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Paying less for hospital care through reference pricing

Written by Diane Archer

Only an an all-payer system with uniform health care rates, will keep us from wildly varying and out-of-control hospital and doctor rates. But, since Congress is not likely to go that route any time soon, CALPERS, the California Public Employees Retirement System, is using reference pricing to pay less for hospital care.

Last year we reported on the benefits and risks of CALPERS’ initiative to drive down hospital prices. In brief, CALPERS used its leverage to set the amount it would pay for a range of routine services and told its 450,o00 members that they could go to a hospital that priced the service at that rate or lower to keep their out-of-pocket costs down. Or, they could go to any other hospitals and pay the difference between the price CALPERS set and the price that hospital charged plus the copay.

The price of hip and knee replacements could be more than $100,000, depending on the hospital. CALPERS set its fee for a hip or knee replacement at $30,000 with a 10 percent copay and urged its members to use one of the 41 hospitals that charged this amount. People who chose to go to hospitals with a $50,000 charge would have to pay the $3,000 copay plus $20,000.

This pricing strategy is called reference pricing. And, Austin Frakt reports for the New York Times that it has not only saved CALPERS millions of dollars, but it has pressured the higher priced hospitals to rethink their charges for a variety of common services.

Not surprisingly, the CALPERS members favored the lower-priced hospitals to keep their costs down. And, those hospitals saw heir business increase by 28 percent, Moreover, when the hospitals with higher prices saw they were losing business to the lower-cost hospitals with similar quality, they reduced their prices by an average of 20 percent.

So, why isn’t reference pricing a solution to high-priced hospital care?

  • It only works for elective services, where people have time to shop around. But, 60 percent of hospital services are not elective; they are emergency services or inpatient services over which patients have no control.
  • It only works where there is price and quality transparency. Often, hospital charges and quality information are not available to patients.
  • It only works when people have the wherewithal to navigate it. Patients with mental disabilities or low health literacy levels may not be able to use it and may end up with exorbitant out-of-pocket costs.
  • It only works when there is a competitive market. If there’s only one hospital in the area, people have little choice where to go.

Opponents of reference pricing would like to see stronger government regulation of the health care market, the strategy of every other developed country. Essentially, do what Medicare does and negotiate prices for all medical and hospital services.

Here’s more from Just Care:




1 Comment

  • While the idea sounds laudable, I quite clearly recall the rationale behind copays in general, a paperwork/book keeping charge was the original rationale that justified copays.
    So, I’m guessing that it takes $35.00 to do paperwork for a specialist and my primary uses *so* much paperwork that it costs $25.00 for the electrons involved in documentation. Regardless of the $1500 per month I spend on a platinum plan.

    What once was a paperwork compensation became a way of life. What could be next in our rationed health care system? Travel to a distant state to save an insurance company that I’m paying out the nose to a bit of money?
    Or perhaps, travel to a high nosocomial morbidity and mortality rate hospital, thereby saving the insurance company followup costs?

    I’ve this thing, abuse a trust once, get mistrusted always.

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