Help Consumers Shop for High Value Health Care

Hc Insurance Costs Illustration

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.1 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, which creates competition that holds prices in check. For example, in Sacramento, California, the cost of a knee replacement can range from $24,485 to $42,380,2 but some plans in the area are giving consumers a strong incentive to compare the price of health care services of similarly high quality. 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.3 Moreover, this approach is a stepping stone for consumers to learn how to shop on the quality of the care, which is important not just for the patient’s health but also because high quality can often lead to lower costs in the long run. 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 High Value Care?

For some non-emergency care (like a knee replacement), consumers have the opportunity to select a provider in advance. Making the right decision depends on having information about the cost and quality of treatment and how much their health plan will cover.

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 based on the price of care and basic quality indicators and encourage people to see those providers by lowering their out-of-pocket 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 as much a concern to patients and providers. This price insulation is one reason that health care prices can vary significantly for individual services and groups of services without differences in the quality of care.4

For example, Anthem Blue Cross and the California Public Employees’ Retirement System (CalPERS) found that in California, the total hospital costs for a hip or knee replacement could cost as little as $15,000 or as much as $110,000 with practically no difference in quality.5 In Massachusetts, payments to hospitals by the state’s largest insurers for individual services vary by more than 170% and, for two of those insurers, by more than 300%.6 In her 2011 report examining health care costs in the state, Attorney General Martha Coakley concluded that these price variations are not explained by differences in quality of care.7

Another comprehensive study of pricing variation comes from UnitedHealth’s Premium Physician Designation Program, which evaluated the quality and efficiency of the practice patterns of 250,000 physicians in 41 states and measured cost variability for similar services within markets and across them.8 It isolated price differences by excluding differences in the severity of illness among the physicians’ patients as well as geographical differences in wages and other non-medical costs. A peer-reviewed analysis of the program revealed that in some markets, costs per episode for arthroscopic knee surgery are three times more variable than they are in others.9 UnitedHealth also found no correlation between average procedure costs and measured quality of care. In fact, in communities with similar quality scores for diagnostic cardiac catheterizations, average costs per episode still varied from about $4,000 to as high as $12,000.10

Such unwarranted price variation is part of a larger problem with rising health care prices. Although the growth of overall health care spending has slowed in recent years, drops in the volume of health care services have masked significant price increases for each service. A recent report found that inpatient prices rose 6.7% and outpatient prices rose 6.4% in 2013 while the Consumer Price Index rose 1.5%.11 Average prices increased at higher rates than in 2012, but reduced utilization held overall expenditure increases down to 3.8% and 0.8% respectively.12

A final obstacle to patients getting high value care is 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. In some cases, it can be difficult to determine in advance exactly which items and services a particular patient will need. And even if a consumer knew exactly which items and services would be required, as well as the associated billing codes, provider prices are notoriously opaque.

Fee-for-service payments also make 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. Instead, quality assessments generally come from analysis of providers’ piecemeal bills—looking for things such as charges for complications following surgery. Such analysis shows significant variation in quality. For example, complication rates for patients having knee surgery (e.g., infections and embolisms) range from 4.2% in top performing hospitals to 11.5% in low performers.13

Information on the quality of care is all the more important considering that people often assume that a higher price means higher quality.14 Presenting quality and cost data to consumers in a clear, easy to understand format, however, can help them see that high quality care can often cost less.15 But without incentives to report and use information about the price and quality of care, consumers and providers will tend to stick with the status quo.16 It is easy to see how the quality of care and provider prices can vary widely and grow worse if unchecked by accountability for the price and 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.17 One strategy is to set a target price for a select set of health care services, like a knee replacement, in order to encourage patients to comparison-shop for the lowest price among providers who offer similar quality care. The target price, which health plans generally set near the average of actual prices, is the maximum coverage that the plan will provide for a service. The health plan member pays the difference between the target price and the price charged by a provider they elect to use.18 It is sometimes described as a “reverse deductible” because patients in some health plans pay nothing up front if they go to a provider who accepts the target price; they pay more only if they personally choose to pay a higher price at a more expensive provider.19 Other plans may have a coinsurance payment for coverage up to the target price in order to encourage members to choose a provider who charges less than the target price.20 While just 10% of employers are estimated to use a target pricing approach, 68% of plans are set to adopt target pricing in the next three to five years.21 Although, in the short term, employers may be waiting to see more results of the initial application by early adopters as well as seeing more documentation of unwarranted price variation.22

Health care experts and industry leaders use the term “reference pricing” to describe the use of a target price, but this term has created an unfortunate confusion with regulatory pricing schemes in European countries by the same name.23 To avoid this confusion, this report uses the term target pricing which the supermarket chain, Kroger, uses to explain the concept to its employees.24

