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Policy Innovation Profile

Reference-Pricing Policy for Hip/Knee Replacements Generates Significant Savings by Encouraging Enrollees To Choose High-Value Facilities


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Snapshot

Summary

In collaboration with Anthem Blue Cross, the California Public Employees’ Retirement System (more commonly referred to as CalPERS) changed the benefit design for its self-funded preferred provider organizations to incorporate a “reference-pricing” policy that covers the facility fees for elective hip and knee procedures (fees that historically had varied widely within geographic regions). CalPERS later extended the policy to outpatient elective cataract surgeries, colonoscopies, and arthroscopy procedures. For each procedure, CalPERS sets a maximum allowable charge (the reference price) at a level that ensures enrollee access to an array of high-quality, low-price providers. Enrollees who choose providers offering a price below the threshold pay according to the plan’s traditional cost-sharing formula. Those who choose a higher priced provider pay this amount, plus the full difference between the hospital price and reference price. To inform their choice for hip and knee replacements, enrollees receive a list of hospitals designated as “high-value” providers that meet established quality criteria and charge at or below the reference price. For the other procedures, enrollees are directed to participating ambulatory surgery centers, unless the physician requests that the surgery be performed at a hospital outpatient facility. For hip and knee replacement surgery, the reference-pricing policy significantly increased the proportion of enrollees choosing high-quality, low-price (i.e., high-value) hospitals. The policy also encouraged hospitals not receiving this designation to lower their price. Together, these two changes generated a 26-percent reduction in the average price paid by CalPERS and cumulative 2-year savings of $5.5 million. Patients choosing high-value facilities reported being satisfied with the level of care they received. Analysis of the policy’s impact with respect to the outpatient procedures is not yet available, although early indications suggest it has generated cost savings with minimal member pushback. 

Evidence Rating (What is this?)

Moderate: The evidence consists primarily of pre- and post-implementation comparisons of the proportion of enrollees choosing high-value hospitals for hip and knee replacement procedures and the average price paid by CalPERS to hospitals for these procedures. Additional evidence includes estimates of the cost savings generated for CalPERS from changes in provider choice and hospital pricing. 
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Developing Organizations

California Public Employees' Retirement System
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Use By Other Organizations

Safeway (a grocery store chain) has adopted reference pricing for expensive imaging and laboratory tests, including diagnostic colonoscopies.1 Kroger (also a grocery store chain) has partnered with WellPoint (part of Anthem Blue Cross) to implement reference pricing for high-cost imaging tests, including magnetic resonance imaging and computed tomography scans.

Date First Implemented

2011
The reference-pricing policy took effect on January 1, 2011, for hip and knee replacement procedures.begin pp

Patient Population

Insurance Status > Commercialend pp

Problem Addressed

Hospital pricing for expensive, elective procedures often varies significantly across facilities within a given market area, and these differences typically have nothing to do with variations in quality of care. Under most benefit plans, insured consumers have little or no incentive to choose hospitals offering a lower price for these services. 
  • Wide variations, unrelated to quality: The prices charged by hospitals in a given geographic area for major elective procedures often vary significantly, and these variations generally have little to do with differences in the quality of care or services offered. For example, prior to introduction of this program, California hospital charges for similar hip and knee replacement procedures ranged from $15,000 to $110,000.
  • Little or no incentive for consumers to base choices on price: Traditional benefit plans offered by employers and insurers create little or no incentive for consumers to choose lower priced providers for expensive elective procedures. While most plans incorporate cost sharing with enrollees through deductibles, copayments, or coinsurance, these mechanisms do little to make consumers price conscious, as outlined below:
    • Deductibles: A deductible refers to a fixed amount of money a consumer must pay each year before his or her insurance applies. While deductibles typically range from a few hundred to a few thousand dollars, expensive procedures and tests almost always cost much more than this amount. In addition, the consumer considering an elective procedure may have already paid his or her full deductible for other services received earlier in the year. Consequently, deductibles generally create little incentive for consumers to choose low-priced providers, as the insurer pays most or all costs above the fixed deductible, regardless of the hospital chosen.1,2
    • Copayments: Under copayments, consumers pay a fixed dollar amount that covers a portion of the fees charged for visits, tests, and treatments, regardless of the choice of provider; hence, consumers have no incentive to choose lower priced facilities or physicians.
    • Coinsurance: With coinsurance, consumers pay a fixed percentage of the cost of a visit, test, or treatment, typically 20 percent or less.3 As a result, enrollees have only a small incentive to care about the price charged by providers; in addition, plans almost always have annual caps on out-of-pocket costs, which limits this incentive even further. 

