The California Public Employees’ Retirement System (CalPERS), one of the country’s largest purchasers of employee health coverage, is reducing health care spending through a “reference pricing” policy that encourages beneficiaries to shop for the best provider prices.
For certain health care procedures, CalPERS will reimburse its 1.6 million beneficiaries in full for amounts less than or equal to a guideline CalPERS sets, known as a reference price. Beneficiaries pay the remainder, creating an incentive for patients to shop for the best value for certain treatments, drugs, imaging tests, and probes.
When the reference pricing program launched as a pilot in 2011, only 46 California hospitals were charging less than CalPERS’ $30,000 reference price for inpatient orthopedic surgeries such as a hip or knee replacement, Governing reported in December 2015. By December 2015, 72 hospitals were charging less than the reference price.
Researchers at the University of California-Berkeley calculated CalPERS saved $5.5 million over the program’s first two years, during which 40 California hospitals lowered their prices closer to the reference prices and patients opted for less-expensive providers, the Los Angeles Times reported in 2013.
Consumers Drive Price Reductions
Ann Boynton, deputy executive officer of benefit programs policy and planning at CalPERS, says real reductions in health care pricing are driven by consumers making conscientious decisions based on value.
“Many [CalPERS] strategies focus on health insurers and health care providers,” Boynton wrote on the Health Affairs Blog with James Robinson, director of the Berkeley Center for Health Technology. “However, CalPERS recognizes that insurer and provider-focused initiatives are hobbled if individual consumers are indifferent to the price of the care they select. More recently, therefore, CalPERS has implemented reference pricing as a consumer-oriented incentive that pursues the same core goals of increasing value in health care through higher quality and lower cost.”
Private Sector’s Preference
Marc Joffe, a senior policy analyst at the California Policy Center, says CalPERS is on the right track in imitating private insurers, but it cannot match the private sector’s efficiency.
“Retired public sector employees receive a sizable sum via CalPERS,” Joffe said. “It looks to me what CalPERS is doing is what a normal private insurer would do—trying to cut costs—but this could be done more efficiently by the private sector. Cities, counties, and school districts are getting crushed by expenses of the public retirement program.”
Although price transparency empowers patients and drives down prices, these benefits do not yet characterize CalPERS, Joffe says.
“Price transparency in medical care is very good and very important,” Joffe said. “We don’t hear much about that regarding CalPERS. Out here we hear CalPERS is overcharging people big time.”
Penelope Lemov, “You’d Better Shop Around,” Governing, December 2015: https://heartland.org/policy-documents/youd-better-shop-around
Ann Boynton and James C. Robinson, “Appropriate Use of Reference Pricing Can Increase Value,” Health Affairs Blog, July 7, 2015: https://heartland.org/policy-documents/appropriate-use-reference-pricing-can-increase-value
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