Firm Responses to Targeted Consumer Incentives: Evidence from Reference Pricing for Surgical Services

Abstract

As health insurance benefit designs become more innovative, fully understanding provider responses to consumer cost-sharing is important. This paper examines the effect of reference pricing, an insurance program that increases consumer cost sharing when consumers choose high-priced providers. We use geographic variation in the population covered by the program to estimate both supply-side responses to changes in consumer incentives and the general equilibrium effects of the program. We find that the program spurs provider price competition and leads to sizable decreases in medical spending. Our estimates suggest that the program leads to a 2.1% decrease in provider prices for three outpatient surgical services, which leads to a $5.8 million reduction in medical spending. Because the majority of the savings occur through provider price reductions, 78% of this reduction is in the form of an $4.5 million positive externality that benefits a population not subject to the program. Similar to the “generics paradox” for pharmaceuticals, we find that the program leads to price reductions for low-priced providers but has no effect on prices for high-priced providers.

JEL Classification: I11, I13, L11