Once a procedure is approved, a patient would have access to the entire market, knowing the insurer will be responsible only for the reference price. Patients could go to any facility, although they may have to pay out of pocket if the cost of the procedure is higher than the reference price.

This reform promises to solve two problems: extreme differences in actual prices for the same service because of a lack of price competition, and narrow networks that are denying patients access to the best doctors and medical facilities.

The most dramatic example of the way reference prices can affect the hospital marketplace happened in California in 2010. Anthem Blue Cross (now Elevance Health) worked in partnership with Calpers, the health plan for California state employees and retirees. Like other third-party payers, Anthem discovered that the charges for hip and knee replacements in California varied from $15,000 to $110,000.

Anthem told Calpers enrollees there would be no additional charge if they got a joint replacement at any of 46 hospitals that met Anthem’s quality standards and routinely averaged $30,000 or less for a procedure. Patients were free to go elsewhere, but the plans wouldn’t pay more than $30,000 for a joint replacement. (At all the hospitals, patients paid a 20% copayment, up to $3,000.) From that point, Anthem stopped negotiating with hospitals over the cost of joint replacements. The negotiating was done by the patients, who undoubtedly told providers they had only $30,000 to spend.

The results were stunning. The average cost of a joint replacement for Calpers enrollees immediately began falling. After one year, the average hospital cost for a joint replacement statewide was less than $30,000.

Today, California has a competitive market for joint replacements, complete with transparent prices—at least for state employees and their families—and it’s generally considered the textbook case of genuine price competition in the hospital marketplace.

Following the success at Calpers, large companies including Walmart and Safeway adopted forms of reference pricing for elective surgery and other services. A McKinsey study estimates these employers are saving 10% to 30% of healthcare costs as a result. Montana and Oregon have adopted modified forms of reference pricing for their own employees, although the Oregon system has elements of price-fixing, which diminishes competition.

The other problem that the Trump administration’s reform addresses is narrow provider networks. A KFF (Kaiser) study found that 20% of people with ObamaCare coverage said a provider they needed wasn’t covered by their insurance, and 23% said a covered provider had no appointments available. In the Chicago marketplace, one of the narrowest networks, enrolled patients found only 14% of physicians participating. Another study showed the average exchange plan covers only 36.4% of nearby physicians or hospitals, compared with 57.3% in large-group employer plans.

Considering the success that was achieved in California, who could be against the idea? Hospitals—because any reform that lowers costs for patients also lowers hospital revenue. But it makes no policy sense that Senate Minority Leader Chuck Schumer (D., N.Y.) and Sen. Ron Wyden (D., Ore.) joined 12 other congressional Democrats in a letter that opposed reference-pricing health insurance and accused Mr. Trump of abandoning his pledge to protect the public from the “big, fat, rich insurance companies, who have made trillions, and ripped off America long enough.” The “big, fat, rich insurance companies” also oppose the idea.

Milton Friedman argued that business interests have a natural tendency to oppose competition in markets in which they are vendors. Adam Smith said much the same thing 250 years ago. The ones who benefit from competition are consumers—in this case patients who need high-quality, low-cost medical care.