CEO SUMMARY: There is always a story behind the story, and THE DARK REPORT went to the lead researcher of the reference pricing study published in JAMA Internal Medicine to get it. In this interview, James C. Robinson, PhD, of the University of California, Berkeley, discusses how the findings of his team’s study may encourage more large employers and health insurers to put reference pricing in their health benefit plans to motivate patients to select clinical laboratories that offer lower prices over higher-priced labs.
REFERENCE PRICING as an effective and fast-acting strategy to lower healthcare costs is catching the attention of many large employers and health insurers. That was one reason why researchers at the University of California, Berkeley conducted a multi-year study of how reference pricing changed the way patients selected their clinical laboratory providers.
In July, JAMA Internal Medicine published the findings of a three-year study that documented how Safeway and the employees involved in the study collectively saw a 32% reduction in the average price paid for 285 different types of clinical laboratory tests.
Titled, “Association of Reference Pricing for Diagnostic Laboratory Testing With Changes in Patient Choices, Prices, and Total Spending for Diagnostic Tests” (http://tinyurl.com/hsql8dq), the study also determined that, during this same three-year period, the number of consumers using higher-priced labs dropped from 45.6% to just 15.6%!
These outcomes are an early warning to clinical lab administrators and pathologists. The study’s findings suggest that wider use of reference pricing by employers and health insurers could trigger a sustained decline in lab test prices.
The study was led by James C. Robinson, PhD. He is the Leonard D. Schaeffer Professor of Health Economics and Director of the Berkeley Center for Health Technology at the University of California, Berkeley. Robinson and his 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.
Because of the impact that this health insurance benefit design, known as reference pricing, will have on how clinical labs set prices for their tests, THE DARK REPORT interviewed Robinson to get additional insights about his findings and their significance for employers, consumers, health insurers, and clinical laboratories.
“This research and other studies show that consumerism is coming to every part of healthcare,” Robinson told THE DARK REPORT. “For years, labs and lab test prices have been under the radar for many insurers and employers. But consumerism is coming for clinical labs, for a good reason— the variability in the prices different labs charge for the same test.
“What we found in this research is a tenfold variation in the prices charged by different laboratories for what are very bread-and-butter, non-exotic tests,” he said.
“These tests are not on the edge of science in any way. High prices for these types of tests can continue only as long as the payer is asleep at the wheel.”
And payers have been asleep because they have not looked at what clinical labs charge,” he continued. “In recent years, employers and payers put most of their effort toward controlling the costs of hospitals and major surgeries. But even after all those efforts, employers and health insurers face continuing cost pressures.
“That is why employers and insurers now look everywhere to reduce costs,” he said. “As they do, they see unbelievable variation in clinical lab test prices, just as they have seen from other types of healthcare providers.”
In the study, the consumers were employees and family members of the national grocery chain Safeway, which operates more than 1,300 stores in Alaska, California, Hawaii, Nevada, Oregon, and Texas. Safeway introduced reference pricing for 285 clinical laboratory tests that are ordered most frequently.
Over the three years of the research (2011 through 2013), consumers chose low-cost tests so often that Safeway’s spending on those tests dropped by 32%! The researchers also had data from 2010, the baseline year.
So, why was reference pricing so successful in driving down lab test prices forSafeway and its employees? Robinson explained that reference pricing is like the per diem that an employer would pay to its workers who travel. When a worker travels for company business, the employee is usually reimbursed by the employer up to a defined amount per day. The employee can choose any restaurant and hotel, but must pay the difference if spending more than the employer’s defined amount.
By the Numbers: Key Findings On Changes to Lab Test Prices
OVER THE THREE-YEAR COURSE OF THE STUDY of how reference pricing influenced the selection of clinical laboratory providers by patients, researchers had a control group of Anthem patients that was five times larger than the 15,000 patients in the Safeway reference pricing program. Here are the key data points, as published in JAMA Internal Medicine:
STUDY GROUP: SAFEWAY
- Savings from 2011-2013: $2.57 million
- Consumers saved: $1.05 million (41%)
- Safeway saved: $1.70 million (59%)
- Percentage of patients using high-priced labs dropped from 45.6% in 2010 to 15.6% in 2013
- Mean price-per-test dropped from $27.72 in 2010 to $18.56 in 2013
- 15,000 Safeway patients in the study, ordering between 80,000 and 90,000 tests per year
CONTROL GROUP: ANTHEM
- Percentage of patients using highpriced labs dropped slightly, from 83.6% in 2010 to 73.4% in 2013
- Mean price-per-test increased from $28.88 in 2010 to $29.72 in 2013
- Up to 84,000 members in the study each year ordered between 387,000 and 476,000 tests each year
It is important to note that all lab test prices used in the study were from in-network clinical laboratories. Thus, out-of-network labs were not a factor. Also, the prices of in-network labs showed a variability of as much as 22 times from lowest price to highest price for the same test.
All the Anthem patients in the control group were in standard health plans (without the reference pricing strategy).