In partnership with Anthem Blue Cross, CalPERS is using target pricing for hip and knee replacement in California. After analyzing the market for cost and quality information, CalPERS and Anthem set a target price of $30,000 for the inpatient hospital care for a routine hip or knee replacement.25 The procedures, while requiring inpatient care, are common, relatively standardized, and therefore suitable for a target pricing program.26 But it does require hospitals to cover their higher cost patients by averaging those costs with lower cost patients. Other kinds of care, like cancer treatment, would not be well-suited to setting a target price because the individualized approach to treatment varies widely and often may not be standard.

After narrowing the target pricing to a limited set of services, like hip and knee replacements, CalPERS identified 46 providers throughout California who met quality standards and offered hip and knee replacements at or close to the target price. It distributed educational materials to enrollees about the change in benefits and about the providers who could meet the target price.27

Evidence shows the CalPERS target pricing initiative has both successfully lowered costs and moved patient volume for hip and knee replacements towards providers who fall at or close to the target price.28 After one year, the number of surgeries performed at facilities that were part of target pricing group increased by 8%, and the average amount paid per surgery was 30% lower.29 In the first two years, CalPERS saved $5.5 million (excluding savings in consumer cost-sharing) and expected the change in benefits would reduce overall expenses by 1.6%.30 Eighty-five percent of the cost savings was attributable to price reductions at both hospitals that accepted the target price and at those that did not.31 Outreach from providers to Anthem was significant: the hip and knee target pricing initiative was discussed in every 2011 hospital contract renewal, resulting in improved pricing in a number of cases.32 A number of providers even sought to renegotiate their contracts—for all Anthem subscribers, not just CalPERS members—to lower their fees in order to meet the target price.33 In addition, some hospitals that were unwilling to renegotiate their fees agreed to waive amounts above $30,000 for CalPERS members in order to keep their business.34 CalPERS has expanded its target pricing initiative to include facility payments for outpatient colonoscopies, cataract surgeries, and arthroscopies.35

The nation’s largest supermarket chain, Kroger, based in Cincinnati, has been a leader in using target pricing for health care products and services that have high price variation and low quality variation, like imaging.36 It has used a target price of $800 for certain imaging scans in 10 states in which it operates.37 In those states, the price variation in abdomen CT scans fell by 32% over two years compared to an increase of 14% variation in states without target pricing.38 Over nearly two years, its target pricing program saved $4 million.

Safeway Inc., a California-based supermarket chain, was also an early innovator of target pricing starting in 2008.39 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.40 It has also used target pricing for half of all laboratory test codes.41 As a result of these and other efforts, the company reduced its total annual spending increases per person (including employees’ costs) to zero from 2005 to 2011 at the same time that national spending increased 60% on average.42

All of these experiences that engage consumers in price shopping are a first step toward true value shopping that also incorporates quality measures. Andréa Caballero with the Catalyst for Payment Reform has envisioned value pricing as the next step for target pricing.43 Value pricing would incorporate quality directly into the target price in order to pay providers extra for higher quality.

How Can We Bring Solutions to Scale?

Policymakers should facilitate broader use of target pricing in health insurance exchanges, individual and employer health plans (both large and small employers), and Medicare Advantage.

Much of this will happen by removing the barriers, like regulations that govern how target pricing works with limits on out-of-pocket spending. Such changes will open the door for employers and health plans to expand the range of providers available to consumers outside of their established networks. In addition, providers will naturally want to expand their services beyond their current health plan networks. This will mean more choices for consumers at the moment when they seek care. At the same time, no one—not consumers, providers, nor health plans—wants a race to the bottom where a target price falls so low that no provider is willing to accept it.

This can be done with the following two steps:

First, regulators should eliminate the barriers for employers and health plans to implement target pricing across all types of health plans.

The Affordable Care Act (ACA) applies a limit on consumer out-of-pocket costs to all new (that is, non-grandfathered) plans in the individual, small group, and large group market, including self-funded plans. In 2015, the limit is $6,600 for self-only coverage and $13,200 for other than self-only coverage. As previously noted, insurance benefits such as out-of-pocket maximums are critically important in protecting consumers from financial costs, which they cannot afford. However, the strict application of these rules to target pricing could undermine incentives for consumers to shop for high quality, low cost care.44 If a consumer has full coverage for the cost of a treatment, then he or she will not save any money by going to a provider with a target price. For example, if a target price for a treatment counts as an expense that is part of an out-of-pocket maximum, but an individual has hit the $6,600 out-of-pocket limit, then that person has no incentive to shop around for high quality, low cost care.

