Despite all of its restrictions, employers do have some wiggle room in terms of what their health plans will pay for under the Affordable Care Act, potentially shifting more costs to their workers.
That’s because the Obama Administration has approved a new approach to cost control called “reference pricing.” And if used correctly, health insurance pundits say the cost-control strategy could encourage consumers to choose less expensive treatments, and that would in turn reduce health care spending.
Reference pricing can be complex to set up, so many businesses will likely not be making wholesale changes to their plans immediately. But because the Obama Administration has approved it, you should know how it works and the potential for improved cost control.
Reference pricing has its roots in an experiment that the California Public Employees’ Retirement System (CalPERS) ran when it capped what it would pay for hip or knee replacements at $30,000.
It set that price after finding that hospital prices for the same surgery could vary from about $15,000 to more than $100,000, with no discernible difference in quality. Workers that chose to go to hospitals that charged more than $30,000 had to pay the difference.
CalPERS saved an estimated $5.5 million in 2011 and 2012 from the program, with more than 85% of the savings coming from hospitals lowering their prices to meet the cap.
Under the new rules announced by Department of Health and Human Services, insurers or employers can set a cap – the reference price – on the amount they will pay for that service. The idea is that enrollees will shop around and pick a provider that charges the reference price or less.
The HHS essentially gave its blessing to large or self-insured employers to use reference pricing in designing health plan benefits. It also said that employers offering drug coverage can use generic drugs to set reference prices.
If a worker chooses a brand-name drug instead, the worker would pay the difference. One caveat: the generic version of the drug must be medically appropriate, as determined by the individual’s doctor.
This could turn out to be a significant cost-saving tool as long as it is implemented fairly and that it’s reasonable that the an employee can find a procedure for no more than the reference price.
According to a study conducted by Mercer, about 10% of large employers already use reference pricing and another 22% are considering it.
The ACA’s annual cap on health plan enrollee costs does not apply in this case.
The health law caps what consumers can be required to pay annually toward in-network care through deductibles or other cost sharing to $6,350 for an individual, or $12,700 for a family.
However, according to the new guidance from the HHS, costs incurred by workers who choose providers that charge more than the reference price will not count toward that limit. In other words, enrollees who spend more on a procedure than the reference price would be considered as going out of network for their care.
Health insurance experts say that say reference pricing can save money for employers when applied to high-cost services where there are big pricing variations, and when enrollees are given time to shop around.
However, it would not work for other services, like emergency care, or other situations where consumers have no time or ability to compare prices. Because the approach relies on market pressure, it also would not work well in areas with only a few medical providers, or where price and quality information is not made available, either by the providers or the employers using reference pricing.
The HHS has asked for comments on reference pricing from the medical and insurance industries, as well as from employers. You can expect more fine-tuned regulations on this issue later, but for now it could be an option in further reducing costs for both employers and their covered employees.