By Jennifer Schneider
April 22, 2015 at 5:00 am ET
The new multi-billion dollar “doc fix” that the President just signed into law will once and for all change how Medicare pays doctors, and it’s being hailed as a health policy watershed.
But there’s one aspect of this bill that’s often overlooked: now doctors who derive at least one quarter of their Medicare Part B payments from a system that pays for value (that is, the quality of care given) rather than volume (quantity of services) will receive a 5 percent bonus from the government. This is yet another big step in a larger transformation of our healthcare system, but the search for value doesn’t end with Medicare. With the majority of Americans continuing to get healthcare coverage through their employers, businesses are also searching for new ways to get more for their healthcare dollars.
In response, many employers are now using new benefit designs that give their employees the incentive to shop for healthcare products and services. One of these designs is known as reference-based benefits, also sometimes referred to as reference-based pricing, and the concept is actually quite simple.
With reference-based benefits, the employer sets contribution limits for certain healthcare services or procedures. For example, an employer may determine that the average price of a high quality CT scan is $300. If an employee picks an option where the price is below that limit, the plan will pay the full amount and the employee will only have to make a copayment. On the other hand, if the employee elects to get a CT scan performed by a provider who charges more than the reference limit of $300, the employee will be responsible for paying the additional amount. Moreover, this excess payment does not generally count toward a policy’s out-of-pocket maximum—meaning that employees will continue to have a reason to select higher value care, even after they have met their out-of-pocket maximum limits.
Ultimately, this system is effective because it relies on the basic principles of the marketplace to shape behavior and reduce prices. Employees are given a financial incentive to select treatment options that are less expensive, while still knowing that their benefits will cover the high-value care they need. This simple mechanism has the power to bring down healthcare costs across the system.
This step toward making patients into healthcare consumers, however, is not without some potential pitfalls. Reference-based plans give employees a reason to shop for higher-value care, but for this approach to be effective, employees also need the ability to do so. In addition, employees need to understand how this model differs from conventional coverage, and employers should leverage communicational, educational and technological measures to achieve this.
The reason is twofold. First, without price transparency for commodity services such as lab tests or imaging procedures, a reference-based benefit merely shifts costs onto patients without doing anything to slow healthcare cost growth. To say it another way, if employees can’t find out how much different providers charge for the same service, they have no way to select the lower cost, higher value option. Second, for more complex procedures such as hip and knee replacements, an employee’s potential liability due to the excess payment could be tens of thousands of dollars.
Those outcomes don’t work for employees, they don’t meet the needs of employers and they don’t benefit the overall healthcare system.
This brings us back to the challenge facing policymakers. Employers can take the lead in making sure healthcare consumerism can really work, but regulators in the Employee Benefits Security Administration of the U.S. Department of Labor can also play a major role with policy guidance. To make the most of this opportunity, policy guidance should require companies that seek to implement reference-based pricing to:
A significant number of people in the healthcare debate agree that we need to give consumers a better sense of their healthcare costs and drive consumerism. This is an important start, but spreading price sensitivity on its own won’t bend the healthcare cost curve back to sustainable levels. Unless people have the ability to make meaningful comparisons of healthcare options, they will be unable to identify high-value care, and they will be left in the situation where we are today: paying too much for care, not getting enough in return and watching as prices continue to climb. As consumers, and as a country, the status quo is something we can no longer afford.
Jennifer Schneider, M.D., M.S., is chief medical officer for San Francisco-based Castlight Health, a leader in Enterprise Healthcare Management. For more information, visit www.castlighthealth.com