Proof that market forces, rather than insurance companies may be a viable way to reduce healthcare costs.
The media has echoed the idea of market forces helping to reduce healthcare costs. The problem has been that their definition of market forces really were insurance companies negotiating with different groups for procedures like hip or knee replacements, where the cost could differ by thousands of dollars depending on how the negotiation went.
Insurers, actually have been responsible for hospital systems getting larger and the larger systems are now raising prices and making it more difficult to negotiate with due to monopolistic activities. Insurance companies have done the same, combining to form large companies that eliminate competition and we are all paying more for health insurance than before. We, the consumers have been duped into paying more while we receive fewer services.
Personally, I have always wondered why an MRI costs $800 if I use my insurance but if I tell them I am paying cash, in NJ, some facilities will do the test for as low as $400 and still clear a nice profit. Would you want these insurance same companies negotiating on your behalf for your next car?
An innovative program was created for the state of California for the California Public Employees”™ Retirement System (Calpers), which in 2011 developed reference pricing, which created price caps for certain procedures. While Calpers would pay all hospitals for certain procedures, there was a maximum they would pay and while certain hospital accepted their fees which appear to be generous, some hospitals would charge much more when this program went into effect.
What happened next is that the lower priced hospitals became much busier while the highly priced hospitals began to lower their prices as fewer people visited them for similar procedures, something that is expected in a true market place, which is sorely missing in healthcare in the USA.
Basically, Calpers was now saving millions and lowering the cost of care for thousands of people who were covered by the system.
While this idea is likely not going to work for everything, any procedure that is commonly done should be subject to market forces, such as an MRI or a knee replacement or even a colonoscopy.
Check out the NY Times report on how California’s program used market forces to do a much better job to negotiate healthcare costs.
How Common Procedures Became 20 Percent Cheaper for Many Californians
At a time when health care spending seems only to go up, an initiative in California has slashed the prices of many common procedures.
The California Public Employees”™ Retirement System (Calpers) started paying hospitals differently for 450,000 of its members beginning in 2011. It set a maximum contribution it would make toward what a hospital was paid for knee and hip replacement surgery, colonoscopies, cataract removal surgery and several other elective procedures. Under the new approach, called reference pricing, patients who wished to get a procedure at a higher-priced hospital paid the difference themselves.
For example, in 2011 the Calpers maximum contribution for a knee or hip replacement surgery was set at $30,000. A Calpers patient receiving knee or hip replacement surgery at or below this reference price paid the usual cost-sharing: 20 percent of the cost, up to a maximum of $3,000. But a patient electing to use a hospital that charged, say, $40,000 paid the usual cost-sharing in addition to the $10,000 above the reference price.
As Calpers initiated the new approach, 41 of the several hundred hospitals in California could provide knee and hip replacement procedures at or below $30,000 and with acceptable quality, as measured by things like low readmission rates and high rates of use of guideline infection controls. Some hospitals charged more than $100,000 for the procedures.
The results of knee and hip replacement surgery reference pricing were striking, as were those for cataract removal, arthroscopy and colonoscopy. In a series of studies, James Robinson and Timothy Brown, University of California, Berkeley, health economists, found that under reference pricing, Calpers patients flocked to lower-priced hospitals and outpatient surgical centers. Prices and total spending for the procedures plummeted.
For knee and hip replacements, lower-priced hospitals saw their market share increase by 28 percent. As higher-priced ones lost market share, many chose to reduce their prices. Prices for the procedures fell by an average of more than 20 percent,