Read that NYT exposé of price gouging in joint replacements? Here's an antidote

For those angered by the recent New York Times exposé of price-gouging in joint replacement devices and operations in the U.S. (total hip replacement tabs topping out at $112k, vs. $13k in Belgium), a CalPERS health insurance initiative offers a partial antidote. Melanie Evans explains in Modern Healthcare:

Joint replacement prices at the most costly California hospitals plunged by one-third after the state required its workers and retirees to pay out of pocket all costs above a “reference price” of $30,000 for orthopedic surgery, a new study said.

The average cost of joint replacement among high-priced hospitals dropped to $28,465 after the California Public Employees' Retirement System made the change in 2011, wrote University of California researchers James Robinson and Timothy Brown in the journal Health Affairs. That's down from $43,308 the prior year.

Using patient incentives to control costs is usually branded as "conservative" in the U.S. And indeed, "consumer-driven healthcare" is just a misleading euphemism unless crucial elements -- price transparency and genuine choice -- are part of the mix. In this case, they are:

CalPERS and insurer Anthem designated 41 hospitals as those with “value”—those with joint replacements priced below $30,000, a high volume of procedures and quality measures reported to the Joint Commission and the state. Patients at “value” hospitals paid co-insurance up to $3,000. Patients who went elsewhere paid the co-insurance up to $3,000 and any additional cost beyond the $30,000 total price.

Value hospitals started getting a lot more of the joint replacement business. In 2010, “value” hospitals performed fewer than half (43%) of joint replacement procedures among the study population. That jumped to 63% in 2011. Hospitals not selected as “value” saw their percentage of joint replacement operations fall to 37% in 2011, from 52% before the benefit design switch.

Another crucial element in this program is that the incentive is calibrated to..incent:

Simply imposing high deductibles, Robinson said, does little to make consumers aware of hospital prices, because the charges exceed the deductible almost immediately, leaving insurers to pick up the rest of the cost and keeping patients oblivious to the price.

But consumers seem highly aware of prices under the new CalPERS benefit design.

Finally, when the employer or plan designer can give the patient the means of making an informed choice, the incentives cut two ways:

“I don't think hospitals are afraid of insurance companies,”[study author Prof. James Robinson of Berkeley' said in an interview. “I don't think hospitals are afraid of employers. I think hospitals are afraid of consumers. If consumers care about price, hospitals care about price. If consumers care about quality, hospitals care about quality.”

There's cause for caution with incentives designed to shape patients' choice of care. In some cases, an expensive procedure that statistically offers no advantage in aggregated cases may be tailored to the condition of a particular patient and shouldn't be priced out of reach. But in the mass of routine treatments, well-designed reference pricing can be a genuine win-win.