By Mike Miesen
Mitt Romney's/Paul Ryan's premium support/voucher plan was heavily derided during the dark days of Campaign 2012, but the devil was always more in the details than the theory. While the re-election of President Obama left premium support dead on the Medicare level, health insurers are increasingly turning to the ideas that drove it – choice, competition, and the power of a (carefully regulated) market – to address high costs on the procedural level. Call it the micro-voucherization of health insurance.
This is known by wonks as reference pricing, and its recent results in California are promising: the costs of hip and knee replacements fell by 19%, with no attendant decrease in quality. Using reference pricing is an assault on the status quo that holds the promise of "bending the curve" in a meaningful way, but it faces technical and political concerns that may consign it to the graveyard of promising-but-unfulfilled ideas.
Broadly-speaking, reference pricing is the act of offering a set amount of money for the purchase of a good, where the reference is an amount that can reasonably said to offer meaningful coverage for that good. Sometimes, reference pricing is focused on a given procedure – what I'll refer to as "inputs-oriented reference pricing"; other times, a given outcome, or "outputs-based reference pricing."
That's pretty vague, so let's use the colonoscopy procedure (which has recently received a lot of attention thanks to an informative New York Times article) to help color this in. The inputs-oriented approach would see the payer asking: given the choice to have a colonoscopy – a procedure which varies wildly in cost without varying wildly in quality – what's a reasonable price to pay? It would decide this based on some combination of price, quality, and geography, and would inform consumers of its spending cap.
Say it finds that most of its insured population can reasonably access a high-quality colonoscopy for $10,000; if a consumer choose provider that charges $15,000, he or she would pay the $5,000 difference out of pocket. Choice is preserved, but at a cost. The simple chart above shows how this may work.
But, if you read the colonoscopy article, you may be asking a separate question: why pay for a colonoscopy at all?
A fecal occult blood test (FOBT), for example, is just as effective as a colonoscopy for colon cancer screening, but it's cheaper to perform. The outputs-oriented approach is procedure agnostic, and identifies only what is most cost-effective; if a high-quality colonoscopy in a geographic area is $20,000 and a FOBT is $12,000, the insurer would pay for $12,000 of the total cost; chart below [1]. Again, the consumer has freedom to choose what procedure he or she would like, but would pay the difference out of pocket.
Stylized examples aside, reference pricing is catching on in America. The 19% decrease referenced above came from the California Public Employees' Retirement System's (Calpers) use of reference pricing for hip and knee replacements. To accomplish this, Calpers went to individual hospitals and made an agreement: charge no more than $30,000, and the hospital will be included in the health plan. Those that didn't agree weren't included in the plan [2].
Safeway, the self-insured grocery chain, has also used reference pricing in limited circumstances, including for colonoscopies and lab tests.
And it's very common in the formularies of pharmaceutical reimbursement; generics are often covered 100% but brand-name drugs will cost the insured extra. A variety of systematic reviews have found that reference pricing typically leads to reductions in pharmaceutical expenditures without an attendant decrease in health outcomes or increase in physician office visits.
So, if scaled to many procedures, reference pricing looks a bit like an insurance plan that contains a bundle of vouchers: one for hip replacement, one for FOBT, et cetera. It's the micro-voucherization of health insurance [3].
Footnotes
1. Theoretically, the insurer would first decide a) which procedure is more cost-efficient, then b) use the inputs-oriented approach to define the appropriate reference price for that procedure.
2. This isn't pure reference pricing, but it provides one path for large insurers to exert downward influence on the price of health services. A purer form would be to simply set the cap – to provide the micro-voucher for a procedure – and let the market drive down costs, as health care consumers choose.
3. To a point, of course; some procedures don't seem a good fit – emergency surgery comes to mind. It's not mean to be all-encompassing.
Mike Miesen is a former hospital operations consultant and current freelance journalist, covering American health policy and international development from east Africa. Follow him on Twitter @MikeMiesen. This post originally appeared at Project Millenial.
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