The use of reference pricing — a set price for a specific procedure — is helping a major California purchaser save big on a costly component of health care: knee and hip replacements. Not everyone, though, is convinced that this is a long-term fix for a flawed payment system.

Until recently, the California Public Employees' Retirement System, which buys health insurance for 1.3 million workers, dependents and retirees, has been paying some hospitals about $15,000 for elective hip or knee replacement surgery while other hospitals charged more than $100,000, says Ann Boynton, CalPERS deputy executive officer.
That ended in January 2011 when 45 hospitals that met certain quality standards and were willing to accept $30,000 — the average price that CalPERS had paid for joint replacements the previous year — were designated as "value-based purchasing centers."

"At least five other hospitals since then have revised their pricing for us and come into the program," Boynton says.
Catalyst for Payment Reform, made up of some of the nation's largest health care purchasers, points to CalPERS as a pioneer of a concept that deserves widespread adoption. After all, CalPERS spent 30 percent less on knee and hip replacements in 2011 than the year before.

"The idea is that you let the world — including your enrollees — know that if they choose to go to a provider that charges more than the reference price, they'll have to shoulder the difference," says Suzanne Delbanco, executive director of the payers group. "That sends a signal to providers that unwarranted price variation is not going to be tolerated anymore."

But Anne McLeod, senior vice president of health policy for the California Hospital Association, thinks claims of savings from reference pricing are shortsighted. Any hospital that lowers certain charges to participate in a reference pricing program must shift the associated costs elsewhere, so nothing is actually saved, McLeod says.
She advocates for payment reforms that support changes in the way care is delivered, which could actually lower a hospital's costs. "It would be great if purchasers could start thinking beyond the 5 o'clock deadline and focus instead on long-term sustainability," she says.

CalPERS' Boynton agrees in principle and has no plans to expand reference pricing at the moment. But she thinks the joint-replacement program has had some important outcomes, in addition to the big financial savings.
"First, it got the attention of the orthopedic surgeons, some of whom had no idea how much the hospitals were charging," she says. "This helped get surgeons more engaged in understanding how greatly they influence the cost."
Second, shining a light on the huge variation in charges within a single state is its own success.

"It had a somewhat catalytic effect on people [who were] paying attention to the fact that we have to figure out the hospital financing question overall," Boynton says. "It is not a rational system, and I think even the hospital association would agree with that."