Last week state Auditor Doug Hoffer outlined a strategy that he says could save as much as $16.3 million each year just for the state employee health plan. And even more savings would be possible in teacher health care.

“The strategy would utilize what’s called “reference-based pricing.” In the simplest terms, reference-based pricing establishes a fair price for a particular medical service, and then pays only that amount (or a fixed percentage of it) to any provider performing the services to people on the health plan. In other words, it sets a maximum price for which the plan will pay for a service rather than merely paying the byzantine prices negotiated by insurance companies and hospitals regardless of whether they are excessive.

What’s the problem reference-based pricing solves? The administrators for both the State employee and teacher health care plans pay a wide range of prices at hospitals for the exact same procedures. 

In fact, our research found that the highest priced provider for a given service was paid an average of 3.5 times more than the lowest priced provider for the same service. For some services, the difference between the highest and lowest priced provider was even more extreme, such as an echocardiograph (9.3 times).”

The auditor is right – but note, this is another version of price control. If the state pays the reference price, the high charging providers will shift their charges up on other procedures.