Parents of teenagers have used the technique for generations. When the growing teenager needs a new pair of jeans, parents have been kicking in the price at K-mart, Walmart or Target. If she wants a high-end brand name fashion, the teenager pays the difference with her own money.
Sometimes they decide not to spend so much when they’re spending out of their own pocket – and the overall teen clothing budget is less than what it might otherwise have been. In theory, anyway.
That’s the logic behind “response pricing,” a pricing concept making its way through the medical insurance industry that analysts hope will help rein in escalating health care costs.
Under response pricing, the insurance company or plan will pay a baseline cost for any given medical procedure – naturally designed to cover about what it would cost in a medical facility at the lower-priced end of the spectrum. If the insured individual wants to go to a more prestigious and pricier hospital, or use a more sought-after specialist, then the insured pays the difference out of pocket, or via some form of cost sharing mechanism.
According to research from the Employee Benefit Research Institute, early experiences from CalPERS, the California state personnel benefits fund, indicate substantial savings for employers under this concept. CalPERS set their reference price for knee and hip replacements to $30,000, which was actually higher than two-thirds of hospitals were providing the procedure for. EBRI’s analysis calculated that the measure resulted in average savings of $10,367 per procedure. In addition, CT scans, colonoscopies, echocardiograms and MRIs provided under response pricing all resulted in savings to CalPERS.
In theory, the approach would make consumers more likely to be sensitive to the cost of tests and procedures, on the theory that they will be more careful with their own money than with other peoples’ money.
EBRI also calculated that if broadly implemented, aggregate savings could be as high as $9.4 billion, or 1.6 percent of all spending on health care among the 156 individuals with employment based health benefits under 65 (as of 2010).
Will it work?
The jury is still out. While early small-scale studies show some signs of short-term savings, the system relies heavily on accurately setting rational pricing in a varied and segmented health care market.
If reference prices are set too low, planners may well find that higher-cost providers are unwilling to budge on prices without a compensating stream of referrals, and their own covered individuals are still priced out of the markets. Hospitals who are dominating certain communities may also stick to their guns on pricing, and individuals covered under response pricing plans again may find care unaffordable, given their income levels, and therefore may still be priced out of access to health care.
On the other hand, if reference prices are set too high, then care providers are likely to simply raise their prices to match the employer subsidy – resulting in the opposite effect than the one intended: Higher health care prices across the board.
Actually coming up with a rational and responsive baseline response price for thousands of medical procedures is going to prove challenging. A national price, for example, will be easy to communicate, but would be a clumsy instrument indeed given wide regional price variance. On the other hand, trying to determine local prices would result in statistical challenges and a very complex effort to communicate benefits to covered individuals.