What They Did

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Description of the Innovative Activity

In collaboration with Anthem Blue Cross, CalPERS incorporates a reference-pricing policy into the benefit design of its self-funded preferred provider organizations (PPOs). This policy covers facility fees for several major elective procedures. For each procedure, CalPERS sets a maximum allowable charge (the reference price) at a level that ensures enrollee access to high-quality, low-price providers. Enrollees who choose providers offering a price below this threshold pay an amount based on the plan’s traditional cost-sharing formula. Those who choose a higher priced provider pay this amount, plus the full difference between the hospital and reference price. Key elements of this policy are outlined below:
  • Application to high-cost elective procedures where price (not quality) varies: The reference- pricing policy applies to the facility fees for several high-cost elective procedures where price—but not quality—varies significantly within a given geographic region. CalPERS initially developed the policy for elective hip and knee replacement surgeries, and later expanded it to elective cataract surgeries, colonoscopies, and arthroscopy procedures performed in hospital-based outpatient facilities. The hip and knee replacement reference-pricing policy covers facility fees only (not physician fees) and does not apply to nonroutine (i.e., urgent and emergent) cases. For cataract surgery, colonoscopies, and arthroscopy procedures, it does not apply to freestanding ambulatory surgery centers, which in California tend to charge significantly less than hospital-based outpatient facilities. 
  • Reference price that ensures broad choice at low out-of-pocket costs: For each procedure, CalPERS sets the maximum allowable charge or reference price. This reference price is based on a review of hospital pricing and outcomes, with the threshold chosen to ensure that the vast majority of enrollees have multiple high-quality, low-price providers from which to choose. For example, with hip and knee replacement surgery, CalPERS adopted a reference price for the facility fee of $30,000. At the time this price was set, roughly two-thirds of hospitals in the State that performed hip and knee replacement surgeries on Anthem members charged less than this amount, meaning that the vast majority of enrollees had a low-price facility nearby. Similar analyses led to the determination of reference prices for routine diagnostic colonoscopy ($1,500), cataract surgery ($2,000), and arthroscopy procedures ($6,000) performed at hospital-based outpatient centers. (As noted, for these procedures, Anthem members can also go to an ambulatory surgery center, which generally charges less than these amounts.)  
  • Designation of high-value providers: For hip and knee replacements, CalPERS designates a list of high-value facilities that offer the procedure for a fee at or below the reference price and that meet established volume and quality screens. For example, to qualify as a high-value provider for hip and knee replacement surgeries, facilities must have performed at least 10 hip replacements and 10 knee replacements in the past 18 months, and must have achieved acceptable scores on a hospital scoring methodology used by Anthem and on surgical-site infection rates reported to the Joint Commission. Overall, 46 hospitals initially received this designation, as some facilities charging less than the reference price did not meet the volume- and quality-related criteria. For the other procedures, enrollees are directed to participating ambulatory surgery centers, unless the physician requests that the surgery be performed at a hospital outpatient facility.
  • Notification to enrollees, including list of high-value providers: CalPERS and Anthem use multiple mechanisms to educate enrollees about the policy and notify them about high-value providers that offer the procedures at a low out-of-pocket cost. These mechanisms are outlined below:
    • General notifications to all members: CalPERS and Anthem include information about the reference-pricing policy in enrollment materials sent out each year, including a list of high-value providers. The materials also include a map showing facility locations throughout the State. Information about the policy and high-value providers also appears on relevant portions of the Anthem Web site. 
    • Preauthorization letter (for hip and knee replacement only): CalPERS and Anthem require that all elective hip and knee replacement procedures be approved before the surgery can take place. Whenever such a request is approved, Anthem sends a preauthorization letter to the enrollee that explains the reference-pricing policy. This information generally reaches enrollees as they are in the process of choosing a provider for the upcoming procedure. Because elective colonoscopies, cataract surgeries, and arthroscopy procedures do not require preauthorization, no such mechanism is currently available to reach those in the process of choosing a provider for these procedures.
  • Enrollee cost sharing based on price of chosen provider: The enrollee’s out-of-pocket costs depend primarily on the price charged by the chosen provider, thus giving the enrollee a substantial incentive to choose a high-value provider. Enrollees choosing a hospital that charges less than the reference price pay only the traditional cost-sharing arrangement for the plan. For example, for knee and hip replacement surgeries, CalPERS PPO enrollees making this choice pay 10 percent of the allowed charge; hence, the maximum out-of-pocket cost would be $3,000 (10 percent of the reference price) plus any remaining amount left on the enrollee's annual deductible. Those choosing a hospital charging above the reference price pay the traditional cost-sharing amount, plus the entire difference between the price charged and the $30,000 reference price. For example, enrollees choosing a hospital charging $50,000 would pay at least $23,000—the $3,000 coinsurance, plus the entire $20,000 difference between the hospital and reference price, plus the remaining amount (if any) left on the annual deductible.
  • Additional travel benefit for those far from high-value facilities: As part of the reference pricing policy, a travel benefit covers transportation and hotel expenses for enrollees and family members who live in areas without a high-value provider in the local market. For example, very few hospitals in sparsely populated regions of northern California (well north of the Bay Area) offer hip and knee replacement procedures; those that do generally perform them infrequently and hence do not qualify as high-value providers. The travel benefit enhances access to a high-value provider for the small number of enrollees who live in these areas.  

