A reference price (RP) is the price that a purchaser announces that it is willing to pay for a good or service. It is used by high-volume purchasers to inform suppliers.
RP requires consumers to have access to price and quality information, which is not general practice in many industries. Further, it does not help consumers with urgent needs, cognitive and/or other impairments.
Reference pricing requires sufficient competition. Otherwise, consumers have no choice about providers, who in turn face less pricing pressure. Reference pricing could encourage lower quality.
"Reference price" in this context is distinct from its use in behavioral pricing scholarship. In that literature, a "reference price" refers to a mental standard of comparison or a posted statement of "normal" prices used to judge whether an offered price is good deal -- as in "Was $100, now $70." Reference prices in this context are related to work by Nobel Prize winner
Richard Thaler
Richard H. Thaler (; born September 12, 1945) is an American economist and the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business. In 2015, Thaler was pr ...
on "transaction utility" in his theory of
mental accounting
Mental accounting (or psychological accounting) attempts to describe the process whereby people code, categorize and evaluate economic outcomes. The concept was first named by Richard Thaler. Mental accounting deals with the budgeting and categor ...
.
Applications
Health care
Some insurers use reference pricing to reduce their provider costs. The insurer announces prices that it is willing to pay for specific surgical procedures, pharmaceuticals and other services. If the provider charges a higher price, the patient is responsible for the balance. One study estimated that about 40 percent of health care spending is for services for which patients could shop.
Appropriate services include hip and knee replacement, colonoscopy,
magnetic resonance imaging
Magnetic resonance imaging (MRI) is a medical imaging technique used in radiology to form pictures of the anatomy and the physiological processes of the body. MRI scanners use strong magnetic fields, magnetic field gradients, and radio wave ...
(MRI) of the spine,
computerized tomography (CT) scan of the head or brain,
nuclear stress test of the heart, and
echocardiogram
An echocardiography, echocardiogram, cardiac echo or simply an echo, is an ultrasound of the heart.
It is a type of medical imaging of the heart, using standard ultrasound or Doppler ultrasound.
Echocardiography has become routinely used in th ...
because they have relatively uniform protocols and are less likely to experience variation in quality.
In health care, a more common alternative is to limit patients to a specific network of providers who have accepted the pricing and other terms specified by the insurer. RP provides consumers a broader choice of providers. Further, some large employers contract with regional "centers of excellence," such as
Cleveland Clinic
Cleveland Clinic is a nonprofit American academic medical center based in Cleveland, Ohio. Owned and operated by the Cleveland Clinic Foundation, an Ohio nonprofit corporation established in 1921, it runs a 170-acre (69 ha) campus in Cleveland, ...
.
Several countries are using RP, such as
external reference pricing
External reference pricing (ERP), also known as international reference pricing, is the practice of regulating the price of a medication in one country, by comparing with the price in a "basket" of other reference countries. It contrasts with ''i ...
, to compare the national drug prices against other countries' or other formulations of a similar therapeutic class.
On May 2, 2014, the Obama administration published its approval for large/self-insured firms to use RP for health care services and to use the price of generic drugs as the RP for other drugs, which would encourage patients to favor generics over non-generics. Costs that exceed the RP are not counted for ACA's out-of-pocket limits.
CalPERS
In 2011
California Public Employees' Retirement System
The California Public Employees' Retirement System (CalPERS) is an agency in the California executive branch that "manages pension and health benefits for more than 1.5 million California public employees, retirees, and their families".CalPERSFac ...
(CalPERS) adopted reference pricing for 450,000 members. The approach was used for
knee
In humans and other primates, the knee joins the thigh with the leg and consists of two joints: one between the femur and tibia (tibiofemoral joint), and one between the femur and patella (patellofemoral joint). It is the largest joint in the hu ...
and
hip replacement surgery
Hip replacement is a surgical procedure in which the hip joint is replaced by a prosthetic implant, that is, a hip prosthesis. Hip replacement surgery can be performed as a total replacement or a hemi (half) replacement. Such joint replacement o ...
,
arthroscopy
Arthroscopy (also called arthroscopic or keyhole surgery) is a minimally invasive surgical procedure on a joint in which an examination and sometimes treatment of damage is performed using an arthroscope, an endoscope that is inserted into the jo ...
,
colonoscopies
Colonoscopy () or coloscopy () is the endoscopic examination of the large bowel and the distal part of the small bowel with a CCD camera or a fiber optic camera on a flexible tube passed through the anus. It can provide a visual diagnosis (''e.g ...
,
cataract removal surgery and other elective procedures. For example, the RP for a knee or hip replacement surgery was $30,000. As before, the patient was responsible for 20 percent of the first $15,000, paying a maximum of $3,000. The insurer covered the next $15,000. However, if the procedure cost $40,000, the patient was responsible for the final $10,000. Initially 41 of the hundreds of hospitals provided knee and hip replacement procedures at or below the RP with acceptable quality. Some hospitals charged more than $100,000. Multiple studies found that patients sought out the lower cost facilities. Prices for knee and hip replacements and cataract surgery fell by an average 20%. Other procedures fell by similar percentages. Many higher price facilities lowered their prices. Quality was apparently unaffected. By contrast, prices paid by employer-sponsored plans rose by about 5.5 percent.
CalPERS reduced cost-sharing for patients who chose a (lower cost) outpatient surgical center, instead of a (higher cost) hospital.
Energy
The Canadian province of
Alberta
Alberta ( ) is one of the thirteen provinces and territories of Canada. It is part of Western Canada and is one of the three prairie provinces. Alberta is bordered by British Columbia to the west, Saskatchewan to the east, the Northwest Ter ...
operates an RP scheme for
natural gas
Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbo ...
. It is a monthly, weighted average of the consumer price in Alberta and a price at the Alberta border, with transporting and marketing adjustments. The system became effective in 1994.
References
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Pricing
Health care reform