Dive Brief:
- A group of economists from the Federal Trade Commission have posted an essay arguing that the concept of reference pricing—in which a payer sets a maximum price for elective services and procedures—is an idea with some promise but also several problems.
- One key problem, they suggest, is that payers can't force providers to get into line with the reference price they've set if that provider has a lot of control the marketplace, making some services inaccessible to consumers.
- Another issue worth considering, the economists note, is that setting a reference price often has the same effect as creating a narrow network plan—it restricts which providers consumers may use significantly. They argue that some consumers might actually prefer a narrow network plan, because the narrow network providers have already been vetted by the health plan.
Dive Insight:
Reference pricing is becoming popular of late, with large insurers like Independence Blue Cross and employer funds like CalPERS setting reference prices for important clinical areas like orthopedics and proton beam cancer radiation therapy. And they've had some success. In fact, when CalPERS created a reference pricing program for hip and knee surgeries with WellPoint in 2011, it saved $55 million.
However, as the FTC's economists point out, reference pricing won't work in every market. Where there is a healthy level of competition in a market, providers are far more likely to drop their prices to meet the reference price. However, with market power consolidating in the hands of a few hospitals and medical practices in a single region far more often these days—often in an ACO which wields tremendous power—the providers involved have little incentive to drop their prices,
Given the FTC's increasing focus on healthcare mergers and their effect on competition, it seems likely that the agency's enforcement side will take a look at the status of both narrow networks and reference pricing and whether anti-competitive activity is preventing them from saving healthcare dollars.
Want to read more? You may enjoy this story about how the FTC is increasingly targeting 'anticompetitive' mergers.