News Release

Steering Patients to Lower-Price Hospitals Prompts Others to Lower Prices

Despite Success with Setting a Price Cap on Hip and Knee Replacements in California, Limitations Hamper Reference Pricing’s Potential to Generate Health Care Savings

Along with steering patients to lower-price hospitals, a California Public Employees Retirement System (CalPERS) reference pricing initiative influenced market dynamics by motivating other hospitals to reduce prices for hip and knee replacements, according to a qualitative study by the Center for Studying Health System Change (HSC) for the nonpartisan, nonprofit National Institute for Health Care Reform (NIHCR). In the context of high health care costs and wide variation in hospital prices, CalPERS and Anthem Blue Cross in 2011 adopted reference pricing to guide enrollees in CalPERS preferred provider organizations to hospitals that provide routine hip and knee replacements below a certain price threshold.

After reviewing quality and cost information showing the hospital price for routine hip and knee replacements ranged from $15,000 to $110,000, CalPERS and Anthem set a threshold of $30,000 for hospital facility payments for both procedures and designated certain hospitals that met certain quality standards and where enrollees could get care at or below the reference price. If enrollees have surgery at designated hospitals, they pay their plans’ typical deductible and coinsurance up to the out-of-pocket maximum. Patients can go to other in-network hospitals for care but are responsible for both the typical cost sharing and all allowed amounts exceeding the $30,000 threshold, which are not subject to an out-of-pocket maximum.

While previous research indicates the CalPERS reference pricing initiative saved money without sacrificing quality or shifting significant costs to enrollees, little is known about how CalPERS implemented the program and whether other purchasers could successfully replicate the approach.

According to the HSC study, the CalPERS program involved intensive communication with enrollees and met with little resistance from them. Respondents believed other purchasers could replicate reference pricing but identified challenges, including lack of price transparency, which complicates setting an appropriate reference price and estimating enrollees’ out-of-pocket costs; lack of enthusiasm from health plans leery of disrupting relationships with providers; and difficulties communicating clearly with enrollees.

The study also identified key limitations of reference pricing—specifically a limited emphasis on quality and limited potential for cost savings since reference pricing is suitable only for a narrow range of services and does not address whether utilization is appropriate.

“Our findings indicate that reference pricing can help make consumers more aware of price variation and inject some competition into hospital pricing—an outcome that some believed is more important than the actual cost savings,” said Amanda E. Lechner, M.P.P., an HSC health policy analyst and coauthor of the study with Rebecca Gourevitch, an HSC research assistant; and HSC President Paul B. Ginsburg, Ph.D.

The study’s findings are detailed in a new HSC Research Brief—The Potential of Reference Pricing to Generate Health Care Savings: Lessons from a California Pioneer.

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The National Institute for Health Care Reform (NIHCR) is a nonpartisan, nonprofit 501(c)(3) organization created by the International Union, UAW; Chrysler Group LLC; Ford Motor Company; and General Motors. Between 2009 and 2013, NIHCR contracted with the Center for Studying Health System Change (HSC) to conduct high-quality, objective research and policy analyses of the organization, financing and delivery of health care in the United States. HSC ceased operations on Dec. 31, 2013, after merging with Mathematica Policy Research, which assumed the HSC contract to complete NIHCR projects.