A few years ago, I wrote about a novel experiment in California that used reference prices to encourage CalPERS beneficiaries to choose lower-cost, high-quality facilities when seeking joint replacement. One experiment capped the price CalPERS was willing to pay for joint replacement at $30,000. Patients could seek care at any provider, but they would be responsible for all charges above the reference price. In addition, CalPERS gave beneficiaries a list of high-quality hospitals that would perform the surgery for $30,000. The result after two years was that patients shifted to the lower-cost hospitals. High-cost hospitals began matching prices for CalPERS patients.
Another experiment encouraged CalPERS beneficiaries to select an ambulatory surgery center for cataract eye surgery rather than a more expensive hospital outpatient surgery center. Both experiments were deemed a success at steering beneficiaries to lower-cost care and encouraging hospitals to compete on price for CalPERS business.
Now similar experiments are taking place in Colorado. Although not technically reference pricing these programs use an alliance of health care purchasers and rewards employees with cash for choosing lower-cost providers. This from US News and Kaiser Health News:
State employees in Colorado are being asked to be better consumers when shopping for health care services. And if they choose lower-cost and higher-quality providers, they could get a check in the mail for a portion of the savings.
Since July 1, state employees have had access to the Healthcare Bluebook, which is an online tool, owned by a health data company of the same name, that ranks health providers by both costs and quality. Providers in the top 25% for quality are designated in green, the bottom 25% in red and anyone in between in yellow. The same color scale is used for costs.
“If you go to a green-green provider, then we’ll send you a check,” said Josh Benn, director of employee benefits contracts for the Colorado government.
For something like a mammogram, the checks are around $50 but can rise above $1,000 for a surgery.
Although it’s too early to tell how much the state will save through the program, Healthcare Bluebook estimates that employers save an average of $1,500 every time an enrolled member uses the online tool to choose a provider.
Whitener recalled one employee who needed a hip replacement and found a free-standing orthopedic surgery center that cost $20,000 less than a hospital-owned facility and had higher quality ratings.
Over the first four years, the county paid out an average of $15,000 in rewards per year. The county calculated that for every $1 it spends to offer Healthcare Bluebook to its employees, it saves $3.50.
A purchasing alliance of 450 self-insured schools in California use a system of reference pricing to lower costs and steer employees to cheaper options that are often better quality. However the alliances are structured a common theme is rewarding workers (or retirees) who make better choices about where to seek care. This from US News and Kaiser Health News:
Robert Smith, head of the Colorado Business Group on Health, which is spearheading the alliance, believes the purchasing-alliance model can revolutionize the health care market and use the power of the employers to drive down costs. Most companies, he explained, pay premiums to a health plan to cover their employees but allow those health plans to negotiate rates with hospitals, doctors and other providers. It would be too complicated and time-consuming for most businesses to take on that role themselves.
Health-purchasing alliances, on the other hand, allow employers to band together and negotiate rates for a much larger group of employees, giving them greater market power to negotiate lower rates.
One problem is that large health care systems don’t want to negotiate with the alliances, although smaller, free-standing imaging centers, ambulatory surgery centers and physician-owned clinics have. When faced with competition the large systems often use predatory pricing to run the alliances out of business. Perhaps the next big thing in health care needs to be that large systems are forced to break up like Ma Bell nearly 40 years ago. Health care is local. Most people don’t want to be hospitalized in a town far from home. However, they may agree to being hospitalized across town if the rewards were large enough.
Note that the concept of purchasing alliances is beginning with self-insured employers — definitely not the commercial insurers. The big insurance companies do not mind paying higher claims — they just raise premiums again and again.
The car insurance industry has been using reference pricing for decades, and did not need federal guidance to do this. The insurers do not simply pay the charges at the most expensive repair shop in town.
Why does this happen? Because auto insurance is competitive. A company which pays high charges will lose customers to other carriers. Much less true in health insurance.
Your Oct 31 posting on the Lupron shows this clearly. United Health did not “negotiate” their rate of $28,000 for injecting a $500 drug. They just took the hospital gross rate and slapped a 15% discount.
To really negotiate they would have to research the drug history, and have oncologists ready to work for a lower rate, and be willing to walk away from the University of Chicago as a supplier.
And they would do all this if they had real competitors.
The economist John Cochrane has famous articles on this; he also has a great podcast with Russ Roberts on health care pricing.
I’ve heard that the reference pricing experiment was CalPERS idea. It was too big of a client for its third-party administrator to refuse.