Alert to All Labs: Beware Of ‘Reference Pricing’

CEO SUMMARY: “Reference pricing” does not refer to how a lab negotiates prices with its reference lab! Rather, reference pricing describes a specific approach to health plan benefits that incentivizes the consumer to choose lower-cost providers while allowing that consumer to still use a higher-priced provider, so long as that consumer pays the additional costs of the higher-cost provider. If employers’ use of reference pricing becomes widespread, it could cause laboratory test prices to drop sharply.

WILL THE ENTIRE CLINICAL LABORATORY INDUSTRY BE BLINDSIDED by a new health benefit plan strategy that has the potential to cause a steady downward repricing of the lab industry’s highest volume assays?

This question needs to be asked in response to several studies published in credible peer-reviewed medical journals that demonstrate the power of a new approach that incentivizes consumers to select the lowest-cost providers while allowing them to choose any provider, even the highest-priced providers, so long as they pay the difference in the higher price themselves.

This health benefits model is called reference pricing. Not yet well-known in the United States, reference pricing has the potential to be disruptive to the clinical lab industry as it operates today—and be disruptive to other sectors of the U.S. healthcare system.

It is possible that wider use of reference pricing could upend the long-established pricing practices of clinical labs and hospital outreach programs. For these reasons, THE DARK REPORT is providing the industry with its first detailed analysis of this new method that employers can use to motivate their employees to select lower-priced labs.

This entire issue is devoted to providing a comprehensive assessment of reference pricing. As a starting point, it is necessary for lab professionals to acknowledge that reference pricing does not describe the process of a laboratory negotiating price levels with a reference lab provider that provides “reference testing services” to that lab.

Rather, reference pricing describes a specific health plan benefit arrangement. Used for this purpose, reference pricing is a strategy that an employer or a health insurer can use to motivate patients to select providers with lower prices, while still allowing the patient to go to any higher-priced provider, so long as the patients absorb the higher cost of that service.Why Lab Test Prices Declined 32% During 3-Year Study and Lead Researcher Outlines New Details of Lab Test Price Study provide details about what reference pricing is, its history, and some early uses of it in the United States.

Three Aspects to Know

There are three aspects to this newest development that every clinical laboratory executive and pathologist should know. First, certain employers and payers are in the early stages of deploying this model for reimbursing clinical laboratory tests, along with other healthcare services. Second, use of the reference pricing model demonstrates that employers, employees, and health insurers can pay at least one-third less for clinical laboratory tests once this new model is implemented. Third, there is credible evidence showing that this new model can lower the cost of lab testing. In July, JAMA Internal Medicine published the findings of a three-year study documenting how Safeway Inc., and its employees involved in the study collectively saw a 32% reduction in the average price paid for 285 clinical laboratory tests.

Credible Study in JAMA-IM

In fact, because of JAMA’s credibility and the careful research done in this study, the clinical lab industry can expect this JAMA-published study to be a major factor in encouraging employers and payers to adopt this strategy. In turn, this may accelerate reductions in the prices laboratories are paid for their tests.

Clinical laboratory testing is a perfect target for price-cutting via reference pricing for three reasons. First, most patients have some lab tests each year, so there is a significant volume of tests with the potential to generate substantial cost savings.

Second, the variability in what different labs charge for the same test can be immense, often a difference of 10 times or more for a particular test. Thus, simply motivating patients to move away from high-priced to low-priced labs can produce worthwhile savings for both employees and the employer.

Third, an employer like Safeway can exclude lab tests done in inpatient, emergency room, and urgent care settings from the reference pricing program. That way, patients getting treated in these settings can continue to get timely access to lab tests without incurring any financial penalty.

High-priced clinical labs should consider the reference pricing strategy to be a significant financial threat. Initially, it can be expected that employers will go after the same 285 tests that are common and highly automated, just as Safeway did. Thus, hospitals and hospital lab outreach programs with high prices relative to Medicare Part B lab test fees will be most at risk.

Reference Pricing Expansion

However, if reference pricing catches on with employers and health plans, it can be expected that these organizations would expand the panel of tests covered by reference testing to include expensive molecular and genetic tests. For that reason, labs offering these tests will want to monitor the pace with which reference pricing is implemented by an ever-larger number of employers in coming years.

Of special interest will be our exclusive interview with the lead researcher of the study published in JAMA. (See Lead Researcher Outlines New Details of Lab Test Price Study.) He provides information about reference pricing not found in the JAMA article. It is a “must read” for lab executives and pathologists who want to understand reference pricing.

What All Lab Executives and Pathologists Need To Know about ‘Reference Pricing’ for Lab Tests

REFERENCE PRICING IS BECOMING A HOT TOPIC among large employers and health insurance companies for a simple reason: by giving consumers a positive and negative financial incentive at the time they select a healthcare provider, reference pricing produces significant savings to both the employer and the employee.

Yet few clinical lab executives and pathologists know much about reference pricing or how it works. Even fewer understand the potential of reference pricing to disrupt the existing clinical lab marketplace.

Defining Reference Pricing

One good definition of reference pricing comes from Ann Boynton of UC Davis Medical Center and James C. Robinson, PhD, of the University of California, Berkeley. In a blog at HealthAffairs.com, they described the characteristics of reference pricing:

1. In a reference pricing program, the purchaser (an employer or health plan) “places a limit on what it will contribute towards payment for a particular procedure, assuring that the selected payment limit allows appropriate access for patients.”
2. This payment limit is based on the distribution of prices for a procedure, such as a specific lab test. Typically the price point is set at the median or another relevant mid-point in the distribution of prices in a local or regional market.
3. When the consumer chooses a provider, such as a lab, that charges less than the reference pricing program’s limit, the consumer enjoys standard coverage, with minimal cost sharing.
4. By selecting a provider charging above the designated price point, the consumer must pay the entire difference.
5. Such excess payments will not count towards the patient’s deductible or the annual out-of-pocket maximum.
6. Excess payments in these situations are “conceptualized as a network exclusion, but a milder form of those inherent in narrow-network insurance designs.”
7. Reference pricing typically offers the patient full coverage at cost-effective providers and only partial coverage at more expensive providers. (By comparison, narrow-network strategies offer full coverage at some providers and no coverage at others.)

Boynton and Robinson also wrote that, “Reference pricing is not for all patients. Appropriately constructed programs permit exceptions based on the clinical needs and geographic location of individual patients. For example, CalPERS provides exceptions from reference pricing when a member lives more than 50 miles from a facility that offers the service below the price limit. It also exempts the patient if the patient’s physician gives a clinical justification for using a high-priced facility or hospital setting. Safeway exempts from its reference pricing program laboratory tests for all patients with a diagnosis of cancer.”

Reference Pricing History

Many European countries have used reference pricing, primarily to control the prices of pharmaceutical drugs. The oldest reference pricing programs date back to the early 1990s.

Investigations into the effectiveness of reference pricing to improve price competition for prescription drugs in Europe indicate success. One global medical journal wrote, that, “the literature suggests that the introduction of a reference pricing system reduces prices of all medicines that are included in the system. Obviously, price reductions tend to be larger for originator medicines than for generic medicines. Also, greater price reductions have been witnessed in markets where generic medicine competition already occurred prior to the introduction of a reference pricing system.”