The key is not letting the costs of a treatment beyond a target price count towards the out-of-pocket cost limit. The regulations should treat those costs the same way as out-of-network costs are treated under current law. The Obama Administration has adopted this approach for large employer plans that are self-funded (meaning the employer assumes the same financial risk as an insurance company normally would). In a joint publication of Frequently Asked Questions (FAQ) about their consideration of this issue, the Departments of Labor, Health and Human Services (HHS), and the Treasury say that the costs of a treatment beyond a target price will not count towards the out-of-pocket cost limit except under specific situations like emergency and preventive care.45 The next step is for the Administration to extend the approach outlined in the FAQ’s for large employers to plans in the individual and small group market and in Medicare Advantage. Alternatively, Congress could take action if the Administration does not.

Second, regulators and policymakers should protect consumers with standards for employers and health plans to ensure access to care under target pricing.

These standards need to ensure that a target price is high enough that a reasonable number of providers meeting a specific level of quality are willing to accept it. These standards would be similar to network adequacy laws, which measure a health plan’s ability to deliver promised benefits through reasonable access to in-network primary care and specialty providers as well as all other services outlined in the benefits package.46

Again, in the FAQ, the departments have adopted this approach for large, self-funded employer plans.47 It says that plans will be considered in compliance with the ACA’s out-of-pocket maximum if they treat providers that accept the target price as in-network providers for the purpose of defining an adequate network. It also requires plans to set exemptions from a target price when, for example, no providers who will accept the target price are available in an area at the time they need care. It further requires plans to provide consumers with key information, such as details about the use of target prices and the availability of providers who accept that price.48

It is important to note that health plans using target pricing in the small group and individual marketplace would have different communication opportunities than large employers using it. Large employers typically have many opportunities and resources to educate employees about how to use a target pricing benefit. Health plans operating in the small group and individual markets have fewer opportunities for direct contacts with their members than large employers that have contact with their employees every workday.

In applying the FAQ to the health care coverage in the individual and small group market, the Administration and Congress should look to the states and the National Association of Insurance Commissioners to develop guidelines similar to those found in the FAQ, but with a view toward what additional steps might be important in the absence of a large employer. For example, states may want to set standards for the FAQ’s requirement that health plans have automatic notifications to their members about how to use a target pricing program at the time when they will need it.

Another consideration for states (and the federal government) is that existing network adequacy metrics may be ill-suited for determining reasonable access to care when plans utilize target pricing. When reviewing the networks of plans that utilize target pricing, regulators would need to review both the list of in-network providers and the list of providers accepting the target price for identified services. It is possible that providers accepting the target price could be either in-network or out-of-network, and regulations should ensure flexibility to accommodate this new payment model. State regulators should also look at what percentile of the range of market prices that the plan sets its target price. For example, Safeway utilizes target pricing for about 450 laboratory procedures, with prices targeted at the 60th percentile for each test.49

Potential Savings?

The potential savings from more broadly adopting target pricing could be substantial. A 2009 RAND Corporation report estimated that if Massachusetts adopted target pricing for care at academic medical centers, private insurers could save $8.8 billion and overall health care costs in the entire state could decrease by 1.3%.50

A 2014 study by the Employee Benefit Research Institute found substantial savings from target pricing if adopted for just six services: hip and knee replacements, colonoscopies, magnetic resonance imagings (MRI) of the spine, computerized tomography (CT) scans of the head or brain, nuclear stress tests of the heart, and echocardiograms.51 By establishing a target price for each service at the 67th percentile in each of 306 hospital referral regions across the country, employers could save $9.4 billion, or 1.6% of health spending on the 156 million people with employer-sponsored insurance in 2010, assuming providers below the target price do not increase prices.52 Notably, hip and knee replacements account for 40% of the savings.

Thomson Reuters recently performed an analysis using its MarketScan database, which includes 170 million patients since 1995 representing commercial insurance, Medicare supplement insurance, and Medicaid.53 Analysts modeled savings that could be achieved in each health care market across the country by reducing the price of 300 shoppable procedures that were above the median price to the median price, after removing high-cost outliers.54 This target pricing strategy would reduce medical spending by 3.5% which, when applied to the 108 million Americans with employer-sponsored insurance, results in savings of $36 billion.

Finally, a 2014 analysis by the National Institute for Health Care Reform used claims from nearly 530,000 active and retired U.S. autoworkers and dependents in 19 Midwestern cities to simulate the effect of target pricing for shoppable inpatient, outpatient, professional, laboratory, and imaging services.55 This study found the greatest potential savings from target pricing was 4.8% of all shoppable services studied.56 The authors did not provide a corresponding dollar figure for savings to the autoworkers’ health plan.

