WSJ – 10/29/2013

Calpers was upset after noticing it paid between $20,000 and $120,000 for the same procedure across the state, without commensurate differences in outcomes. In January 2010, the retirement organization established a $30,000 reference-price limit on what it would pay, and the administrators identified 41 hospitals that charged less than the limit while scoring well on quality criteria…..

Apparently patients are willing to look at the price—when they are the ones paying it. The percentage of Calpers patients selecting low-price hospitals increased to 63% in the year after reference pricing was introduced, from 48% in the year before, and the trend continued into the second year after the introduction.

Even more striking was the effect on pricing strategies. Half of the high-price hospitals cut their rates, many by a considerable amount. (Guess which number they were trying to hit.) Across all hospitals, prices charged to Calpers for joint-replacement surgery declined by 26% in the first year and by even more in the second. The combination of changes in market share and cuts in prices reduced Calpers’ expenditures over two years by $6 million, a much-appreciated gift to a state whose budget deficit has been at Greek levels.