Reference pricing lowers healthcare prices, could save CT millions

Hospital prices are driving up healthcare costs making coverage unaffordable, in Connecticut and across the US. It’s hard to reduce hospital prices, especially in consolidated markets like Connecticut’s, where huge health systems have monopoly power to demand steep prices. But since 2019, Oregon has been saving $50 million annually on just their state employee plan, using reference pricing. Other states are following suit and expanding the benefits to all their residents. Connecticut could save $141 million annually on just our state employee plan, and far more if expanded to the rest of the state.

Under reference pricing, payers and employers set a maximum benchmark price for services. In contrast, most commercial insurance plans negotiate prices, allowing monopoly health systems to name their own price. Insurers don’t have much choice and consumers pay the costs.

Reference prices are usually set as a multiple of Medicare prices. Under federal law, actuaries set traditional Medicare prices to cover “the reasonable cost of services” , adjusting for patient medical needs, geographical costs, and other modifiers. All Connecticut hospitals and 98% of doctors accept Medicare patients at those payment levels.

Oregon’s reference pricing plan did not disrupt hospitals or other plans in the state. Oregon’s state employee plan pays up to 200% of Medicare prices for hospital care and 185% of Medicare for outpatient services. Researchers found very small to no impact on hospital operations, care delivery, or patients’ experience of care. Critics of the plan were concerned that hospitals would drop out, but all 24 hospitals stayed in the plan. And there was no cost-shifting increase in hospital prices for other plans in the state.

A Hospital Payment Cap Simulator from Brown University estimates that setting hospital prices for just state employees at 200% of Medicare rates would have saved Connecticut $141 million in 2022. The simulator predicts that Connecticut hospital margins would lower modestly from 35% to 33%. The simulator estimates the impact by Connecticut hospital and allows visitors to adjust the reference price as a percent of Medicare. Expanding across all of Connecticut could share those savings with all commercial plan enrollees.

Other states are following Oregon’s lead. This year Washington passed legislation to implement reference pricing for their state employee plan. Also, this year, both Vermont and Indiana passed similar legislation for all private insurance hospital spending in the state. While the reference prices are maximums, Washington and Vermont’s laws also set minimum price floors to ensure that hospitals remain viable. Vermont and Indiana included monitoring to ensure hospital financial health in their laws.