Reference Pricing: In Reference To What?

Austin Frakt's Upshot column in today's New York Times offers an interesting summary of some research looking at an important Calpers experiment with what he, elsewhere, calls horizontal reference pricing.  Reference pricing — what used to be called steering — has managed to make California's Calpers enrollees more price sensitive in provider selection for certain non-emergent procedures: knee and hip replacements, colonoscopy, arthroscopy, cataracts, etc.  Prices fell relatively quickly in response to this exercise of buyer power. Essentially, Calpers will fund a capped amount for certain procedures and no more.  The excess is then the elective responsibility of the patient.  Given the incredible variability in pricing for health services, this is a bold experiment. Sure enough,  the Calpers enrollees moved away from the high out of pocket cost providers and toward those clustered at or below the reference prices. That the prices providers charged were so responsive and so non-sticky tells us that price sensitivity can be induced in consumers relatively quickly and can be induced in providers by consumers relatively quickly, provided the services required are non-emergent and price transparency is both available to and comprehensible by by those patients involved.

In fact, the most common non-emergent services studied, it would appear, overwhelmingly target consumption by older Calpers enrollees. Some young people face joint replacement but many more older retirees do.  Similarly, colonoscopies are sometimes required by the young or youthful, but real turnout hits at the age of 50 in the United States.  So, it should be noted we are likely examining — at least in these studies — the price sensitivity of older Calpers enrollees, perhaps predominantly Calpers retirees.

As anyone who has ever spent time in communities with lots of  middle class retirees knows: many  middle class retirees have lots of time. In light of this, the fact that I have heard real estate agents code super-prepped for showing residential properties as "retiree owned" should come as no surprise.  

What about the rest of us?  Other insureds may lack the time, interest, and savvy to engage in the cost-quality tradeoff. This makes reference pricing the  retired middle class alternative to narrow networks, I suppose.