A successful effort by a large public health care payer to essentially set a market price for hip and knee replacements has not yet been widely duplicated and there are signs that it won't ever be.
An analysis by the Center for Studying Health System Change of the California Public Employees' Retirement System's use of so-called reference pricing came to mixed conclusions. While CalPERS potentially saved millions on its hip and knee replacement spending, there are some big obstacles to widespread adoption of reference pricing, according to the report called "The Potential of Reference Pricing to Generate Health Care Savings: Lessons from a California Pioneer."
What the retirement system did, starting in 2011, was negotiate a maximum price of $30,000 for hip and knee replacements in its contracts with hospitals. If a hospital didn't agree to accept the reference price, CalPERS and its insurer partner, Anthem, would not reimburse beyond that $30,000 limit and the insured would be responsible for the difference, in addition to regular coinsurance payments, according to the center's report.
The authors note that a previous study found that CalPERS saved $3.8 million the first year alone and also may have saved additional money for others by inducing nonparticipating hospitals to lower their prices. When analyzing the market to determine the reference price, Anthem found prices that ranged from $15,000 to $110,000.
But the HSC report found some big reasons why other employers may not find the same success or even be able to add the strategy given the time and money needed to do so.
CalPERS' large size, 1.3 million members, and status as a state agency give it negotiating leverage that most other employers wouldn't have. Moreover, the strategy may be useful only in simpler procedures, and creating reference prices for multiple procedures may be administratively difficult.
CalPERS itself ran into trouble with the second round of reference pricing it implemented, which was for outpatient arthroscopies, colonoscopies and cataract procedures. Reference prices were not negotiated for the generally lower-priced independent surgery centers, but they were for hospital-affiliated outpatient facilities.
That fostered confusion among patients who may not have readily known the difference, a problem that was worsened because the procedures did not require preauthorization. Patient education on reference pricing was part of the preauthorization process for the hip and knee replacement program.
The increased amount of administrative work involved and the fact that reference pricing does not address quality — as do other reform efforts being tested — may mean reference pricing will get left by the wayside by employers looking to cut health care costs.
"A key challenge for purchasers is that they have limited resources to devote to cost-saving strategies and must decide where to focus their efforts," wrote the authors.
"Whether reference pricing is a worthwhile approach for an individual purchaser may depend in part on the administrative and implementation costs as well as the opportunity cost of forgoing other strategies."