News & Commentary

WHAT WE’RE READING: California Initiative Slashes Prices for Many Common Medical Procedures

Wednesday, August 10, 2016

Today we’re reading about a hospital payment initiative in California that has significantly reduced prices for a number of common elective medical procedures. 

Beginning in 2011, the California Public Employees’ Retirement System (CalPERS) implemented reference pricing, a practice in which CalPERS sets a maximum amount it will pay hospitals for several elective procedures, including knee and hip replacement surgery, colonoscopies, and cataract removal surgery. Patients who wish to get a procedure at a higher-priced hospital must pay the price difference themselves in addition to the 20 percent cost-sharing (up to $3,000) that all CalPERS members must pay. 

For example, CalPERS set its maximum payment amount for a knee or hip replacement surgery at $30,000 in 2011. At any hospital that charged more than $30,000 for the surgery patients had to pay the price difference. When CalPERS implemented this initiative, only 41 out of the several hundred hospitals in California could charge $30,000 or less for knee and hip replacement surgeries while maintaining quality standards. Some charged over $100,000. 

According to the New York Times’ blog The Upshot, CalPERS’ reference pricing initiative has been highly successful in reducing costs and spending for the surgeries included. Health economists at the University of California, Berkeley found that CalPERS patients predominantly sought care at lower-priced hospitals and outpatient surgical centers. Additionally, prices and total spending for the procedures decreased because hospitals charging more than CalPERS’ maximum payment amount reduced their prices as they lost patients to hospitals offering cheaper rates. 

Specifically, prices for knee and hip replacements dropped by an average of more than 20 percent, saving CalPERS and its patients $6 million over two years. Reference pricing resulted in similar savings for other procedures without any decrease in quality. 

While CalPERS’ reference pricing initiative has proven successful, The Upshot warns that reference pricing cannot fully resolve health care spending growth. It only works for elective procedures for which patients have the time and ability to compare prices; it requires price information that is often unavailable; and it requires sufficient competition among hospitals that does not exist in communities that have, for example, only one hospital. 


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