HA415 Unit 2 Reference Pricing Economic Analysis Example

A Price Ceiling the Member Can See: An Economic Analysis of a Composite School District Health Plan Adopting Reference Pricing for Hip and Knee Replacement, Following Demand, Supply and the Plan's Own Spending

[Student Name]

Purdue University Global

HA415: Health Care Policy and Economics

Unit 2 Economic Analysis

[Instructor Name]

[Date]

The district, its plan, the hospitals and every price are composite and bracketed for the writer's own data; the analysis is a course model, not benefit advice.

The Plan Change

The district covers [4,800] members. Last year [41] members had a hip or knee replacement at [five] hospitals in the region. Negotiated prices ranged from [$24,000] to [$58,000] for the same procedure, with no measurable difference in complication rates in the plan's data. Under the old design, every member paid the same [$1,500] deductible and coinsurance maximum wherever they went. Under the new design, the plan pays up to the reference price of [$30,000]; above it, the member pays the difference.

Three Prices

The hospital's charge: the list price on the bill, which almost nobody pays. The negotiated rate: what the plan has agreed to pay each hospital. The member's price: what the member pays out of pocket. Under the old design the member's price was the same everywhere, so it gave no signal about the large gap in negotiated rates. That gap is what third-party payment hides. Before the change, a member choosing the [$58,000] hospital paid exactly what a member choosing the [$24,000] hospital paid, so nothing in the price told either one about the difference.

Demand

For members, the change raises the price of high-priced hospitals from [$1,500] to as much as [$29,500] while leaving low-priced hospitals at [$1,500]. Demand for the expensive hospitals should fall, and demand for hospitals at or below the reference price should rise. This is a movement along each hospital's demand curve for members, and a shift in demand toward the cheaper hospitals. Joint replacement suits this design because it is planned weeks ahead, quality is fairly uniform across the region's hospitals and members can compare. When a large public employer in California introduced reference pricing for hip and knee replacement, the share of patients choosing low-priced hospitals rose and prices at higher-priced hospitals fell (Robinson & Brown, 2013).

Supply

Hospitals above the reference price face a choice: lower their negotiated rate to keep the district's patients, or accept fewer of them. A hospital with spare surgical capacity and high fixed costs has a reason to lower its price, because each lost case loses revenue that would have covered fixed costs. A hospital that is full may not respond. Research on private insurance found that hospital prices vary widely and that prices are higher where hospitals face less competition, which suggests that hospitals with market power may resist (Cooper et al., 2019).

The Plan's Spending

If [20] of the [41] members who used high-priced hospitals move to hospitals at or below [$30,000], and the average price at the hospitals they leave was [$48,000], the plan saves about [$18,000] per moved case, or about [$360,000] a year. If one high-priced hospital also lowers its rate to [$30,000] to compete, savings rise further. Savings could be lower if members who stay at expensive hospitals cannot pay the difference and the district must handle bad debt or exceptions.

Effects on Members

Most members gain nothing and lose nothing if they choose a hospital under the ceiling. Members who strongly prefer a high-priced hospital pay more. Members in areas far from low-priced hospitals face travel costs, and the plan should allow exceptions for distance and for clinical reasons.

Evidence From a Related Design

A similar design for outpatient services, such as colonoscopy and cataract surgery, shifted patients toward lower-priced settings and reduced employer payments (Robinson et al., 2015). Outpatient procedures and joint replacement share the features that make reference pricing work: they are planned, comparable and widely available.

What Could Go Wrong

1. Members may not understand the design and be surprised by bills. The plan needs clear communication and a price list.

2. If quality differs in ways the plan's data do not show, members may be pushed toward worse care.

3. Hospitals may respond by raising prices on other services.

Who Bears the Risk

Under the old design, the plan bore nearly all the price risk. Under the new one, members bear the risk above [$30,000], but only if they choose a high-priced hospital. The plan still bears the risk of complications, readmissions and the cost of any exception. Setting the reference price too low would shift too much risk to members; setting it too high would leave the design with no effect. The [$30,000] figure sits near the price of the [third] cheapest of the five hospitals, so most members have more than one choice under the ceiling.

Recommendation

Adopt the design with a list of hospitals at or below the reference price, a clinical exception process, a distance exception and a review after one year comparing prices, volumes and complications.

Conclusion

Reference pricing makes the member's price carry information about the negotiated price. That changes demand, gives hospitals a reason to compete and should reduce the plan's spending, as long as members understand the design and exceptions protect those who cannot choose.

References

Cooper, Z., Craig, S. V., Gaynor, M., & Van Reenen, J. (2019). The price ain't right? Hospital prices and health spending on the privately insured. The Quarterly Journal of Economics, 134(1), 51-107. https://doi.org/10.1093/qje/qjy020

Robinson, J. C., & Brown, T. T. (2013). Increases in consumer cost sharing redirect patient volumes and reduce hospital prices for orthopedic surgery. Health Affairs, 32(8), 1392-1397. https://doi.org/10.1377/hlthaff.2013.0188

Robinson, J. C., Brown, T., & Whaley, C. (2015). Reference-based benefit design changes consumers' choices and employers' payments for ambulatory surgery. Health Affairs, 34(3), 415-422. https://doi.org/10.1377/hlthaff.2014.1198