California’s Reference Pricing Cuts Charges

Until recently there has been little incentive for hospitals to reduce the fees they charge for procedures such as hip and knee replacements. Then, about one year ago, the California Pubic Employees Retirement System took on hospitals in the state in regard to the fees they were charging for replacements. It did that through a program called “reference pricing”, adopted in 2011. As reported by Peter Ubel, in Pharma & Healthcare, the administration told California public employees that they could use any hospital and any orthopedic surgeon they wanted for a hip or knee replacement but their insurance would cover only $30, 000 of the hospital expenses.

If an employee wanted to use a hospital and surgeon who charged more than the $30, 000, he was free to do so but he would have to pay the extra cost himself. The results have been dramatic with the price of implant procedures dropping by more than 25%. Hospitals known as “high price hospitals” lost more than 20% of their implant business from the public employee population. Lower price hospitals saw their business go up.

Ubel reported that, in response to their lost business, high-priced hospitals dramatically reduced their fees. Not surprisingly, the new fees came in just under $30, 000. Reference pricing may turn out to be one of the most powerful ways to reduce the price of healthcare in the US, Ubel suggested.