When the California Public Employees’ Retirement System told its Anthem Blue Cross members it would pay only up to $30,000 for a knee or hip replacement surgery, some patients shopped around for a cheaper hospital.
What may be more surprising is that about 40 higher-priced hospitals in the state cut their surgery prices significantly to avoid losing patients. That response accounted for about 85% of the $5.5 million CalPERS saved over two years, researchers at UC Berkeley found, with the rest of the savings coming from patients opting for lower-cost hospitals.
The average charge among the more-expensive hospitals fell 37% from $43,308 in 2010 to $27,149 last year for these common joint replacements. The average price for CalPERS members at the less-expensive hospitals was $24,528, down just 3% since 2010.
“There were striking reductions in some of the higher-priced facilities,” said James Robinson, a UC Berkeley professor of health economics who studied the pilot program by CalPERS and Anthem.
This pricing strategy “has received a lot of interest in the large-employer world because it does seem to be an antidote to aggressive hospital pricing.”
These results may encourage other employers to follow suit as companies and policymakers search for ways to spur competition and hold down ever-rising medical costs.
Last month, federal officials released the prices U.S. hospitals bill Medicare for the most common procedures and tests to show consumers the wide variation in costs and to put pressure on institutions to justify inflated charges that often have little or no correlation to the quality of care.
CalPERS, the nation’s third-largest purchaser of health benefits, said it pursued this idea because its hospital bills for hip and knee surgeries ranged from $15,000 to $110,000. Now the giant pension fund said it will look at expanding this approach to other procedures.
Anthem Blue Cross, a unit of industry giant WellPoint Inc., covers about 360,000 CalPERS members.
Other employers, such as grocery chain Safeway Inc., have successfully used this “reference pricing” strategy.
It works essentially as a reverse deductible for employees and their families. Their employer will pay up to a certain amount for a surgery, colonoscopy or lab test and anything above that amount comes out of the patient’s pocket.
To assist workers, CalPERS and Anthem gave members a list of 46 hospitals that were judged to be both higher quality and lower cost. This group, which has grown to 54 facilities, includes hospitals such as Cedars-Sinai Medical Center.
Anthem said the use of those preferred hospitals increased 21% among CalPERS members. That shift in patient traffic and declining hospital prices overall dropped CalPERS’ average cost for these joint replacements by 19%, from $35,408 to $28,695 per admission.
HealthCore, a research arm of WellPoint, found that participating CalPERS patients had the same or better outcomes compared with a similar group of Anthem members.
“I am hopeful with increased experience and the publication of more data that this idea would catch on,” said Michael Belman, medical director for Anthem Blue Cross.