Reference pricing saves California providers millions on voluntary procedures

Amid rising healthcare costs around the nation, a California initiative has cut expenses for common procedures by millions, according to The New York Times.

Five years ago the California Public Employees’ Retirement System, or CalPERS changed the way it pays hospitals for 450,000 of its members, setting a maximum contribution for several elective procedures according to the article. This approach, known as reference pricing, means patients pay the difference when they have such procedures at higher-priced hospitals.

Since altering their approach, NYT reports that lower-priced California hospitals have seen a 28 percent increase in market share for knee and hip replacements as the new pricing scheme drives down prices, and draws in CalPERS patients. In the meantime, higher-priced hospitals, faced with the loss of market share, have reduced their prices. Therefore, costs for the procedures have declined an average of 20 percent, saving CalPERS and its beneficiaries about $6 million in the past two years, according to NYT.

Despite these successes, reference pricing alone won’t solve all of hospitals’ cost woes, according to the article; it relies on healthy competition to give hospitals enough incentive to reduce prices. This has led some major regional providers, such as the Cleveland Clinic, to partner with large employers for referrals for patients with limited local choice, according to the article.

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