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Large employers should try reference pricing before regulation

An article from Harris Meyer at Modern Healthcare reported that large businesses, fed up with high provider rates, are becoming increasingly open to provider rate regulation: 

Frustrated with rising provider prices, nearly three quarters of self-insured employers favor hospital rate regulation, according to a new survey by the National Alliance of Healthcare Purchaser Coalitions.

In addition, 84% of the companies surveyed supported hospital price transparency measures.

On the other hand, employers are not in favor of Medicare for All. More than half the companies said a government single-payer model would be very or somewhat hurtful to their strategies. Many don’t want to lose their ability to offer workers private coverage.

This is a troubling report. As the health care sector is dominated by widespread consolidation and rising prices, some see regulation as the only solution. But, regulating provider prices would be harmful by limiting the flexibility of providers and insurers to negotiate freely. It may be the case that price regulations would disproportionately affect providers or insurers, depending on the market. Furthermore, this new regulation would welcome an sizable increase in government intrusion into the health care market. 

Fortunately for these large, self-insured employers, they do have tools at their disposal to take back control of their health spending. One of those ways is reference-based pricing, which I have written about in the past

Now consider if the company used reference-based pricing. The employer would set a maximum it would pay for any procedure. For example, an employer sets a maximum allowable amount of $750 for an MRI. If the MRI costs more than $750, the employee would have the pay the remainder, that is, the price for getting a higher-cost service. If the cost was less than the $750, the employee may be able to share in the savings of that procedure because it was less than the reference price for the procedure. The consistent element is that the employer, employee, and provider know what the employer will pay, and the rest is left to the market.

Reference-based pricing shifts the power away from the insurer and provider and to the employer and employee. As an employer, you know exactly what you are going to pay for each service. Negotiations and surprises after the fact don’t occur in this model. From the employee perspective, they have all of the purchasing power. They have a specific amount that they know the employer will cover and have the freedom to choose a provider based on the price given by the provider.

While it may seem like extensive regulation is the only solution to slow the rising cost of employer health care, this policy would be very harmful to all parties involved in the health care purchasing process. The health care sector is already the most regulated sector of the economy. Instead of asking how regulation could help lower prices, let’s instill market-oriented policies that will foster a more functional health care market. 

For more information on reference-based pricing see: 


Jordan Roberts / Government Affairs Associate

Jordan joined the Locke Foundation in the summer of 2018 as Health Care Policy Analyst. He analyzes state and national health policy issues with an eye toward removing governm...