Context of the Innovation

CalPERS administers health and retirement benefits on behalf of more than 3,000 public school, local agency, and State employers in California. It administers health plan benefits for 1.38 million members who collectively spend $7.5 billion on health care services each year. CalPERS offers multiple insurance options to members, including a set of three self-funded PPOs managed by Anthem Blue Cross and a variety of health maintenance organization (HMO) plans. Approximately 350,000 CalPERS members are enrolled in the self-funded PPOs managed by Anthem. 
 

The impetus for the reference-pricing program came from various in-house studies conducted in the late 2000s that evaluated major cost drivers for CalPERS’ health benefit plans. These studies highlighted large variations in both price and utilization, with osteoarthritis emerging as one area where such variations were particularly large and unrelated to quality of care. These studies convinced CalPERS and Anthem leaders to implement a constellation of purchasing strategies to control costs without negatively affecting quality. Some of these strategies focused on reducing unnecessary utilization through disease management and better care coordination and integration. To address price variations, CalPERS and Anthem leaders discussed the idea of reference pricing for high-cost elective procedures, and identified hip and knee replacement procedures as a good initial target.

Did It Work?

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Results

For hip and knee replacement surgery, the reference-pricing policy significantly increased the proportion of enrollees choosing high-value hospitals. The policy also encouraged hospitals not receiving this designation to lower their price. Together, these changes generated a 26-percent reduction in the average price paid and cumulative 2-year savings of $5.5 million. Patients choosing high-value facilities reported being satisfied with the level of care they received. Analysis of the policy’s impact with respect to the outpatient procedures is not yet available, although early indications suggest it has generated cost savings with minimal member pushback.

  • Migration to low-price, high-quality hospitals: The proportion of CalPERS–Anthem enrollees choosing a high-value hospital for hip and knee replacement surgery increased from roughly 50 percent in the 3 years before program implementation (2008–2010) to 62.6 percent in 2011 and to 64 percent in the first 9 months of 2012. During this same time period, Anthem enrollees not covered by CalPERS exhibited little or no change in their choice of facilities. Hospitals designated as high-value facilities had significantly lower 30-day complication and infection rates than did nondesignated facilities. (Readmission rates did not vary significantly between the two types of facilities.) 
  • Price cuts by previously high-cost facilities: A significant number of hospitals not initially designated as high-value providers meaningfully cut their prices after implementation of the program, presumably in an effort to minimize any potential loss of market share. The average price charged by these hospitals to CalPERS–Anthem enrollees fell from more than $42,000 in the 2 years prior to implementation to $28,465 in 2011 and to $27,148 in the first 9 months of 2012. In total, 15 additional hospitals agreed to the reference price and met the quality and volume criteria, thus also becoming designated as high-value facilities.
  • Significant cost savings, due primarily to price cuts: Reference pricing for hip and knee replacement procedures saved CalPERS approximately $5.5 million in its first 2 years, with the average price paid by CalPERS falling by 26 percent (more than $9,000 per procedure). The vast majority (86 percent) of savings came from the aforementioned lowering of costs by hospitals, with the remainder being due to enrollees switching from higher to lower priced facilities.
  • Satisfied patients: Patients choosing high-value facilities for hip and knee replacement surgeries reported being satisfied with the care received.4

Evidence Rating (What is this?)

