Hoping to cut medical costs, employers are experimenting with a new way to pay for health care, telling workers that their company health plan will pay only a fixed amount for a given test or procedure, like a CT scan or knee replacement. Employees who choose a doctor or hospital that charges more are responsible for paying the additional amount themselves.
Although it is in the early stages, the strategy is gaining in popularity and there is some evidence that it has persuaded expensive hospitals to lower their prices.
In California, a large plan for public employees has been especially aggressive in using the tactic, and the results are being watched closely by employers and hospital systems elsewhere.
Under the program, some employees are being given the choice of going to one of 54 hospitals, including well-known medical centers like Cedars-Sinai and Stanford University Hospital, that have agreed to charge no more than $30,000 for a hip or knee replacement. Prices for the operation normally vary widely in the state, with hospitals billing from $15,000 to $110,000 for the same operation, a spread that is typical for much of the nation.
A knee replacement at Rush University Medical Center in Chicago.
SALLY RYAN FOR THE NEW YORK TIMES
“It’s a symptom of the completely irrational pricing structure hospitals have,” said Ann Boynton, a benefits executive for the California Public Employees’ Retirement System, known as Calpers, which worked with the insurer Anthem Blue Cross, a unit of WellPoint, to introduce the program.
Overall costs for operations under the program fell 19 percent in 2011, the program’s first year, with the average amount it paid hospitals for a joint replacement falling to $28,695, from $35,408, according to an analysis by WellPoint’s researchers that was released Sunday at a health policy conference.
The study found no impact on quality of care.
“It’s a race to value,” said Dr. Samuel R. Nussbaum, the chief medical officer for WellPoint. One of the nation’s largest health insurers, WellPoint operates Blue Cross plans in 14 states.
The hospitals might have been willing to drop their prices because Calpers has such clout, said James C. Robinson, a health economist at the University of California, Berkeley, who also analyzed the results.
The California plan, which is one of the nation’s largest buyers of health care benefits, is “viewed as a bellwether of what other large employers will do,” Mr. Robinson said. He and colleagues calculated the savings from the program for the first two years at $5.5 million.
While relatively few companies fully embrace the strategy now, more employers are experimenting with it. Using a technique called “reference pricing,” the employer sets a cap, based on what can be an average price for the service or a price that allows employees to select from a wide group of hospitals or doctors but still excludes the very high-priced providers. The idea is to exert pressure on prices for certain procedures without limiting the individual’s choice of hospital or doctor for all kinds of care.
“There will be acute interest and focus on prices and price variation,” said Ron Fontanetta, a benefits consultant at Towers Watson, who said that programs like this represented one approach. About 15 percent of large employers say they expect to try the technique next year, compared with just 5 percent this year, according to a 2013 survey by the firm.
“This seems something that’s a no-brainer,” said Steve Wojcik, a vice president for public policy at the National Business Group on Health, which represents employers offering health benefits to their workers. “Why pay more if you can get it for less?”
Last year, WellPoint worked with the Kroger Company, a large grocery chain, to start a similar program in which payments for certain M.R.I.’s and CT scans were capped at around $800, and employees were given a list of places that would charge that amount or less.
Kroger picked services that had a significant variation in price but did not vary in quality from provider to provider, according to Theresa Monti, a benefits executive at Kroger. The company also chose to set the price the plan would pay at a point where employees would still have a wide range of choices, she said.
Historically, information about how much a doctor or hospital will charge before a patient gets a test and treatment has been difficult — if not impossible — to obtain, and the federal government’s recent decision to publish Medicare data on hospital charges has focused attention on the wide variation that exists throughout the country.
Employers that offer health plans have been pushing hard to get information on pricing and quality so their workers can make more informed choices about providers. WellPoint, for example, is also working closely with an outside company, Cast-
light Health, which offers companies Web-based tools that help employees compare hospitals and doctors.
One of the goals is to determine when the price of a medical service bears no resemblance to the quality care. Paying more money without getting better care in return has been a longstanding source of frustration for employers.
Under the federal health care law, many employers are looking for ways to reduce their own costs without shifting them onto their workers, said Darren Rodgers, a senior executive at the Health Care Service Corporation, which operates nonprofit Blue Cross plans in four states.
“We’re having a dialogue about it right now,” Mr. Rodgers said. Two employers it works with have programs that cap payments for tests, like colonoscopies or CT scans, and a handful of other companies will introduce a similar program next year.
Benefits experts say these programs are only appropriate for medical services with little urgency and where the quality of care does not vary significantly. But it is not always clear that even a seemingly mundane procedure like an M.R.I. may not vary in quality from facility to facility, depending on the skill of the physician to interpret the images, said Dr. Robert Berenson, a health policy expert at the Urban Institute. “Is an M.R.I. just an M.R.I. and just a commodity?” he asked.
While Dr. Berenson described these programs as promising in forcing a more explicit discussion about the value of their care from hospitals and doctors, he said the current ways of determining quality were inadequate. “There are huge domains in quality that we don’t measure at all,” he said.
In the California program, the hospitals were not selected simply on price but on other measures, like how many surgeries they performed and their outcomes, Ms. Boynton said. “It’s not just about reducing cost at the expense of health and clinical outcomes of members,” she said.
About 350,000 people are covered by the California program. While more members chose to get operations from facilities participating in the program, members who went outside were able to get the procedures done for less. On average, members had about the same out-of-pocket costs as they did before the program.
At the least, the California experiment may suggest that the irrationality of pricing may be coming to an end. “Price is the leading driver of health care cost growth,” said Suzanne Delbanco, the executive director for Catalyst for Payment Reform, a group that aims to encourage employers and health plans to change the way they pay for care.
The California plan has made it clear to the hospitals that it was both aware of the unexplained variation in prices and that it would no longer simply pay whatever a hospital charged the insurer, she said. “That’s a very powerful signal,” she said.