Why Lab Prices Declined 32% During 3-Year Study

Employer’s use of reference pricing got patients to choose lower-priced labs over high-priced labs

CEO SUMMARY: Researchers studied the effect reference pricing had on an employer’s efforts to steer consumers to low-cost clinical labs. The study showed that patients were particularly sensitive to lab test prices—in part because those prices varied widely. Over the course of the study, a grocery chain saved $2.7 million when 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.

IN MARCH 2011, THE GROCERY STORE chain Safeway, Inc., implemented reference pricing for clinical laboratory 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 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 sidebar below.)

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.

Seeking Low-Cost 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.

Using this strategy, Safeway, its employees, and their family members saved $2.57 million in three years. Consumers got $1.05 million (41%) of those savings and the grocery chain got $1.70 million (59%). Assuming that the savings to Safeway and its workers would be similar if all laboratory tests were included in the study, the researchers estimated that the total savings from reference pricing would be $4.08 million.

The cumulative savings of $2.57 million was distributed about equally each year from $874,496 in 2011 to $842,755 in 2012 to $855,624 in 2013. The total savings represented a 35% reduction in spending on clinical lab tests compared with what would have been spent without reference pricing, the researchers wrote.

Study Shows Patients Quickly Favored Lower Test Prices

Percentage of Patients Using Higher-Priced Clinical Laboratories

ONE OUTCOME FROM SAFEWAY’S USE 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.

Because of price transparency and the incentives of reference pricing, Safeway employees saved $320,768 in 2011, $361,063 in 2012, and $364,197 in 2013 for a three-year total of $1.05 million. For patients, these amounts represented an average per-year savings of 40.6% over the three years and ranged from 36.7% in 2011 to 42.6%. For a family accustomed to clipping coupons from grocery-store flyers each week, the effect of a 40.6% savings on any household cost would be substantial.

One strength of this research is the size of the study. Safeway had an average of more than 15,000 patients participate each year and the number of annual tests ranged from 92,606 in 2010 to 79,532 in 2013. For comparison, the researchers collected data from health insurer Anthem Inc. Even though Anthem did not use reference pricing to control costs, the percentage of Anthem members using higher-priced labs still dropped.

Control Data From Anthem

In 2010, 83.6% of Anthem members used higher-priced labs. By 2013, only 73.4% used higher-priced labs. In the same time, Anthem reported that the mean per-test price actually rose from $28.88 in 2010 to $29.72 in 2013. The average number of members getting lab tests also rose from 68,082 in 2010 to 84,379 in 2013 and the number of tests rose as well from 387,638 to 476,573, Robinson and colleagues wrote.

The researchers collected lab test claims data for laboratory tests done on nonunionized employees from January 2010 (the baseline year) through December 2013.

The 285 types of laboratory tests accounted for 63% of Safeway’s total laboratory test claims. Safeway spends 5.12% of its total medical care budget on laboratory tests, and the tests included in the reference pricing project accounted for 3.04% of the company’s total medical spending, the researchers explained.

Extensive Data on Price

For the study, researchers collected data from Safeway on which laboratory each patient chose and on the type, volume, and price of the 285 most-commonly ordered in vitro diagnostic assays. The data included the CPT code for each test or panel; the date of the test; the price; and the patient’s age, sex, and home zip code.

“The price data included the total negotiated and paid amount (allowed charge) and, separately, the amount paid by the employer and the amount paid by the patient,” the researchers wrote.

Safeway gave its employees a software tool they could use on a mobile phone or computer to see what each in-network laboratory charged for the 285 covered tests. Employees using the tool could choose any lab and pay the difference between the limit Safeway set and the actual price. If they chose a low-cost lab, they saved money. “Patients selecting a laboratory that charged more than the payment limit were required to pay the full difference themselves,” the researchers wrote.

A self-insured employer, Safeway and its workers paid in-network rates for these tests that Safeway’s health insurer negotiated on Safeway’s behalf. The 285 tests Safeway chose for reference pricing were well-established assays for nonurgent care. Choosing tests for nonurgent care is important because doing so meant the employees could shop for the best price.

Some Lab Tests Excluded

For this reason, Safeway excluded tests done in the emergency department or in inpatient, urgent care, or other settings in which consumers could not compare prices among different labs. Safeway also excluded genetic tests and those prescribed for treatment of serious conditions such as cancer, renal failure, infertility, and severe mental illness.

It is significant that the researchers compared the Safeway data over the same years (2010 to 2013) to data from a control group (at Anthem) to account for changes over time in the laboratory market that were unrelated to reference pricing, they wrote. Also significant is the amount of data collected. From 2010 through 2013, researchers analyzed a total of 2.13 million claims for the 285 tests, including 344,413 laboratory tests for Safeway employees and 1,781,640 tests for Anthem members.

Data on Patients’ Lab Test Utilization Indicates Day of Reckoning Coming for High-Priced Labs

REPRODUCED BELOW are two tables from the study about the use of reference pricing for lab tests by a large national employer. Lab executives and pathologists should understand that the economic goal of this program was to encourage employees to select labs that offered tests at prices that were at or below the maximum amount the employer would pay for each test, set at the 60th percentile of the distribution of negotiated prices with in-network labs in each region.

The variability in the level of prices charged by different in-network laboratories created the opportunity for the employer and employees to save money when employees selected low-priced labs. Over the three years of the study, the average price per test Safeway and its employees paid dropped from $27.72 to $18.56, a decline of 32%. Researchers reported that the savings totalled $2.57 million over the three-year study period. Of this total, patients saved $1.07 million (41%)

Screen Shot 2016-09-09 at 10.19.36 AM

.Table B: Distribution of Prices Paid by Safeway Across Laboratories in 2010 for the 10 Most Commonly Used Diagnostic Tests

Source for both tables: Robinson JC, Whaley C, Brown TT. Association of Reference Pricing for Diagnostic Laboratory Testing With Changes in Patient Choices, Prices, and Total Spending for Diagnostic Tests. JAMA Intern Med. Published online July 25, 2016. doi:10.1001/jamainternmed.2016.2492.

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