Reference Pricing with Endogenous or Exogenous Payment Limits: Impacts on Insurer and Consumer Spending.

HEALTH ECONOMICS Health Econ. (2015) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/hec.3181 REFERENCE PRICING WITH ENDOGENOUS OR EXOGENOUS PAYMENT LIMITS: IMPACTS ON INSURER AND CONSUMER SPENDING TIMOTHY T. BROWN* and JAMES C. ROBINSON School of Public Health, University of California, Berkeley, CA, USA ABSTRACT Reference pricing (RP) theories predict different outcomes when reference prices are ﬁxed (exogenous) versus being a function of market prices (MPs) (endogenous). Exogenous RP results in MPs at both high-price and low-price ﬁrms converg- ing towards the reference price from above and below, respectively. Endogenous RP results in MPs at both high-price and low-price ﬁrms decreasing, with low-price ﬁrms acting strategically to decrease the reference price in order to gain market share. We extend these models to a hospital context focusing on insurer and consumer payments. Under exogenous RP, insurer and consumer payments to low-price hospitals increase, and insurer payments to high-price hospitals decrease, but predictions regarding consumer payments are ambiguous for high-price hospitals. Under endogenous RP, insurer payments to high-price and low-price hospitals decrease, and consumer payments to low-price hospitals decrease, but predictions regarding consumer payments are ambiguous for high-price hospitals. We test these predictions with difference-in- differences speciﬁcations using 2008–2013 data on patients undergoing joint replacement. For 2 years following RP implementation, insurer payments to high-price and low-price hospitals moved downward, consistent with endogenous RP. However, when the reference price was not reset to account for changes in MPs, insurer payments to low-price hospitals reverted to pre-implementation levels, consistent with exogenous RP. Copyright © 2015 John Wiley & Sons, Ltd. Received 30 November 2013; Revised 26 February 2015; Accepted 24 March 2015 KEY WORDS: reference pricing; hip replacement; knee replacement; difference in differences; consumer cost sharing; insurer expenditures 1. INTRODUCTION Reference pricing is widely applied to pharmaceutical markets across Europe, including Belgium, Germany, Hungary, Italy, Norway, Spain, and Sweden, and outside of Europe in New Zealand and Canada but has not been widely used in the USA (Galizzi et al., 2011). In pharmaceutical markets, a reference price is a reimburse- ment limit that is set for a group of drugs that are therapeutically interchangeable. A reference price represents the maximum amount that an insurer will cover, with the consumer being responsible for any difference between the actual market price and this reimbursement limit. Thus, the reference price inﬂuences the out-of-pocket payment of consumers, with consumers having the ability to reduce these payments by favoring low-price providers. The reference price is not a pricing policy but a reimbursement policy that sets payment limits. It is consis- tent with market prices being freely negotiated by market participants. Payments are determined in a two-step process. In the ﬁrst step, the insurer or employer negotiates a market price with the provider. In the second step, the insurer or employer establishes a reimbursement limit, the maximum amount it will contribute towards that *Correspondence to: School of Public Health, University of California, 50 University Hall, #7360, Berkeley, CA 94720-7360, USA. E-mail: timothy.brown@berkeley.edu Copyright © 2015 John Wiley & Sons, Ltd.