While multiple studies show reference pricing is an effective approach to reduce the cost of testing and procedures, medical laboratories and consumers alike must continue to focus on quality to ensure positive outcomes

The Dark Report in its September 2016 issue highlighted how reference pricing is positioned to become one of the biggest contributors to price erosion medical laboratories and pathology groups have faced in more than a decade. The issue featured details of a 2016 study published in JAMA Internal Medicine outlining how Safeway’s use of reference pricing for clinical laboratory tests decreased laboratory spending for itself and employees by 32% between 2011 and 2013—a total savings of more than $2.5-million.

That issue of The Dark Report also highlights a similar use of reference pricing by CalPERS (California Public Retirement System) that involved hip and knee replacement surgeries. CalPERS saw a 30% reduction in the cost of these surgeries after 12 months.

These highly publicized efforts have fueled interest in how reference pricing might work for other businesses, insurers, and the US government. The 2014 Protecting Access to Medicare Act (PAMA) is already collecting private payer rates paid to laboratories for tests. This data will then be used to create new rate-based fee schedules in 2018.

Speaking with Joseph Burns, Managing Editor of The Dark Report, about the outcome and potential rise of reference pricing, study author James C. Robinson, PhD, of University of California Berkeley noted that, “Any discussion about how to contain inappropriate healthcare utilization is challenging. By contrast, significant price variation is the low-hanging fruit. Employers would much rather save money by having patients travel to cheaper clinical labs than get into some esoteric discussion about whether a clinical procedure is appropriate or not.”

Quality is Key to Both Avoiding Price Erosion and Improving Patient Outcomes

There’s no question that reference pricing has forever changed the landscape of clinical laboratory pricing. Paired with increased pricing transparency and easier access to pricing information through platforms such as Castlight Health, Healthcare Blue Book, and Change Healthcare Corporation, consumers and businesses can quickly compare prices across a range of service providers.

However, in April, Leah Binder, President and CEO of The Leapfrog Group, published an article in Forbes that highlights the potential downsides to price shopping for laboratory testing and medical care.

“Differences among providers in quality can eliminate any cost advantages,” stated Binder in the Forbes article. “Some purchasers assume they can get around this problem by targeting reference pricing only for procedures that don’t vary in quality. When quality is all the same, decisions can pivot on price alone. Unfortunately, no such procedures exist. Extreme variation is the hallmark of our healthcare system.”

As reference pricing continues to force more consumers to shoulder a portion of medical laboratory testing costs, prices for more expensive laboratories are likely to continue eroding unless they can convince consumers that their services are higher quality or produce better results. (Graphic copyright: California Public Retirement System.)

Binder cites a study in Spine Journal’s April 2017 issue regarding diagnostic error rates for magnetic resonance imaging (MRI). The study involved a 63-year-old woman seeking relief from low back pain. Over a three-week span, she received 10 different scans. These scans resulted in 49 different findings. Of these findings, none were repeated across all 10 scan reports provided to her physician.

“As a result,” the study’s authors concluded, “where a patient obtains his or her MRI examination, and which radiologist interprets the examination, may have a direct impact on radiological diagnosis, subsequent choice of treatment, and clinical outcome.”

Binder reinforced this, stating, “Purchasers should still pursue reference pricing and try to incorporate considerations of utilization and quality to the extent they have the data. Never assume any procedure is like a commodity—largely the same quality everywhere.”

High-Cost Medical Laboratories Likely to Face a Decision Between Volume or Price Erosion

A 2016 study by Health Care Cost Institute found the average pricing of 240 common medical services varied by as much as 200% between states. Within states, prices fluctuated as much as 300%.

Thus, for pathology groups and medical laboratories in the upper percentiles for their region, referencing pricing is likely to impact volume. Even if adoption of reference pricing by payers or self-insured business groups remains stable, price cuts due to PAMA loom on the horizon. As reported by Dark Daily in December 2016, price cuts to the Part B clinical laboratory fee schedule could add up to $400 million in reduced Medicare payments in 2018 alone.

This is particularly troublesome for hospital laboratory outreach programs, where Medicare patients commonly represent 40% to 70% of outreach lab volumes. The combination of reduced volume and reduced Medicare pricing could have dire financial consequences.

It will remain essential for medical laboratories to differentiate their services from those of lower-cost competitors to avoid volume and price erosion. Continuing to optimize test utilization, improving laboratory efficiency, and emphasizing the value of services rendered will help to further strengthen lab positions and reduce the impact of coming change.

—Jon Stone

Related Information:

Price Shopping Could Cut Employer Health Costs by 20%, but There’s a Catch

Variability in Diagnostic Error Rates of 10 MRI Centers Performing Lumbar Spine MRI Examinations on the Same Patient Within a 3-week Period

The Striking Variation of Commercial Healthcare Prices

Some States Pay Twice the Price for Health Care, Finds New Report

Association of Reference Pricing for Diagnostic Laboratory Testing with Changes in Patient Choices, Prices, and Total Spending for Diagnostic Tests

Coming PAMA Price Cuts to Medicare Clinical Lab Fees Expected to Be Heavy Financial Blow to Hospital Laboratory Outreach Programs

Volume XXIII No. 12 – September 6, 2016

Consumers Now Use Medical Cost Websites to Price Shop for Clinical Pathology Laboratory Tests and Other Medical Procedures