Select Networks Effect on Spending

The health plan covering many of California’s public employees adopted a plan to set a firm price for certain orthopedic surgery procedures and thereby hope to encourage patients to use more low-cost facilities.  A study in Health Affairs looked at early experience under this initiative.   (HA Article)   The use of reference pricing for hospital services can be useful to counteract hospital market power and to add to the limited effect of deductibles on these usually expensive procedures.  Reference pricing allows the member to use any hospital or surgeon in a broad network, but requires the member to pay more if that hospital or surgeon charges more than than the ceiling price.  The tactic may be used in combination with a subset, narrow network of hospitals exempt from the ceiling because they already are deemed low-cost, good quality.  The CalPERS plan focused on knee and hip replacement and was implemented in January 2011.  Forty-one hospitals in the state were placed in the narrow network subset, and they were under the $30,000 limit CalPERS set for the procedures.  Employees were educated about the program and if they chose a narrow network hospital they were subject only to coinsurance up to the out-of-pocket maximum.  If they went to another hospital they faced the coinsurance and the cost over $30,000.  In the year after implementation, 21% more surgeries were performed in the narrow network and surgeries in hospitals outside the network fell by 34%.  No such changes in surgery location occurred in a control group not subject to the program.  In addition, the average price paid for such surgeries in 2011 declined by over 25%.  Many of the non-narrow network hospitals decreased prices, apparently in a bid to keep market share.  This initiative demonstrates the power of incentives to not only affect patient behavior, but that of providers.