Holes in the argument for reference pricing


Reference pricing has been touted as a way to create provider competition in healthcare, but a recent Federal Trade Commission article argued this isn't the case.

Reference pricing is a relatively new benefit design model that establishes a standard price for an elective service or procedure (such as a knee replacement) and usually requires customers to pay any charges beyond that set amount.

Fans of reference pricing say it lets patients "vote with their feet" and encourages providers to improve the value of healthcare services they deliver, the article noted. This practice has also been credited with expanding the transparency of medical prices without reducing quality of care.

Some supporters see reference pricing as an attractive alternative to selective contracting, which limits provider choice through narrow networks. And since the Obama Administration approved the use of reference pricing in health insurance products sold pursuant to the Affordable Care Act, that approval is subject to further study of the practice's effects, the FTC noted.    

But the FTC argues that reference pricing does not and cannot create competition or change a provider's market power as supporters of this practice claim.  

In a market with only one hospital, for example, the monopolist provider has little risk of losing customers to competitors. So reference pricing won't create an incentive for the hospital to reduce its charges. Another deal-breaker is setting reference prices so low that no providers accept them. Finally, some patients would rather let insurers find high-quality, low-cost providers rather than doing provider evaluation legwork themselves, the FDA added.  

Overall, "if consumers desire lower-price health insurance options, these can be achieved with benefit designs like narrow networks and reference pricing that harness the power of provider competition to lower prices and improve quality," the FDA wrote, "but only if meaningful provider competition already exists."       

For more:
- read the FTC article

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