The encyclopedia · Finance & Accounting · Financial decision · 2011–2013
CalPERS capped what it pays for hip and knee surgery, and hospital prices fell
Facing five-fold price variation for joint replacements, CalPERS set one reference price; members pay excess, so hospitals cut prices.
CalPERS
The solution
In January 2011, CalPERS and its PPO insurer Anthem Blue Cross introduced reference pricing for knee and hip replacements after finding a five-fold variation in what California hospitals charged for the two procedures, with no measurable difference in outcome quality. Anthem identified 41 hospitals as value-based purchasing facilities based on price, and the program set a maximum reimbursement of $30,000 for the surgery.
Members kept the freedom to choose any hospital, but had to pay the part of the bill above the reference price if they went outside approved facilities. The share of CalPERS members choosing an approved high-value hospital rose from 50 percent in 2008–2010 to 64 percent in the first nine months of 2012, while non-CalPERS Anthem members did not move.
The result was savings of about $5.5 million in the first two years and a 26 percent fall in the average cost to CalPERS for the procedures, with about 86 percent of the savings coming from hospitals lowering their prices rather than from patients shifting providers.
Why it worked
- The announced ceiling turned hospital price differences into a patient out-of-pocket cost, changing what patients chose.
- Hospitals cut prices because staying under the reference price kept them on the approved list and kept volumes.
- The design needed no new regulator or price controls — the purchaser just changed its own payment rule.
- CalPERS built it on an existing PPO network, so it scaled to other procedures at almost no cost.
What can be applied
When supplier prices vary wildly for identical services, an announced maximum with patient out-of-pocket exposure moves both choices and prices faster than renegotiating contracts.
Aftermath
CalPERS extended reference pricing to about 20 procedures: colonoscopies, cataract surgery, imaging and others, saving millions annually while reporting fewer complications, according to the fund's own account. Studies by health economists documented price declines not only for CalPERS members but in California's broader market. States and employers copied the design, including Montana's public employees program, and the debate turned to equity — ensuring reference prices do not fall hardest on low-income patients.
Sources
- CalPERS' 'Reference Pricing' Initiative Saves $5.5M Over Two Years
- CalPERS Now: New Strategies to Provide You Affordable, High-Quality Healthcare
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