Healthcare and Reference Pricing White Paper

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Healthcare Costs

Discuss the Challenges of Reference Pricing-describe it, is it currently feasible, what are the pitfalls if it was part of your job assignment to build and manage such a program to control cost. What are the advantages and pitfalls if you are an individual using this "reference pricing" as an element of your personal health insurance program?

Reference pricing has enormous potential to curb rising healthcare costs. In this situation, the insurance company or other stakeholder sets a target price that reflects what is considered a fair market value. Then if the consumer selects a healthcare service that is less than that amount, they are obligated to pay nothing. However, if the consumer selects a service that is greater than the reference price, then they are obligated to pay the difference. This system gives the consumer an incentive to participate in controlling costs whereas they might not otherwise concern themselves with the cost of service.

The advantages of this system is that it puts pressure on high-price providers who have gained market share in the current healthcare system to consider lower their costs. For example, if a price charged for a service is beyond what could be construed as a reasonable market price, then the patient would have an incentive to seek a lower-cost provider.

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However there are also many disadvantages associated with reference pricing as well as a limited range of services that it is appropriate for -- such as non-urgent standardized services (Lechner, Gourevitch, & Ginsburg, 2013). In situations where there is not adequate time to perform a price comparison, the reference price has no net advantage. In this situation the patient would be locked into the price set by the closest provider and even if a reference price was set, they would be forced to pay the premium.

However, for non-urgent services, and even prescription drug prices, the reference pricing has shown more promise. The Center for Studying Health System Change (HSC) and the California Public Employees' Retirement System (CalPERS) has had success in applying this concept to hip and knee replacements.

"CalPER's use of reference pricing for inpatient hip and knee replacements is among the most prominent examples in the United States. After reviewing quality and cost information, CalPERS set a threshold of $30,000 for hospital payments for both procedures and designated certain hospitals where enrollees could get care at or below that price. If enrollees have surgery at designated hospitals, they….....

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