Moderate: The evidence consists primarily of pre- and post-implementation comparisons of the proportion of enrollees choosing high-value hospitals for hip and knee replacement procedures and the average price paid by CalPERS to hospitals for these procedures. Additional evidence includes estimates of the cost savings generated for CalPERS from changes in provider choice and hospital pricing. 

How They Did It

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Planning and Development Process

Key steps included the following:
  • Securing formal board approval: In March 2010, leaders brought a proposal for reference pricing to CalPERS’ board of directors, which gave its approval in April. 
  • Conducting upfront analysis to guide setting of reference price: In collaboration with CalPERS, Anthem took the lead in analyzing price variations for total hip and knee replacement surgeries and in determining the appropriate reference price, as described earlier. Similar analyses were conducted to determine the reference price for colonoscopy, cataract surgery, and arthroscopy procedures. 
  • Holding meetings to introduce program to hospitals: Anthem staff used their existing relationships to introduce the hip and knee replacement reference-pricing program to hospital leaders. Leaders of facilities that offered the procedure for a price at or below the reference price and that met the other inclusion criteria tended to accept the program quickly. Leaders of facilities that did not meet inclusion criteria sometimes objected, but for the most part the program did not meet a lot of resistance.
  • Introducing program to orthopedists: Anthem staff also reached out to orthopedists to make them aware of the program. As with the hospitals, little pushback was encountered, although some orthopedists affiliated with higher priced facilities expressed concerns that they may have to seek privileges or perform procedures at other facilities as a result of the new policy. (These concerns may be partly responsible for the subsequent decision by some hospitals to reduce price.)
  • Developing materials for members: In collaboration with CalPERS, Anthem developed co-branded materials describing the program and revamped existing evidence-of-coverage information (which provides a detailed explanation of covered health benefits and services) to include a description of how the program works. Anthem and CalPERS also added information about the program to relevant portions of their Web sites, and developed materials to be incorporated into authorization letters sent to enrollees undergoing hip and knee replacement procedures.

Resources Used and Skills Needed

  • Staffing: The program requires no new hiring, as existing staff at CalPERS and Anthem incorporate the program into their everyday duties.
  • Costs: The program requires minimal financial outlays. Outlays are related primarily to system programming and to development and printing of materials that explain the policy. To ensure that the program worked effectively, some resources were also designated to analysis, research, and reporting. As noted earlier, the program has saved CalPERS a significant amount of money.
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Funding Sources

California Public Employees' Retirement System
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Adoption Considerations

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Getting Started with This Innovation

  • Begin with easier targets: Reference pricing works best with certain types of procedures, and these procedures should likely serve as initial targets for the policy. The best candidates tend to be high-cost procedures that for the most part are elective in nature and for which price but not quality varies significantly across providers in a given region. Procedures where increased volume and focus has the potential to improve quality may be particularly strong candidates.
  • Limit policy to elective cases: The program works only if enrollees have time to investigate their options and make an informed choice of provider. Consequently, emergent or urgent cases should be excluded.
  • Avoid procedures prone to varying opinions on diagnosis, treatment: Reference pricing may not work well in situations where physicians often disagree on the relevant diagnosis or the appropriateness of a given treatment. For example, program leaders at CalPERS considered making spinal fusions part of the reference-pricing program. However, they soon realized that physicians often do not agree on the appropriateness of this treatment. As a result, situations could arise in which an enrollee chooses a facility where his or her current surgeon does not have privileges, forcing a handoff to another surgeon who might subsequently recommend a different course of treatment.

