How reference pricing lowered prices for common procedures by 20% in Calif.

An initiative by the nation's largest public pension fund, based in California, has helped cut the prices of many common procedures, saving millions of dollars in healthcare expenses, according to The New York Times.

In 2011, the California Public Employees' Retirement System — CalPERS — changed the way it paid hospitals for 450,000 of its members by implementing a new system called reference pricing. Under this approach, CalPERS set a maximum contribution it would make for the cost of knee and hip replacement surgeries, colonoscopies, cataract removal and a handful of other elective procedures, according to the report. Patients who decided to get a procedure at a hospital with higher prices paid the difference out of pocket.

According to a series of studies, health economists found under the reference pricing system, patients largely sought care a lower-priced hospitals and outpatient centers. As a result, prices and total spending on the procedures fell dramatically.

Lower-priced hospitals saw their market share grow by 28 percent for hip and knee replacements, prompting many higher-priced hospitals to lower their prices. Overall, the cost of the surgery fell by an average of more than 20 percent, saving CalPERS and its patients $6 million in the first two years. Reference pricing had similar effects for the other designated procedures, according to the report.

In contrast, typical healthcare prices paid by employer-sponsored health plans increased by 5.5 percent.

Despite the program's success so far, there are substantial challenges associated with implementing it on a broad scale. First, the model excludes emergency care and care provided when patients are already hospitalized or incapacitated, according to the report. It also requires patients to have easy access to comprehensible price and quality data, but this level of transparency is not commonplace. Finally, reference pricing also requires a good deal of competition among hospitals; if there are too few hospitals in one area, patients will not have a choice about where to seek care, and hospitals won't have the incentive to lower prices.

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