Most otolaryngologists likely have heard about reference pricing, the relatively nascent concept that a payer—be it a person, a plan, or a pension fund—contributes a set amount toward specific procedures. The most public example of the model is the California Public
Employees’ Retirement System (CalPERS), which in 2011 began using the concept to determine what a hospital would be paid for a variety of elective procedures, including high-cost services such as knee and hip replacements, colonoscopies, cataract surgery, and arthroscopic surgery.
Research has since shown that the model appeared to increase the use of ambulatory surgery centers, while employer and employee payments per procedure fell nearly 20%.
“In each of these very different areas [of procedures], there have been very significant savings for insurers,” said Timothy Brown, PhD, an associate adjunct professor of health economics in the School of Public Health at the University of California, Berkeley who has a research focus on reference pricing. “While we are still in the beginnings of the application of reference pricing to healthcare in California, it is a resounding success to date.”
So what does this mean for otolaryngologists, who don’t perform high-cost, high-frequency procedures such as hip and knee replacements? Right now, those who watch the specialty say it’s diligent observance and preparation for a future that could include the model.
“If this phenomenon picks up and major payers decide to include common otolaryngology procedures … [otolaryngologists] may need to adjust their costs accordingly, however they would accomplish that,” said Gordon Sun, MD, MS, chief medical quality officer and chief of otolaryngology at Rancho Los Amigos National Rehabilitation Center in Downey, Calif.
How Payment Works
To understand the program, Dr. Sun said to think about a tonsillectomy. Say that a payer—e.g., CalPERS or your state’s largest private insurer—has capped the price that it is willing to pay for the procedure at $2,000. “Beyond that threshold, the enrollee, if you will—the beneficiary—will have to pay the difference on top of a copay that the payer may implement,” he said. “The payer says, ‘We’ve got 50 otolaryngologists whom we’re contracted with. So, if you find a surgeon who will do the procedure for you for $1,500, great. Then, it’s covered by our program.” Other than perhaps a small copay, the insured won’t pay anything extra. If the insured finds a surgeon who is going to charge $3,000, then the insured will have to pay the copay plus the $1,000 difference, he added.
The numbers may not seem striking in otolaryngology, but in 2011, when CalPERS set its maximum payout for a knee or hip replacement at $30,000, the amounts quickly added up. Patients “flocked to lower-priced hospitals and outpatient surgical centers,” wrote health economist Austin Frakt, PhD, in the New York Times (August 8, 2016.) Prices and total spending for the procedures plummeted.
Through the program, CalPERS saved $2.8 million, or approximately $7,000 per patient, on hip and knee replacements in 2011 over 2010 rates, according to the Center for Studying Health System Change, a Washington, D.C., think tank founded by the Robert Wood Johnson Foundation (Health Affairs. 2013;32:1392-1397). Patient cost sharing decreased by roughly $300,000, or $700 per patient.
If this phenomenon picks up and major payers decide to include common otolaryngology procedures, otolaryngologists may need to adjust their costs accordingly. —Gordon Sun, MD, MS
Will Otolaryngology Be Impacted?
James Denneny III, MD, executive vice president and chief executive officer for the American Academy of Otolaryngology–Head and Neck Surgery, said his organization has been tracking reference pricing closely for years. While no otolaryngology procedures are currently included in the CalPERS program, Dr. Denneny said he must prepare should other states or private insurers eventually decide to include such procedures as tonsillectomies or tympanostomy tube insertion in their reference pricing programs.
He thinks that the yield in otolaryngology is so low, percentage-wise, and the cost to institute this pricing model by the payers so great, that otolaryngology won’t see much of it. “My suspicion is that the people who are most interested in doing it are the private insurers, and the overall bill for otolaryngology services is still low enough where I don’t think we’re looking at it in the next three to five years,” he said. “There may be trial models by certain larger hospital systems, but it’s an issue that, from a federal dollar point of view, is not a big spend.”
Still, Dr. Denneny noted that, in an era of value-based care, alternative payment models, and an overall move away from fee-for-service spending, otolaryngologists need to determine the best care to provide their patients and then determine the appropriate costs for that care.
Dr. Brown added, “Otolaryngologists can determine procedures that are likely targets for reference pricing by simply ranking ENT procedures that meet the reference-pricing criteria by national aggregate reimbursement.”
Dr. Sun said that good candidates for this pricing model would be high-volume, elective procedures for which there might be a wide variation in cost but not necessarily a big difference in quality. For example, tonsillectomies and tympanostomy tubes might be good candidates, he added. These are single procedures for which follow-up may not necessarily be as complex.
Dr. Denneny said that the AAO–HNS has already taken the first steps toward determining the best care by measuring the care currently provided. In October, the AAO-HNS Foundation launched Regent, a clinical data registry the organization believes will serve as a foundation for quality reporting, measures development, quality improvement, and clinical and product research in the field of otolaryngology (see “Practical Knowledge” in the November 2016 issue of ENTtoday).
“Pricing isn’t going to make patients better,” said Dr. Denneny. “It’s the access to the data on what works that will make [them] better. Pricing is just part of the system that has to be. You can’t spend unlimited money that you don’t have, [but] the actual desire to make things better for patients and the data to do it are what’s going to change the quality.”
Richard Quinn is a freelance medical writer based in New Jersey.
Reference-Based Pricing in a nutshell
What Is Reference-Based Benefit Design?
Reference pricing is the application of a defined contribution to choice among medical facilities. More commonly thought of as consumer choice among health insurance plans, the concept is designed to encourage consumers to choose lower-cost options for care.
How Does It Work?
A payer sets a threshold for what it will pay for a particular procedure. The patient then chooses a provider, and if the cost of the procedure comes in at or below the set price, no out-of-pocket costs are incurred other than copays. If the cost exceeds the set price, the patient is responsible for paying the difference.
How Well Does it Work?
The largest reference pricing model studied to date is the one managed by CalPERS, which has resulted in 20% reductions in costs for some procedures and produced millions of dollars in savings.
Can This Payment Model Be Applied to All Procedures?
Technically, yes. But the highest value is gained by targeting procedures that tend to have wide variances in pricing.
Why Is the CalPERS Model Working?
For patients, choosing hospitals within the CalPERS plan limits out-of-pocket costs. Additionally, many hospitals that have charged more than what CalPERS is paying have renegotiated their pricing to meet the pension system’s payment so that they don’t lose patients.
What Are Its Limitations?
Some concerns about this model have been that it does not include quality improvement. Also, the model has no way to reward efficient care or address unnecessary utilization.—RQ
Source: Center for Studying Health System Change