Reference Pricing for Health Care Services: A New Twist on the Defined Contribution Concept in Employment-Based Health Benefits

April 2014
EBRI Issue Brief #398
Paperback, 16 pp.
PDF, 1,423 kb
Employee Benefit Research Institute, 2014

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Executive Summary

  • This analysis examines reference pricing, a form of defined contribution health benefits, where plan sponsors pay a fixed amount or limit their contributions toward the cost of a specific health care service, and health plan members must pay the difference in price if a more costly health care provider or service is selected.
  • Reference pricing for hip and knee replacement, colonoscopy, magnetic resonance imaging (MRI) of the spine, computerized tomography (CT) scan of the head or brain, nuclear stress test of the heart, and echocardiogram were examined because these services have fairly uniform protocols, and they are less likely to experience variation in quality, both of which make price comparisons easier for patients.
  • Potential aggregate savings could reach $9.4 billion if all employers adopted reference pricing for the health care services examined in this paper. The $9.4 billion represents 1.6 percent of all spending on health care services among the 156 million people under age 65 with employment-based health benefits in 2010.
  • Savings from reference pricing materializes through the combination of 1) patients choosing providers at the reference price, 2) patients paying the difference between the reference price and the allowed charge through cost sharing, and 3) providers reducing their prices to the reference price. Any increase in prices among providers below the reference price would reduce the potential for savings.
  • Reference pricing for knee and hip replacements would result in savings averaging $10,367 per knee or hip replacement among the cases that were above the reference price, and would account for about 40 percent of the aggregate savings. While the incidence rate of hip and knee replacements in the population of people with employment-based coverage is relatively low, the costs are relatively high. In contrast, stress tests of the heart accounted for only 2 percent of the aggregate potential savings. While incidence rates ranged from 14 to 20 percent between 2008 and 2010, only $87 per case would be saved from reference pricing. Colonoscopies, CT scans of the head or brain, and echocardiograms each accounted for between 15–20 percent of aggregate potential savings, while MRIs of the spine accounted for about 10 percent of the potential savings.
  • Plan sponsors should consider a number of issues as they weigh adopting reference pricing, including how the reference price is determined and how providers may react. Communication to plan members is also key to effective use of reference pricing.