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To Cut Health Costs, California Makes Patients Shop Around

California is saving millions making people compare prices for certain medical services.

Go shopping. That’s essentially the message the California Public Employees’ Retirement System is delivering to the 1.3 million people covered by the giant public pension plan’s health insurance. Whether it’s for something as hospital-bound as hip replacement surgery or as clinic-centered as imaging tests, CalPERS wants its beneficiaries to shop around. A routine hip replacement, for instance, can cost anywhere from $12,000 to $75,000.

CalPERS is amenable to having its members choose any doctor, hospital or other provider they want, with one hitch. The group has a price list for charges that it considers fair -- that is, within the range of the average price tag in a particular region of the state. If a patient chooses a provider who bills more than the number on CalPERS’ list, the patient pays the difference.

This experiment in taming health-care bills is called “reference pricing,” and it’s used mainly for prescription drugs, imaging tests and elective procedures where providers are widely available and there’s little variation in quality. Where some insurers cap costs through a narrow-network strategy that offers patients full coverage at some providers and no coverage at others, reference pricing pays full coverage for providers that meet the cost-effective line and partial coverage for more expensive providers.

The theory is that price-conscious patients will make better, more reasonable decisions. The usual insurer’s approach is “hobbled if individual consumers are indifferent to the price of the care they select,” Ann Boynton, deputy executive officer of benefit programs policy and planning at CalPERS, noted in a recent article in Health Affairs.

CalPERS has been offering reference pricing for about four years now, long enough to gauge real-world impact. In the first two years after implementation, reference pricing saved Cal-PERS -- which pays $7.5 billion a year for retiree health care -- $2.8 million for joint replacement surgeries, $1.3 million for cataract surgeries, $7 million for colonoscopies and $2.3 million for knee arthroscopies.

In addition to actual savings, the program has had a wider and more disruptive effect. There have been actual price reductions, not merely slowdowns in the rate of price growth. In 2011, for instance, only 46 California hospitals were charging prices below the CalPERS reference price of $30,000 for inpatient orthopedic surgery. By this year, that number had risen to 72.

As to quality -- that is, successful outcomes -- Boynton noted that studies of reference pricing for orthopedic surgery have shown that patient experience, clinical symptoms, functional ability and quality of life have stayed the same or improved after the implementation of reference pricing. That said, she also noted that “it goes without saying that the quality measures available to reference pricing initiatives are incomplete, but this applies to quality measures available for any public or private strategy to moderate costs.”

To be sure, not all health-cost reformers are on board with reference pricing. Critics see the approach as a diversion from deeper, more encompassing price reforms -- strategies that might include antitrust enforcement, “price bundling” (a single payment for all of the treatment of a given condition) and outright price regulation. In addition, reference pricing addresses only a limited number of procedures and services and does not touch the costliest of services, those at the end of life or for a life-threatening illness.

But while reference pricing is hardly a complete solution, CalPERS is finding that turning patients into price-conscious consumers is a relatively simple and effective approach to taming at least some health-care costs. 

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.
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