Reference Pricing: Stimulating Cost-Conscious Purchasing and Countering Provider Market Power

By: James C. Robinson, PhD, Leonard D. Schaeffer Professor of Health Economics & Director, Berkeley Center for Health Technology, University of Califorina, Berkeley

The dramatic price variations for common procedures like knee surgeries and colonoscopies have been well documented, as has the fact that these variations generally reflect market power rather than quality. While selection of high-value providers is critical to affordability, consumers often have little incentive to shop around, particularly for costlier services that quickly surpass deductibles. Reference pricing injects new price awareness by setting a maximum payer contribution for a given procedure and leaving the patient responsible for any overage. In this essay, James Robinson lays out evidence that reference pricing has both guided patients to select high-value providers and compelled costlier hospitals to lower their prices to remain competitive.