Lower Surgical Costs by Better Aligning the Interests of Insurers and Consumers

July 9, 2015

By Terry Bohlke

The good news about our private health insurance system is that more Americans have coverage today than at any time in history. The bad news is that private health insurance has, at least historically, perpetuated a system that lacks any real incentives or ability for individuals as health consumers to exercise much discretion over their healthcare purchases. This is because unlike any other service or product we buy with our own money, most of us with health insurance never bother to ask what a health procedure costs. Even if we did, it’s unlikely we would get accurate answers. But if, as a country, we are ever going to gain any real control over our healthcare expenditures, this has to change.

In an effort to empower individuals to make smarter healthcare choices, in 2009, the California Public Employees Retirement System (CalPERS), which provides health insurance to 1.3 million employees of the State of California and other public entities, changed the way it provided coverage for some common surgical procedures. Specifically, they advised their policyholders what different providers in the state charged for the same exact procedures, and then, capped what their insurance would cover at a reasonable market rate. What CalPERS hoped would happen is that their policyholders, newly incentivized, would become better healthcare shoppers – and put more effort into finding the best providers at the best price.

For too long the prevailing conventional wisdom among healthcare policy experts was that average consumers lacked the sophistication necessary to make smart choices, and instead, almost automatically defaulted to high-cost providers presuming that higher prices were equated with higher quality. Essentially, what CalPERS did was challenge that conventional wisdom, betting instead that healthcare consumers were more capable than the credit they had been given.

To assess the effectiveness of this strategy, Professor James Robinson and two of his colleagues at the University of California at Berkeley conducted a study on the impact of these policy changes. Here’s what they found: prior to 2009, CalPERS had been paying anywhere from $20,000 to $120,000 for the same knee and hip replacement procedures depending on where the procedure was performed. After 2009, CalPERS set the maximum reimbursement at $30,000 after identifying a number of high-quality surgery settings that would perform these procedures at that level of reimbursement. More importantly, they provided this information to their policyholders well in advance of their required surgeries.

They also looked at the choices beneficiaries were making for cataract surgeries when given side-by-side price comparisons for both hospital outpatient departments (HOPD) and ambulatory surgery centers (ASCs).

What they found in both instances is that most patients elected to have their procedures done in the lower cost setting that, for CalPERS beneficiaries, meant ASCs. In addition, they found that hospitals, which invariably charge more for same-day surgical procedures, began to lower their prices in response to more and more patients choosing ASCs for their surgical care.

Part of the appeal of ASCs is that they focus exclusively on certain surgical procedures that do not require an overnight stay and allow patients to recover in the comfort of their own homes. Consequently, ASCs offer certain efficiencies that hospital outpatient departments cannot, and can often charge significantly less for the same procedures while still meeting and exceeding a wide range of rigorous state and federal regulatory standards.

Until recently, many consumers have been slow to use price data as part of their choice of providers, mostly because they have lacked a financial incentive to do so. What the CalPERS-funded research found, however, is that new benefit designs and transparency tools show considerable promise for an increasingly consumer-driven healthcare system. Most importantly, the study offers clear evidence that many consumers, when empowered with transparent information about cost and outcomes, are fully capable and willing to become more engaged in managing their own healthcare and healthcare costs.

Bohlke is the president of the Ambulatory Surgery Center Association and vice president of Operations for National Surgical Healthcare. He is also the immediate past president of the California Ambulatory Surgery Association and lives in Atwater, California.