Using the Reference Pricing Strategy, Safeway and its Employees Reduce Spending on Clinical Laboratory Tests by 32% in Only 24 Months by Selecting Lab with Lowest Prices
Researchers at the University of California Berkeley tracked how the incentives of Safeway’s reference pricing program caused patients to reduce their use of medical labs with the highest prices
It took just 24 months for Safeway and its employees to pay 32% less for clinical laboratory tests using a new health benefits strategy called “reference pricing.” This strategy targets the large variation in prices that different medical laboratories charge for the same tests and incentivizes employees in a consumer-friendly way to select medical laboratories with lower prices over labs with higher prices.
Dark Daily’s sister publication, The Dark Report recognized how Safeway’s use of reference pricing to reduce the overall cost of what it and its employees pay for clinical laboratory tests by about a third in just 24 months could turn out to be a sentinel event of a wider trend. This trend would put those medical labs with the highest lab test prices under significant financial pressure if other employers and health insurers were to incorporate a reference pricing arrangement in their health benefit plans.
This is why, on September 6, 2016, The Dark Report devoted an entire issue to the topic of reference pricing and its potential to trigger powerful downward pressure on the highest lab test prices charged by some labs. This is essential reading for senior lab administrators, executives, CFOs, and their financial advisors.
What brought attention to the subject of reference pricing was a study conducted by researchers at the University of California Berkeley (UC Berkeley) School of Public Health. These researchers documented how the combination of making clinical laboratory test prices transparent, and a negative financial consequence for consumers who chose labs with the highest prices, caused a measurable and significant decline in the average prices paid for lab tests by the consumers and their employer who participated in the study.
The research was published in the Journal of the American Medical Association Internal Medicine with the title, “Association of Reference Pricing for Diagnostic Laboratory Testing with Changes in Patient Choices, Prices, and Total Spending for Diagnostic Tests.” Researchers found that the use of reference pricing for clinical laboratory tests, combined with accessible price information, does reduce what employers and employees pay for the tests.
UC Berkeley calls reference pricing an increasingly popular strategy in the US. It is aimed at incentivizing patients to select low-cost providers, including hospitals, physicians, and medical laboratories. Through reference pricing, employers and insurers provide payment up to a defined contribution limit. Anything above that threshold is the patient’s responsibility to pay out-of-pocket.
Reference Pricing versus No Reference Pricing
The UC Berkeley researchers analyzed 2.13 million Anthem Blue Cross insurance claims from 30,415 Safeway employees between 2010 and 2013. The analysis was conducted before and after the national grocery retailer implemented, with Anthem, reference pricing for lab services.
A total of 285 types of clinical laboratory tests were subject to the reference pricing program. The UC Berkeley researchers used a control group of 180,000 other Anthem plan members who were not subject to reference pricing. The price data from their clinical laboratory tests were compared to the price data of the Safeway employees during a 24-month period.
The study found combined employee and employer savings of $2.57 million over three years. Patients saved $1.05 million in out-of-pocket costs, while their employer, Safeway, saved $1.70 million.
Savings were not associated with less testing. Actually, each employee had an average of five to six tests per year over the three years. It was the reference pricing, researchers stated, that led to new choices by employees in where they had lab tests performed.
“Patients are not stupid. When given information and incentives, they switch from high-priced to low-priced laboratories unless convinced that especially high prices are accompanied by especially high quality,” stated James C. Robinson, PhD, Professor of Health Economics and Director of the Berkeley Center for Health and Technology (BCHT) at the UC Berkeley School of Public Health, in a statement.
The average price per lab test, paid by Safeway, decreased from $27.72 to $18.90 a year after reference pricing, while it stayed the same over time for Anthem enrollees not incentivized by reference pricing, noted a Reuters article. The Safeway employees were given access to prices through a mobile app on their smartphones or over the Internet.
Marked Drop in Number of Tests Performed at Non Reference-Price Labs
According to an article in the American Journal of Managed Care (AJMC), prior to 2011, 50% of tests were conducted at labs charging more than Anthem’s reference price. By 2013, that was down to just 16% of tests.
“When combined with access to price information, reference pricing was associated with patient choice of lower-cost laboratories, and reductions in prices and payments by both employer and employees,” the UC Berkeley researchers noted in JAMA Internal Medicine.
Transparency Critical to Success of Reference Pricing
These programs show that patients continue to be incentivized to shop for the lowest cost quality care. Clinical lab tests, a gateway to the healthcare system, are non-emergency healthcare services well suited to reference pricing.
“While being treated for cancer, we don’t expect the patient to shop the market. But most of medicine is non-emergency,” Robinson stated in a Reuters Health article. “There’s no reason to believe the quality of tests varies across labs.”
However, transparency about reference prices is necessary to make the rewards work. And the burden for communication falls on the health plan, the AJMC article noted.
Therefore, the message to clinical labs and pathology groups is clear: Aim for greater workflow efficiencies and give patients easy access to transparent test pricing.
Through reference pricing, people may save money on healthcare. But, most important, patients may also be encouraged to access the tests in the first place, and, therefore, head off disease and illness.
—Donna Marie Pocius