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

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 converging 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.