How Important Is Cost Transparency To Lowering Health Costs?

The largest public employees retirement system in the country - CalPERS - has plenty to gain from a drop in health care costs. After all, they cover 1.6 million employees, retirees and their families in California.

Now they're saying, they found a way to decrease the amount they've spent on knee and hip replacements by 19 percent in a year, which could have implications for other employer health plans.

Lisa Aliferis blogged about the CalPERS experiment in controlling costs right here on State of Health about a year ago. Aliferis wrote that they decided to tackle costs around these two surgeries, which cost them $55 million dollars a year in 2008.

Now, you might not think there would be much difference in the price for getting a knee or hip replacement across the state. But think again. CalPERS asked Anthem Blue Cross — which manages its PPO plans — to examine the range of prices for these operations in California.

Anthem came back with the startling information that CalPERS was paying $15,000 on the low end to $110,000 on the high end, a more than seven-fold difference from lowest to highest.

“So we started asking ourselves,” Kathy Donneson, Chief of the CalPERS Heatlhy Plan Administration Division told me, “what are we getting from the $110,000 surgery that we couldn’t get from the $15,000 surgery?”

That’s when CalPERS turned to what’s called a “value based purchasing” approach for elective hip and knee replacements, starting with its non-Medicare population. CalPERS set a threshold price of $30,000 for the hospitalization and device charges for these operations. That $30,000 is slightly higher than the average price CalPERS had been paying for a hip or knee replacement. Anthem identified 46 hospitals across the state which would do these operations at the threshold price.

Those PPO members who chose a hospital above the threshold price had to pay the additional costs out of pocket.

CalPERS's Donneson said that quality was an important consideration. Only institutions that scored a certain rank on a quality scorecard were included.

This week CalPERS and Anthem released the analysis showing that their expenses dropped from $35,408 to $28,695 for each knee or hip replacement surgery they covered. And they say that patients' out of pocket expenses didn't go up during this time period.

So if being aware of the costs of treatment and chosing the lower cost options without sacrificing quality worked for CalPERS, can it work for the general population as they strike out on their own to find a doctor for a given procedure?

There has been a tremendous surge in interest in this issue with new initiatives to get medical cost data online.

The Centers for Medicare and Medicaid Services released their charges to hospitals for common procedures in May. This followed an in-depth article about dramatic differences in medical bills that was published in Time magazine this March. And both for-profit websites like Healthcare Blue Book and not-for-proft ones like FAIR health are giving people a benchmark for reasonable procedure rates.

In a story for iHealthBeat,I spoke with Victoria Bogatyrenko, the vice president of product and innovation at insurer United HealthCare. That company has been putting both cost and quality data for their providers online so that consumers can browse the options. Bogatyrenko says they'll be analyzing the data from the online tool at the end of the year and have a few questions in mind.

"Of those people who used the tool, did they go to the physician for the service that they were looking for, that they estimated cost for in the tool?" she asks. "Did they switch from their longstanding doctor to a new provider who might have been more cost effective or who might be of higher quality?"

Bogatyrenko says 84 percent of users in recent focus groups say they're very likely to access the data again. More striking, a third of those said using the tool changed their decision about their provider or treatment.

Still, recent testimony to a US Senate Committee on Finance hearing about medical bills suggested cost transparency alone won't be enough to rein in the price of health care.

Steven Brill whose article in Time Magazine helped prompt the hearing told senators, "While transparency starts the conversation about prices ... it's only a start."