The Power of Reference Pricing

by Reihan Salam

Elizabeth Rosenthal of the New York Times points to the potential benefits of medical tourism and fixed pricing:

The California Public Employees’ Retirement System set a so-called reference price of $30,000 for joint replacement surgery for those it covers. If patients choose a hospital that charges more, they must pay the difference.

A study by James C. Robinson [and Timothy T. Brown], a health economist at the University of California, Berkeley, that was published on Monday in the journal Health Affairs found that the program was a two-pronged success: a majority of patients chose hospitals that met the price. More important, many hospitals reduced their price so patients would be more likely to choose them.

In two years, the program saved California $6 million and saved patients $600,000 in costs and co-pays, Dr. Robinson said.

Robinson and Brown’s paper reminds me of Lorens Helmchen’s “Cash for Care” concept, which I discussed in a column for The Daily back in 2011. Peter Suderman wrote an excellent summary of the proposal. Helmchen, a health economist at George Mason University, suggests giving patients a cash payment for choosing a lower-cost over a higher-cost therapy. While there are many kinks to be worked out, the basic idea is deeply attractive. It increases cost-consciousness, thus encouraging medical providers to lower their costs rather than pad them. It also has the potential to increase non-medical consumption for the elderly. Helmchen is keenly aware of the potential dangers of his proposal, including the danger that it will be interpreted as a bribe to patients to choose less-than-adequate care. That is absolutely not his intention. He is calling for a modest pilot program that would be used in relatively few instances. One hopes that as insurers embrace reference pricing, they consider not just requiring beneficiaries to pay the difference if they choose providers that charge more for the reference price, but that they also offer cash to beneficiaries who choose providers that charge less.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.