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Reference Pricing with Endogenous or Exogenous Payment Limits: Impacts on Insurer and Consumer Spending
Timothy T Brown1, James C Robinson1
1School of Public Health, University of California, Berkeley, CA, USA.
Health Economics
|April 24, 2015
Summary
Reference pricing (RP) impacts hospital payments differently based on whether prices are fixed (exogenous) or market-driven (endogenous). Endogenous RP generally lowers hospital payments, while exogenous RP can increase payments to low-price providers.
Area of Science:
- Health Economics
- Healthcare Market Dynamics
- Pricing Strategies
Background:
- Reference pricing (RP) theories offer distinct predictions for market prices under exogenous (fixed) versus endogenous (market-influenced) conditions.
- Existing models suggest convergence towards reference prices, but strategic adjustments by firms can alter outcomes.
- Extending these economic models to the healthcare sector, specifically hospital payments, is crucial for understanding market behavior.
Purpose of the Study:
- To analyze the impact of exogenous versus endogenous reference pricing on insurer and consumer payments in the hospital sector.
- To test theoretical predictions using real-world data from joint replacement procedures.
- To differentiate the effects of RP based on hospital price levels (high-price vs. low-price).
Main Methods:
- Employed difference-in-differences specifications to analyze changes in market prices.
- Utilized longitudinal data from 2008-2013 covering patients undergoing joint replacement.
- Compared payment trends immediately following RP implementation with longer-term effects when reference prices were not adjusted.
Main Results:
- In the two years post-implementation, insurer payments to both high-price and low-price hospitals decreased, aligning with endogenous RP predictions.
- When reference prices remained static despite market price changes, insurer payments to low-price hospitals returned to pre-implementation levels, supporting exogenous RP.
- Consumer payment predictions showed ambiguity for high-price hospitals under both exogenous and endogenous RP scenarios.
Conclusions:
- Empirical evidence suggests that hospital payment dynamics under reference pricing exhibit characteristics of endogenous models initially.
- The persistence of exogenous RP effects, particularly the reversion of payments when reference prices are not updated, highlights the complexity of healthcare pricing.
- Policy implications may involve considering the dynamic adjustment of reference prices to achieve desired market outcomes in healthcare.
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