How Reference Pricing Encourages Patients to Help Cut Cost of Care

CalPERS uses reference pricing to contain costs for hip and knee surgery, also for common procedures

USE OF REFERENCE PRICING by Safeway to lower the cost of clinical laboratory tests was the subject of a study published by JAMA Internal Medicine in July. In a special issue, THE DARK REPORT analyzed the study, which showed that reference-based pricing helped slash the cost of clinical laboratory tests by 32% in just 24 months!

Reference pricing is used to drive down what healthcare providers charge for services and in so doing, it narrows the wide variation purchasers pay for healthcare services. This intelligence briefing is a follow up to that special issue of THE DARK REPORT. Our editors interviewed experts at companies that have extensive experience with reference pricing.

David Cowling, PhD, is at the Center for Innovation at the California Public Employees Retirement System, (CalPERS). As one of the nation’s largest purchasers of healthcare, CalPERS spends $7.5 billion annually to buy health plan benefits for 1.38 million members in California’s more than 1,200 public agencies and schools. It has learned lessons from using reference pricing with several clinical services.

The first lesson came when CalPERS used reference pricing for joint replacement surgery. “In that program, we found that higher-priced providers were willing to drop their prices,” noted Cowling. “It meant CalPERS met its goal even though the program was designed to have consumers drive down prices by choosing low-cost, high-value providers.

“The second lesson came when CalPERS used reference pricing for more common and lower-cost procedures, such as colonoscopy, cataract, and arthroscopic surgery,” he continued. “In this program, consumers drove down the average price by choosing among providers based on price.”

The lesson for clinical lab managers is that reference pricing drives down the cost of care. This means more purchasers, including employers, could adopt reference pricing when seeking to eliminate wide price variation in clinical lab testing and to drive down those costs.

Big price Variation

“We see a lot of pricing variation, and—to us as the purchaser—it’s not clear why there would be such a high pricing variation,” stated Cowling. “Large pricing variation is one of those things to which we definitely pay attention, especially where the service is perceived as a commodity and there’s not much difference in the service being provided in terms of quality.”

Hip and knee surgery is not considered a commodity service because there is a belief that the providers’ quality of care may differ. But CalPERS’ use of reference pricing for hip and knee surgery was successful because providers themselves drove down the costs of these surgeries, Cowling said.

“In 2012, when we looked at pricing variation for hip and knee replacements, there were. very large variations, ranging from about $15,000 up to $110,000,” he said. “The interesting thing about the hips and knees program was that it was designed to have consumers make the choice about which provider to use.

“But what was surprising and what’s unique about CalPERS’ hips and knees program is that the hospitals responded to the possibility of losing volume by lowering their prices. That doesn’t happen usually with reference pricing,” Cowling said.

Lower-priced Surgeries

Following the success of that program, CalPERS introduced a reference pricing program for colonoscopies, a service for which consumers can choose providers based on cost and where the quality of care is generally similar from one provider to the next. In that way, colonoscopies are like lab tests: high volume, and similar quality among providers.

The large pricing variation in hip and knee replacement surgeries caught the attention of CalPERS. In 2012, it developed a strategy to limit price variation. It decided to use reference pricing for patients who needed hip and knee surgeries.

“In that program, we saw what we were expecting with the hips and knees, which was that consumers changed their behavior,” he said. “There was a big shift in terms of members going to the reference-priced facilities. For colonoscopy surgery, something like 93% of members went to the reference-priced facilities.

“In that program, we had a different mechanism that produced the same result: lower costs and less variation,” he said. “So, here at CalPERS we are getting the effects that we’re interested in seeing and those effects are still occurring.

“We don’t have reference pricing for clinical lab testing right now, but we do have a partnership with Castlight Health to use their price transparency tool,” Cowling concluded. “CalPERS wants to get members engaged in looking at price when they purchase all healthcare services to help keep costs down.”

Contact Bill Madison at CalPERs, 916-795-0482 or; Howard Willson at 415-829-1400 or

Reasons Why Employers Use Reference Pricing

ONE COMPANY SUPPORTING REFERENCE PRICING PROGRAMS is Castlight Health, a company in San Francisco whose users include consumers and self-insured employers looking to contain healthcare costs with Castlight’s health benefits program.

Howard Willson, MD, is head of clinical strategy at Castlight. He explained that reference pricing is a tool that clinical lab managers need to understand. “It should be on their radar, particularly if employers in their area are focusing on it,” he said. “Both reference pricing and price transparency have plenty of momentum and will be part of every healthcare consumers’ life in the same way consumers use online sites to shop for travel and so many other goods and services.

“Medical services such as lab tests and imaging are perceived by employers and patients as being like commodity services—meaning they are services where quality is not as much of a factor as it is with other healthcare services,” explained Willson. “Pathologists may not want to hear that. But from a patient’s perspective, clinical laboratory tests are a reasonable choice for reference pricing.

“Employers use reference pricing for four different reasons. They are:

“One is to generate savings and reference pricing is the only benefit design that pretty much guarantees savings to employees by defining the maximum that an employer or other purchaser will pay.

“Two is to educate members about the importance of shopping for services. With reference pricing, individuals are compelled to pay attention to dramatic price variation in order to avoid overpaying.

“Three is that employers want to pull their employees away from paying for the most expensive providers because the most expensive providers are the real outliers.

“Four is to disrupt the market by sending a signal to providers that, by using reference pricing, these employers will not pay more than is necessary,” concluded Willson.


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