Sustaining This Innovation

  • Consider expansion to other procedures over time: Once the policy has proven effective, adopters should consider expanding it to other procedures. As noted, CalPERS chose to expand reference pricing to elective colonoscopies, cataract surgeries, and arthroscopies. These procedures also exhibited wide pricing variations within regions, and enrollees generally have time to make an informed choice of provider. Program leaders also considered—but to date have rejected—the idea of expanding the policy to high-volume, high-cost laboratory and imaging tests, due to concerns that enrollees want to get these procedures scheduled and performed as quickly as possible.
  • Consider impact of the Affordable Care Act: Regulations established by the Affordable Care Act may have an impact on the appropriate design of reference-pricing policies.
  • Recognize and respond to outreach challenges: Implementation of the policy may prove more challenging with procedures that do not require preauthorization. In these instances, it becomes more difficult to educate enrollees about the policy and available high-value providers during the decisionmaking process. To address this issue, program leaders at CalPERS are considering strategies for proactively identifying and reaching out to enrollees who may be considering an elective colonoscopy, cataract surgery, or arthroscopy. For example, demographic information (e.g., age) or claims data could potentially be used for this purpose. 
  • Regularly reevaluate reference price: It can be difficult to anticipate how the market will react to the introduction of reference pricing or to a specific reference price for a given procedure. For example, CalPERS leaders did not expect so many hospitals that initially charged more to reduce their fees in response to the $30,000 reference price for hip and knee replacement surgery. Going forward, CalPERS leaders will continue to monitor the market’s reaction to the policy and adjust reference prices as appropriate. Given California’s size, these leaders may consider establishing separate reference prices in different regions of the State (prices for hip and knee replacement and other elective procedures have historically been lower in Southern California).

Use By Other Organizations

Safeway (a grocery store chain) has adopted reference pricing for expensive imaging and laboratory tests, including diagnostic colonoscopies.1 Kroger (also a grocery store chain) has partnered with WellPoint (part of Anthem Blue Cross) to implement reference pricing for high-cost imaging tests, including magnetic resonance imaging and computed tomography scans.

More Information

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Contact the Innovator

David Cowling, PhD
Chief, Center for Innovation
California Public Employees’ Retirement System
(916) 795-3262
E-mail: david.cowling@calpers.ca.gov  

Innovator Disclosures

Dr. Cowling reported receiving reimbursement for travel expenses from the National Governors Association for a presentation delivered in June 2013 on reference pricing.

References/Related Articles

Robinson JC, MacPherson K. Payers test reference pricing and centers of excellence to steer patients to low-price and high-quality providers. Health Aff. 31(9):2028-36. [PubMed]

Reinhardt UE. The sleeper in health care payment reform. The New York Times [Internet]. 2012 August 2. Available from: http://economix.blogs.nytimes.com/2013/08/02/the-sleeper-in-health-care-payment-reform/?ref=business.

 

Abelson R. Employers test plans that cap health costs. The New York Times [Internet]. 2013 June 23. Available from: http://www.nytimes.com/2013/06/24/health
/employers-test-plan-to-cap-medical-spending.html?pagewanted=all
.

 

Rao A. Does knowing medical prices save money? CalPERS experiment says yes. The Washington Post [Internet]. 2013 December 6. Available from: http://www.washingtonpost.com/national/health-science/does-knowing-medical-prices-save-money-calpers-experiment-says-yes/2013/12/06
/ac70a020-5ebb-11e3-8d24-31c016b976b2_story.html
.

Footnotes

1 Abelson R. Employers test plans that cap health costs. The New York Times [Internet]. 2013 June 23. Available from: http://www.nytimes.com/2013/06/24/health
/employers-test-plan-to-cap-medical-spending.html?pagewanted=all
2 Robinson JC. Applying value-based insurance design to high-cost health services. Health Aff (Millwood). 2010;29(11):2009–16. [PubMed]
3 Robinson JC, MacPherson K. Payers test reference pricing and centers of excellence to steer patients to low-price and high-quality providers. Health Aff. 31(9):2028-36. [PubMed]
4 Rao A. Does knowing medical prices save money? CalPERS experiment says yes. The Washington Post [Internet]. 2013 December 6. Available from: http://www.washingtonpost.com/national/health-science/does-knowing-medical-prices-save-money-calpers-experiment-says-yes/2013/12/06
/ac70a020-5ebb-11e3-8d24-31c016b976b2_story.html
.
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Original publication: May 21, 2014.
Original publication indicates the date the profile was first posted to the Innovations Exchange.

Last updated: May 21, 2014.
Last updated indicates the date the most recent changes to the profile were posted to the Innovations Exchange.