“When I travel for work, my employer pays a certain amount toward the hotel and meals each day,” he commented. “I can spend more if I want to, but they won’t pay more. Frankly, that makes me think about how much I’m spending. Do I need to stay at the Four Seasons Hotel? Not really. That succinctly describes reference pricing.”
Using reference pricing, Safeway paid a set amount per test. Its employees had a mobile app that told them what every laboratory in Safeway’s network charged for each of the 285 tests. They could choose any lab and pay the difference between the limit Safeway set and the actual price of the lab test.
If they chose a low-cost lab, they saved money. But if they chose a high-cost lab, they were required to pay the difference. The research showed that reference pricing helped to reduce variation in lab test prices.
Waking Up to Price Issues
“Any discussion about how to contain inappropriate healthcare utilization is challenging,” observed Robinson. “By contrast, significant price variation is the low-hanging fruit. Employers would much rather save money by having patients travel to cheaper clinical labs than get into some esoteric discussion about whether a clinical procedure is appropriate or not.
“That is why tackling lab test prices is easy,” he said. “Take the example of whether a consumer should go to Walmart to save $5 instead of Walgreens. Then, if Walgreens reduces its prices by $5, what could happen? Who makes that decision? Reference pricing allows patients to decide, even if it means they are choosing to pay a higher price for their lab test.
“Because that price awareness is coming to lab testing, high-priced labs must either reduce their prices to something closer to the market or they need to document that their quality and service are better enough to justify the higher price,” he said.
Erosion of Volume
“To go back to the per diem analogy, the Four Seasons does attract customers even after charging what they charge,” he said. “If they didn’t get customers, they would have to endure some erosion of volume.
“As more employers and health plans decide to introduce reference pricing, every clinical lab will need to make a decision on how to price every different test they run,” noted Robinson. “Is a lab going to set their test prices at the market level? If it choses higher prices, is it willing to absorb some erosion of volume?
“The fact that the reference pricing model Safeway used in the study drove down costs sharply is perhaps the most important lesson for clinical labs,” he stated. “There are other lessons as well. One of those secondary lessons is about the utility of cost-sharing for lab tests.
“One goal of our study was to determine how a reference pricing benefit requirement affected the way consumers chose their source of clinical lab tests,” continued Robinson. “Our study also was a test of cost-sharing in general. There are other healthcare services for which we can make the plausible case that cost-sharing is something that can save money without putting the patient’s health at risk.
“To clarify that point, I don’t believe that consumers should share the cost for every type of healthcare service,” he noted. “It’s inappropriate and unethical to require cancer patients to pay 20% for co-insurance on a $100,000 drug, for example.
Labs Probably Didn’t Notice Patient’s Shift to Cheaper Tests
DID CLINICAL LABORATORIES NOTICE that Safeway employees were shifting their use of clinical laboratory tests away from high-priced labs to low-priced labs during the three years of the study?
“No, and we wouldn’t expect that because Safeway is a big company but its employees are going to be a relatively small share of any local market,” stated James C. Robinson, PhD, lead researcher of the reference pricing study. “The typical clinical lab would not be aware that some lower-priced labs are gaining business and some higher-priced labs are losing business. Labs wouldn’t notice because this redirection of a patient’s lab tests is within the general random fluctuations of their volume.
“I believe that, in communities where a single employer has thousands of employees, then the impact of reference pricing would be visible to labs in that region,” he noted. “Our study provided data that can be interpreted as demonstrating that patients do respond when they can see lab test prices. For a specific test, they will select a low-price lab over a high-cost lab.”
“On the other hand, reference pricing works for those types of healthcare treatments that we call shoppable services, such as lab tests,” said Robinson. “Shoppable services typically involve non-emergency clinical care. That is certainly true of the 285 clinical lab tests we used in the study because they are not complex and, for the most part, we’re not talking about an emotional service (such as cancer care). The consumer is simply choosing between going to facility A or to facility B.
“Also, the quality of shoppable services tends to be approximately the same,” he commented. “I don’t know if there’s wide variation in the quality of lab tests across facilities. If there is, that’s a whole different topic that should be studied. But for now, we can assume that the quality and service are roughly similar.
“In our study, all of the labs were accredited, in-network providers,” continued Robinson. “Therefore, in all of these ways, clinical lab tests are in a completely different category from high-cost cancer care, for example. Stated differently, it is appropriate to use the reference pricing model to require patient cost-sharing with lab tests.
“When employers see that cost-sharing is appropriate for clinical lab tests at a time when they don’t want to keep paying costs for their health benefit plans, it becomes an easy decision to ask their employees to accept higher cost-sharing in exchange for moderation of the premium,” he added. “Then the employees can do what they need to do to shop for the lowest-priced clinical laboratory tests.
“Once an employer gets the consumer involved in cost-sharing, then the consumer will want help on how to save money,” said Robinson. “That’s why Safeway gave their workers the information they needed to find the low-priced tests and avoid the high-priced tests. Safeway provided that information via a mobile app and a web service. In addition, Safeway also said, ‘You can go to any network lab you want.’
