Reference Pricing on the Horizon

Reference pricing is not widely used in the US, but it has been on the radar for some time as a promising mechanism to limit cost.

By Rita E. Numerof... on Sep 9, 2015

The progression toward value-based care has enormous implications for pharmaceutical manufacturers, influencing change in everything from pipeline investments to sales strategy. Two critical trends stemming from the move to value are the increasing role of the consumer, and demands for price and outcome transparency. Tapping into both of these trends is reference pricing – a practice long-used outside of the US, and gaining popularity in recent years within the States.

What is reference pricing?

Reference pricing is the practice of capping reimbursement for a procedure at an established benchmark. In the US, the most prominent example of reference pricing has been a pilot program by the California Public Employees Retirement System (CalPERS). By establishing reference prices for a set of common procedures (joint replacement surgery, cataract surgery, colonoscopy, and arthroscopy), CalPERS recently reported saving more than $13 million dollars in the first two years¹.

Essentially, the benefits provider set standard prices for these procedures, and incentivized beneficiaries to select hospitals willing to provide those services for the standardized price or less. Beneficiaries were allowed to select other hospitals, but they were required to pay any costs above the reference price. Savings were realized by lowering hospital costs. This was largely driven by negotiating rates on standardized implants and enrollee migration to facilities that committed to delivering the service at the reference price. It’s too soon to report on breadth of use of reference pricing, but it’s a safe assumption that such results, if they are borne out in further trials, will drive robust adoption.

Why now?

Reference pricing isn't new – it's been around for years outside the US as a mechanism for establishing a fair market value for new technology and re-evaluating pricing for existing products. The appeal of reference pricing is that it introduces normal market forces to everyday healthcare transactions that are otherwise lacking:

Providers must compete by either lowering prices to the reference price or demonstrating differentiation that justifies why patients should pay a premium.
Patients must be savvy consumers since they’re required to pay the difference if they opt for a facility that charges above the reference price.

In addition, proponents of reference pricing point out that the practice is better for patient access than other increasingly popular plan designs – like narrow networks – that are intended to rein in costs. While narrow networks deny coverage if you go outside the network, reference pricing pays a defined amount no matter where you choose to receive care.

Reference pricing is not widely used in the US, but it has been on the radar for some time as a promising mechanism to limit cost. Currently, a handful of states have introduced legislation demanding cost transparency from pharmaceutical manufacturers. Massachusetts has gone one step further, introducing a bill that enables the state health policy commission to effectively set a reference price for a targeted list of drugs². Under the proposed law, the commission would have authority to establish a maximum allowable price. Factors it proposes to use to establish that reference price include medical benefits the drug provides, costs associated with development and manufacturing, and the drug’s price in other countries.

What does reference pricing mean for pharmaceutical companies?

The bottom line is that manufacturers will need an economic and clinical value case for each stakeholder group that resonates with their requirements.

Reference pricing shines a spotlight on the importance of demonstrating economic and clinical value in a way that resonates with payers, providers, and consumers. In a reference pricing world, payers will set reference prices based on comparing the relative value of products and procedures across the care continuum. Once the price is set, providers will evaluate the value of products they need to deliver the service that provide the best mix of quality care while staying “under budget.” And consumers will be evaluating the value of treatment regimens to decide whether it’s worth paying a premium for care beyond the reference price. The bottom line is that manufacturers will need an economic and clinical value case for each stakeholder group that resonates with their requirements.

We’ve been advocates for demonstrating economic and clinical value for over 25 years and the potential for reference pricing to become more prevalent just confirms how important it will be in the years ahead. In the absence of compelling data that demonstrates the economic and clinical value of products, payers and providers will make their decisions based on price alone. Pharma companies have a distinct opportunity to be proactive in clearly defining how their products deliver value. This will help ensure that they are the winners in a reference pricing world.

Rita E. Numerof, Ph.D. is President of Numerof & Associates, a strategy development and implementation firm with more than 25 years’ experience helping major pharmaceutical, device, diagnostic, payer and delivery organizations define, create, and deliver value across healthcare. Experts in business model transformation, Numerof specializes in redesigning commercial models, developing economic and clinical value propositions, and crafting market access strategies for the pharmaceutical industry worldwide. For more information, visit our website at http://www.nai-consulting.com.

Sources:

1. http://healthaffairs.org/blog/2015/07/07/appropriate-use-of-reference-pricing-can-increase-value/

2. https://malegislature.gov/Bills/189/Senate/S1048