacements. Educating consumers was a key to its success. CalPERS ensures its members have ample information about the quality and prices of different providers, so the reference pricing program can help them choose the lowest-cost, highest-quality provider. And providers were sensitive to the reference price, with some higher-priced providers responding by bringing prices down.

Reference pricing programs are most applicable to “shoppable services,” especially elective procedures, for which a consumer has time to compare providers and shop around. Payment limits can help shape the use of lifestyle drugs or encourage consumers to examine alternatives for care. On the flip side, reference pricing is not a good match for emergency care or critical, life-saving drugs. 

But purchasers have other tools to help contain health care costs. At CPR, payment reform is our focus. When considering a benefit design strategy like reference pricing, purchasers should pair it thoughtfully with how they pay providers for the care they deliver. If we pay with an episode-based or bundled payment — a package price for services related to, for example, a hip replacement — it will be easier for consumers to understand the pricing, as well as information about the quality of the care. This payment strategy also helps keep providers accountable for costs and quality and makes spending more predicable for the purchaser.

At this point, some purchasers are just warming up to reference pricing, while others are evolving beyond it to benefit designs and provider network strategies that use the same principles more broadly.  Regardless, reference pricing hints at how the health care market of the future may hone in more tightly on “value” and apply these types of mechanisms more holistically.