California Employees Retirement System Employs Reference Based Pricing

By Melanie Evans

“I don’t think hospitals are afraid of insurance companies,” he said in an interview. “I don’t think hospitals are afraid of employers. I think hospitals are afraid of consumers. If consumers care about price, hospitals care about price. If consumers care about quality, hospitals care about quality.”

Joint replacement prices at the most costly California hospitals plunged by one-third after the state required its workers and retirees to pay out of pocket all costs above a “reference price” of $30,000 for orthopedic surgery, a new study said.

The average cost of joint replacement among high-priced hospitals dropped to $28,465 after the California Public Employees’ Retirement System made the change in 2011, wrote University of California researchers James Robinson and Timothy Brown in the journal Health Affairs. That’s down from $43,308 the prior year.

After taking into account other factors that affect price, the average hospital price for joint replacement dropped by one-fifth in response to CalPERS’ policy, known as reference pricing. The switch saved an estimated $3.1 million for 447 patients, the researchers estimated.

Hospitals, which in recent years have gained leverage to raise prices through consolidation, seemed to react by dropping their prices as consumers were given a powerful financial incentive to comparison shop, said Robinson, a health economics professor and director of the University of California Berkeley Center for Health Technology.

“I don’t think hospitals are afraid of insurance companies,” he said in an interview. “I don’t think hospitals are afraid of employers. I think hospitals are afraid of consumers. If consumers care about price, hospitals care about price. If consumers care about quality, hospitals care about quality.”

Simply imposing high deductibles, Robinson said, does little to make consumers aware of hospital prices, because the charges exceed the deductible almost immediately, leaving insurers to pick up the rest of the cost and keeping patients oblivious to the price.

But consumers seem highly aware of prices under the new CalPERS benefit design.

CalPERS and insurer Anthem designated 41 hospitals as those with “value”—those with joint replacements priced below $30,000, a high volume of procedures and quality measures reported to the Joint Commission and the state. Patients at “value” hospitals paid co-insurance up to $3,000. Patients who went elsewhere paid the co-insurance up to $3,000 and any additional cost beyond the $30,000 total price.

Value hospitals started getting a lot more of the joint replacement business. In 2010, “value” hospitals performed fewer than half (43%) of joint replacement procedures among the study population. That jumped to 63% in 2011. Hospitals not selected as “value” saw their percentage of joint replacement operations fall to 37% in 2011, from 52% before the benefit design switch.

“Up until now, the consumer has not cared about the price of hospital care because those prices exceed the consumer deductible,” Robinson said. But under reference pricing benefit design, “it’s the consumer, not the employer, who pays the extra price charged by the highest-priced hospitals.”

Reference price are in limited use in the U.S. but are more common in Europe’s national health insurance systems, he said. That benefit design can also be used for tests and procedures with quality measures that allow for comparisons and prices that vary significantly.

Hospital prices for joint replacements varied fivefold among those Robinson analyzed.

Robinson said competition for better-paying commercially insured patients is increasingly important to hospitals as Medicaid and state insurance exchange-based health plans enroll millions of Americans starting next year. Medicaid and exchange plans are expected to pay hospitals less than employer-sponsored insurance.

“Hospitals are concerned that their strategy the past decade, which has been to merge, create powerful chains and raise prices to insurance companies, is a strategy of decreasing value to them because they are at risk of losing their best-paying customer,” he said.

Follow Melanie Evans on Twitter: @MHmevans

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