Here’s a point most of us can agree on. Tackling ballooning health care costs requires more than insurance reform because the charge and cost structure for health services in the U.S. is inconsistent and irrational. The same quality CT scan that costs $500 at one outpatient facility costs $2,000 at a nearby teaching hospital.
Obamacare’s typical high-deductible insurance plans encourage many cost-conscious consumers to shop around for low-ticket items below their deductible — and that is good. However, the bulk of health care spending is attributable to patients who rapidly blow through their deductible, after which they have no incentive to shop for value. Those 5 percent of people — who spend a whopping 50 percent of the nation’s health care dollars — have little incentive to consider price. With the cost of multiple medications, frequent doctors visits, use of specialists and one or more hospitalizations a year, these 5 percent will exceed even the highest deductible in the first few months of each year.
So what might be the single most powerful tool to slow the seemingly intractable yet unsustainable increases in health spending affecting practically every family in America? “Referenced-based” pricing for health services encourages patients — most significantly, those with the highest costs — to act as smart consumers by seeking the most cost-effective care, even after they have exceeded their deductible.
Here’s how it works. Insurance companies or employers set a limit they are willing to pay for a specified service of excellent quality — say, $1,000 for a CT scan — and communicate that reference price clearly to consumers. If patients choose a location where the charge is below the maximum set reimbursement rate, they pay nothing. If they choose a provider where the charge is higher, they pay the difference.
As patient-consumers shop around for the best price and quality services, competition in the market pushes prices down and value up.
Tools already exist to facilitate cost comparison for relatively low-cost items. Reference-based pricing, however, has an impact on big-ticket items, the ones that drive overall health spending. Increasingly, companies and insurers are contracting with doctors, hospitals and provider networks to negotiate a reference price for services offered.
As our understanding of quality measurement and price transparency matures, reference pricing grows easier. This model works well for services that have small quality differences but wide cost variation, such as radiology and pharmaceuticals. Services like in-patient care and surgery are more complicated.
Large companies that are self-insured (meaning they are the payer) are already negotiating prices on behalf of their employees. For example, Lowe’s has contracted with the Cleveland Clinic to bundle care for high-quality cardiology services using a reference price. CalPERS, the California insurance for public employees, successfully uses reference-based pricing for knee and hip replacements.
When CalPERS allowed consumers to shop for services by site using a fixed price point above which they were fully responsible for all charges, the result was lower health care spending for equal outcomes. Moreover, as these consumers gravitated to lower cost facilities, other providers changed their behavior to provide higher value more cost effectively.
Reference-based pricing is true health service and cost innovation. It places the consumer at the heart of reform, making patients more sensitive to price differences across service providers.
Moreover, it has a system-wide impact that counters some of the unintended consequences of Obamacare, such as provider consolidation, resulting in increased bargaining leverage in the creation of accountable care organizations. And finally, it reduces spending most dramatically for the very populations responsible for the bulk of health care spending today.
Creative solutions like reference-based pricing move us to a system that ensures patients get excellent care at a price both they — and the nation — can afford.
William H. Frist, M.D., is a heart and lung transplant surgeon, former U.S. Senate majority leader and chairman of the executive council of Cressey and Co. Frist represented Tennessee in the U.S. Senate for 12 years, serving on both the health and finance committees. This post originally appeared in The Washington Examiner.