Incentive to save money
“Safeway could do that because it knew that, by giving employees an incentive to save money and by giving them easy-to-understand information about where to get low-priced lab tests, then the employees would save money. And they did exactly that,” Robinson said.
Considering all the strategies that employers have for controlling health costs, reference pricing for lab tests stands out as being effective and without any of the negative consequences of other costcontrol efforts, such as high deductibles and narrow networks, he explained.
“Right now, employers have three main strategies they’re pursuing,” he said “Number one is increasing the deductible through high-deductible health plans. Number two is using narrow provider networks. Number three is contracting with accountable care organizations. Each strategy has strengths and weaknesses.
“The problem with a high-deductible health plan is that it does not help the consumer differentiate between effective or high-value services and ineffective or low-value services (such as those recommended in the Choosing Wisely program),” emphasized Robinson. “Studies show that people with high-deductible health plans use less of the inappropriate care; but they use less appropriate care as well. Thus, among the many concerns about high-deductible health plans is not only the affect they have on price, but that they may also have a negative effect on a patient’s utilization.
Plan with Narrow Networks
“There is a similar drawback to the strategy of narrow networks,” he observed. “Although a plan with narrow networks somewhat resembles reference pricing, it is a much harsher version that says if the patient goes to the high-priced clinical lab, the plan pays nothing and the patient pays 100% of the charge.
“In the third strategy, the employer enrolls its workers in an accountable care organization. The employer then gives the organization a budget and the providers determine which clinical lab they will refer these patients,” he said.
“Given the considerations of the three strategies of high-deductible health plans, narrow networks, and ACOs, the strategy of reference pricing offers employers and health plans a simpler solution to managing costs,” noted Robinson. “The reference pricing strategy targets only price. There is no incentive not to get the lab test; there’s just an incentive to get the laboratory test at the cheaper price. That’s all it is.”
Much Attention Given to CalPERS’ Success With Reference Pricing for Certain Surgeries
WHEN A LARGE EMPLOYER IN California used reference pricing for selected clinical services, patients responded by choosing lower-cost providers.
“In 2013, we evaluated the effect of a reference pricing initiative of the California Public Employees’ Retirement System (CalPERS) from 2008 to 2012,” said James C. Robinson, PhD, Director of the Berkeley Center for Health Technology at the University of California, Berkeley. For the hip and knee study, Robinson and Timothy T. Brown, an assistant adjunct professor in the Berkeley Division of Health Policy and Management, wrote about the initiative in an article in Health Affairs in 2013.
“Inpatient hip and knee replacement surgeries are big-ticket procedures and CalPERS is a major payer. Thus, when the reference pricing program was implemented, there was much publicity about the program and significant shifts in patients’ choices away from higher-priced facilities and toward lowerpriced facilities,” Robinson explained.
“About half of the hospitals that were charging above the CalPERS reference price reduced their prices,” he said. “In this example, hospitals could see patients making decisions that included price and because orthopedic surgery is a big revenue generator for hospitals, they lowered prices to retain those patients.”
Robinson compared the big-ticket approach of the CalPERS program to Safeway’s strategy of targeting lab test costs. ”The difference was that CalPERS went after big-ticket invasive procedures where they had the opportunity of saving meaningful amounts of money on every case, and the Safeway program was for lower-cost services,” Robinson commented.
“But the hip and knee cases represent a small proportion of healthcare services,” he explained. “How often does a patient undergo joint replacement surgery, for example?
“Safeway took a broader view of the opportunity with reference pricing,” stated Robinson. “They wanted to help change the culture of their workforce into one in which the employees were thinking about healthcare utilization the way they think about other shopping behaviors. By that I mean that consumers are making an informed decision by considering price, quality, and convenience. This is different than the traditional healthcare purchasing mindset, where the patient thinks of a service as something for which someone else will pay.
“This is why Safeway deliberately started with small-ticket services, such as clinical laboratory tests and also imaging,” Robinson said. “What lab tests, imaging, and prescription drugs have in common is that everyone uses them. And these are services where there are potential savings, although the savings are modest on a per-unit basis.
“But every employee uses lab tests or drugs,” he continued. “Thus, every one of them is exposed to this concept so now they’re thinking about the cost savings. If they buy the higher-priced lab test or drug, they pay more out of pocket. Patients are thinking consciously about the purchasing decision because it’s their money at the margin.
“This is a primary element of our study with Safeway,” emphasized Robinson. “It’s a study of how consumers respond to small amounts of money involved in lab tests and drugs. This is not about the patient saving $1,000. It’s about saving just $10 or $30.
“Here is another way to think about the need to shift the mindset of patients when purchasing healthcare,” he noted. “As a grocery chain, Safeway knows their customers will drive across town to save $10 on a big bottle of shampoo but patients won’t go anywhere to save $1,000 on an MRI because the employer pays for it. This is the mindset that Safeway hoped would change in response to the reference pricing program.”
Contact James C. Robinson, PhD, at 510- 642-0564 or firstname.lastname@example.org.