Until recently, hospitals in California had little reason to reduce the fees they charged for procedures like knee and hip replacement. Insurance companies might come their way, trying hard to bargain down their rates. But the hospitals knew that if enough of them said “no” to these lower fees, insurance companies would be left with very small provider networks, and would therefore have a hard time attracting customers.
But that changed in 2011, when the California Public Employees’ Retirement System (CalPERS) adopted a program of “reference pricing,” a policy that wasrecently shown to reduce the price of these procedures by more than 25%.
Here is how the program worked. California public employees were told they could use any hospital, and any orthopedic surgeon, they wanted to, but with the understanding that their insurance would cover only $30,000 of hospital expenses for their hip or knee replacement procedures. So if a patient chose a hospital that charged $40,000 for such a procedure, that patient would be financially responsible for that extra $10,000. The results of this program were dramatic… (Read more and view comments at Forbes)