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The new Obamacare issue worrying consumer advocates

Carsten Koall/Getty Images News

There's a tool for reducing health costs that many health economists and policy geeks are eager to embrace, but that leaves consumer advocates are somewhat wary. It's called reference pricing, and it's surprisingly controversial.

Reference pricing: What is it?

In this cost-control scheme, insurers select a fixed price they consider "fair" for a given medical procedure, the "reference price." Their enrollees are encouraged to shop around to find a doctor; if they find someone who will offer the service at or below the reference price, the insurance covers it in full, or perhaps with a standard co-pay. But if the patient wants to visit a doctor who charges more than that reference price, she's responsible for paying the difference.

By encouraging consumers to shop smartly for their care, health care providers are pressured to bring their prices in line with the reference price, or else risk losing customers. This is good for patients and, if scaled up widely and successfully enough, good for the health care system at large.

This is very different from the current system, where insurers negotiate rates with certain hospitals and doctors, and patients face a (generally fixed) out-of-pocket cost for anyone that the insurer includes in their "network". If a patient wants to see someone out-of-network, they often have to foot much more of the bill — sometimes the whole thing — even if an out-of-network doctor is willing to charge comparable rates.

"Reference pricing gives the individual more choice and uses the resources that insurers are willing to provide more efficiently, so economists love that," says Austin Frakt, a health economist with the Department of Veterans Affairs and Boston University.

Why is this an issue now?

Reference pricing isn't widely-used yet; it requires a lot of investment in consumer education and support. But it has been deployed — with considerable success — in the past, like with public employees in California.

As more employers may be weighing the issue, the Obama administration has solicited feedback on the best way to proceed.  There's a particularly thorny issue that's caused a small outcry: whether a patients' spending above and beyond the reference price should count towards federal out-of-pocket limits.

Part of Obamacare limits out-of-pocket spending (beyond monthly premiums) to $6,350 per year. But this protection doesn't apply to some kinds of health spending, like if a patient gets care outside their insurer's "network." The question here is how to handle spending beyond the reference price.

If a patient, for example, goes to a knee surgeon who is $2,000 above her insurer's reference price, should that extra spending count towards the limit? Or would she be on the hook for going above the reasonable price, raising the potential ceiling on her out-of-pocket costs from $6,350 to $8,350?

Consumer advocates have also raised other concerns about reference pricing harming patients.

Why are consumer advocates worried?

Consumer advocates don't reject the idea of reference pricing; they see it as a useful tool for correcting the crazy and unwarranted price variation that characterizes American health care. But they want to make sure it's implemented in a way that doesn't harm the very people that insurance is supposed to protect.

Families USA, a non-profit that supports Obamacare, has flagged several concerns.

The group wants expenses beyond the reference price — the extra $2,000 spent at the knee surgeon — to count towards a patients out-of-pocket max. This would, Families USA argues, block insurers from using reference pricing as a scheme to get around the out-of-pocket limit.

The group has also suggested that some services where there isn't much consumer choice — trips to the emergency room, for example, or highly specialized care — ought to be exempt. Instead, reference pricing ought to be limited to standard procedures like lab tests, imaging scans, and certain kinds of surgery.

Economists argue that some of these changes — particularly exempting spending beyond the reference price from the out-of-pocket limit — would undercut the whole idea. The point of this type of plan is to incentivize shoppers to choose less expensive providers.

"Counting dollars spent over the reference price against the out-of-pocket-limit would take away a lot of the market mechanism in reference pricing," Frakt told me. Some of these services — like surgeries — are predictably expensive. Patients could meet their out-of-pocket limit in a single procedure, and then they wouldn't have reason to be prudent about health spending for the rest of the year.

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