Executive Summary: Help Consumers Shop for High Value Health Care

After surgery to replace one of his knees, Jack had to pay 10% of each bill to cover the coinsurance under the benefits of his health plan. Little did he know, the hospital he selected for his surgery was one of the more expensive facilities for knee surgeries in California. His share of the hospital bill was much more than he imagined.

Had Jack been a California state employee, he might have had a completely different experience. Before his surgery, he would have seen the variation in prices for hospitals with similar quality of care through an online comparison tool. He could have saved money because he would have been part of a large group of employees who were shopping for knee surgeries and other types of care under a new approach to insurance coverage that has created competitive pressure on expensive facilities to drop their prices.

Bold experiments by employers and health plans are enabling employees to shop for care, creating competition that holds prices in check. For example, in Sacramento, California, the cost of a knee replacement can range from $24,485 to $42,380, but some plans in the area are giving consumers a strong incentive to compare the price of high quality health care services. They have set a maximum target price of $30,000 for the total hospital costs of a knee surgery, while requiring that providers show consumers how much each of them would charge compared to the target price. Under this approach, consumers are responsible for paying the full additional cost above the target price, but the target price has a huge effect on the high prices charged by some providers—they drop dramatically. By scaling this approach up nationally, policymakers can give patients more control over the cost of their health care and reduce health care costs overall by as much as 1.3%, which amounts to billions of dollars of savings when aggregated across the health care system.

This idea brief is one of a series of Third Way proposals that cuts waste in health care by removing obstacles to quality patient care. This approach directly improves the patient experience—when patients stay healthy, or get better quicker, they need less care. Our proposals come from innovative ideas pioneered by health care professionals and organizations, and show how to scale successful pilots from red and blue states. Together, they make cutting waste a policy agenda instead of a mere slogan.

What is Stopping Patients from Getting Quality Care?

Health insurance rightly protects consumers from catastrophic financial costs, but the financial insulation that comes with insurance also makes it easy for everyone—from patients to providers—to ignore differences in the price and quality of care. Most health plans assemble a network of health care providers and encourage people to see those providers by lowering their out-of-pockets costs for in-network care. But when a health plan covers most (or all) of the cost of care, the actual price is no longer much of a concern to patients. As a result, providers end up varying the price of care without any difference in the quality of care.

The current, fee-for-service payment structure—where providers bill for each individual item or service, rather than charging a package price for a particular episode of care—also prevents patients from getting high value care and makes the quality of care less transparent. With separate billing for each service, no single provider has the responsibility to document and report the quality of care.

Where are Innovations Happening?

Large employers are pursuing payment reforms and value-based purchasing within their networks to address price variation and improve value. One strategy—target pricing, also known as reference pricing—encourages patients to comparison-shop for providers who offer the best quality care at the lowest price. Successful examples include:

• In partnership with Anthem Blue Cross, CalPERS set a target price for a routine hip or knee replacement in California. After one year, the number of surgeries performed at facilities that charged below the target price increased by 8% and the average amount paid per surgery was 30% lower. In the first two years, CalPERS saved $5.5 million (excluding savings in consumer cost-sharing) and expects target pricing will reduce overall expenses by 1.6%.
• The nation’s largest supermarket chain, Kroger, based in Cincinnati, found that certain imaging scans fell by 32% over two years of using target pricing, saving $4 million.
• Safeway Inc., a California-based supermarket chain, was also an early innovator of target pricing starting in 2008. After observing a tenfold variation in colonoscopy prices within a market, Safeway applied target pricing to colonoscopies, establishing a $1,500 target price for the facility fee for non-emergent, uncomplicated procedures.

How Can We Bring Solutions to Scale?

Policymakers should facilitate broader use of target pricing by health insurance exchanges, individual and employer health plans, and Medicare Advantage by:

• Protecting consumers with standards for employers and plans to use for target price programs that ensures a reasonable number of providers meeting a specific level of quality are willing to accept the target price as payment in full and allows exemptions from target pricing for patients who don't have access to providers who accept the target prices in their area at the time they need care.
• Eliminating the barriers for employers and health plans to implement target pricing across all types of health plans by not counting the costs of treatment beyond a target price towards the Affordable Care Act’s out-of-pocket limit.

Potential Savings

A growing body of evidence finds cost savings from the use of target pricing. A number of recent studies have found the potential for target pricing to reduce health care spending by 1.3-4.8%.