The newest threat to lab revenues: reference pricing in healthcare

This is an excerpt from a 1,600-word article in the September 6 issue of THE DARK REPORT. The complete article is available to paid members of the Dark Intelligence Group.

CEO SUMMARY: It’s the newest threat to clinical lab survival. A new study shows exactly how reference pricing in healthcare is likely to work, as widely varying prices in a new study prompted patients to be highly sensitive to lab test costs. Over the course of the study, the percentage of patients using higher-priced labs dropped from 45.6% in 2010 to 15.6% in 2013, along with a drop in the mean per-test price from $27.72 in 2010 to $18.56 in 2013. This article includes key data points and insights that labs should use to develop their own strategies for responding to this threat.

IN MARCH 2011, THE GROCERY STORE chain Safeway, Inc., implemented reference pricing for clinical lab tests to make employees more sensitive to the cost of lab tests. By choosing low-priced laboratories from 2011 through 2013, those employees drove down the price per test by 32%.

The mean per-test price fell from $27.72 in 2010 (the year before the program began) to $18.56 in 2013, according to research by James C. Robinson, PhD, and colleagues at the University of California, Berkeley. At the same time, the percentage of patients using high-priced labs dropped from 45.6% in 2010 to 15.6% in 2013.

These findings should catch the attention of lab administrators and pathologists. The study suggests that a major employer or health plan can use reference pricing to achieve an overall reduction of 32% in spending on clinical laboratory tests. This is potentially bad news for labs with high test prices.

Reference pricing in healthcare is an effective cost-control strategy because the employer, Safeway in this case, analyzed all of the lab test prices from its network of laboratories. It then set the maximum amount it would pay for each test at the 60th percentile level, the researchers wrote.

Any Safeway worker who chose a laboratory that charged less than or equal to this maximum amount paid no more than the usual deductible. Those workers who chose a laboratory that charged more than the reference price (above the 60th percentile level) had to pay their deductible plus the entire extra amount the lab charged, the researchers explained. (See related sidebar.)

Lab Test Prices Varied Widely

The study tracked how consumers shop for clinical lab tests. It revealed that patients were particularly sensitive to lab test prices—in part because lab test prices varied widely. For a basic metabolic panel, which was the most commonly prescribed test, prices among different labs ranged from $5.75 to $126.44, the researchers wrote. Prices for a lipid panel ranged from $8.85 to $74.92. Throughout the three-year study, the average number of tests employees ordered remained at about five to six tests per year.

For the research, Robinson and colleagues from the School of Public Health sought to determine what effect reference pricing would have on an employer’s efforts to steer consumers to clinical laboratories that charge lower prices for diagnostic tests. JAMA Internal Medicine published the research online on July 25, in an article, “Association of Reference Pricing for Diagnostic Laboratory Testing With Changes in Patient Choices, Prices, and Total Spending for Diagnostic Tests.”

Safeway operates more than 1,300 stores in Alaska, California, Hawaii, Nevada, Oregon, and Texas. It introduced reference pricing for 285 of the most frequently ordered clinical laboratory tests.

“Employers and insurers increasingly are adopting ‘reference pricing’ policies to create incentives for patients to select lower-priced facilities,” wrote Robinson and colleagues. Robinson is the Leonard D. Schaeffer Professor of Health Economics and Director of the Berkeley Center for Health Technology.

One outcome in particular from Safeway’s use of of reference pricing for clinical laboratory tests should catch the attention of every lab executive and pathologist.

Safeway set a maximum price for each of 285 lab tests based on the 60th percentile of the distribution of negotiated prices with the in-network laboratories within each region. It then told employees that, if they selected a lab test priced above that level, they would pay the difference and that payment would not be included as a deductible.

Within the first year of the reference pricing program, the number of Safeway patient’s using higher-priced labs dropped from 45.6% to 15.6%. This is evidence that patients can quickly become sensitive to higher lab test prices.

How would reference pricing in healthcare impact your business if it becomes an issue in your community? Please share your thoughts with us in the comments section below.