Questions and Responses

How will consumers be assured their plan’s target price offers adequate access to quality providers?

The Administration’s FAQ’s calls for a comprehensive approach for regulators to assure adequate patient access to providers who will accept the target price. The criteria include, among others, giving patients sufficient time to make an informed choice of a provider after learning that they will need certain care; having quality standards for the providers whose prices the plans use to set the target price; and automatic disclosure of information to patients about how to use the target pricing program. Another key measure is to require health plans to keep up-to-date lists of providers who participate in the target pricing program just as the Administration is requiring health plans to do for their provider network lists.57

What else can be done to ensure high quality care?

Health plans should continue to do more to provide consumers with information on quality variation among providers in conjunction with price information. Variations in quality have been discovered through research. For example, a recent analysis of hospitals where Medicare patients had hip and knee replacement surgeries found that a high number of patients at 95 hospitals faced setbacks in their care that often forced patients to return to the hospital.58 Another study found that hospitals with a low volume of knee replacements hit the right quality standards for knee replacements 50% of time, while high volume academic health centers scored 58%, which is far from perfect but significantly better.59 Plans can provide this kind of information in the form of a one-to-five star rating for quality or some other display of quality differences that is easy for consumers to understand.

What happens when an innovative new service or product used in a target pricing program increases the price of care beyond the target price?

New ways to perform surgery or deliver health care may increase the cost of care beyond what a target price initially covers. For example, a new type of knee surgery involves creating customized replacement bones using digital imaging of a patient’s existing bones. This technique can decrease the adjustment period for patients and increase the durability of the new knee.60 The customization also adds an upfront cost to the standard knee surgery. This challenge is not specific to target pricing, however. Health plans regularly make choices about what new technologies to cover regardless of the type of cost-sharing. Under target pricing, health plans would have to cover the same range of services as they do under their traditional benefits for a specific service. They may need to adjust the target price once a new technology becomes a standard benefit.

One way that target pricing could support innovation is that patients might not need to wait for a plan to adopt a new technology as a standard benefit. Although this approach is not part of current target pricing programs, a plan could say that people who wished to be an early recipient of a new technology could use their existing coverage for a target price to pay for a portion of the service rather than having to pay the full cost out-of-pocket.

Won’t this be complicated for consumers to understand?

Clear, consistent consumer education and communication is a critical element in the success of a target pricing program. While most consumers have an understanding of in-network and out-of-network providers, target pricing further divides in-network providers into two sub-categories: designated and non-designated. Evidence from the CalPERS experience indicates enrollees who learned about the new program from the health plan at the time they needed care caught on quickly to the change, with limited instances in the first month of implementation of patients having surgeries at non-designated hospitals.61 In these instances, payments were reconciled between the patient and the hospital. CalPERS reported few complaints about the use of target pricing, which CalPERS attributes to the inclusion of prestigious hospitals on the list of designated providers. However, CalPERS has experienced some challenges in communicating with consumers about target pricing for outpatient arthroscopies, colonoscopies, and cataract procedures, stemming in part from price differences between hospitals and ambulatory surgery centers, but ended up simplifying this by setting a single target price that includes all the ambulatory facilities.62 CalPERS and Anthem continue to explore the most effective methods for communicating with members. As other payers consider target pricing, it might be helpful to require providers to disclose whether or not they accept the target price.

Since many surgeries may not be necessary in the first place, what can be done to ensure patients are fully informed about their options before they start considering provider choices under a target pricing program?

The goals and preferences of each person should serve as the guide for the health care services they receive and make full use of what each person can contribute to their care.63 But despite much talk about patient-centered care, health care delivery regularly falls short partly because neither patients nor providers have the right tools. One tool that can engage patients in determining their goals and preferences is a medical discussion guide, also known as a decision aid, which is part of a shared decision making process between providers and patients.64

Medical discussion guides can help patients sort out what type of surgery they prefer when scientific evidence is ambiguous about the right course of care. For example, some surgeons replace hip joints through the front of the hip instead of the usual back side approach. This front side technique, which requires less time in the hospital, may allow a patient to recover more quickly, but the evidence is not yet entirely clear.65 With a medical discussion guide, patients can learn about the advantages and disadvantages of treatment options based on the best available evidence and have a productive conversation about the best course of treatment with their provider. Health plans should work with providers to give their members, who are considering a major test or procedure, a seamless process that starts with a medical discussion guide and shared decision making (when appropriate) and continues all the way through helping the member shop for care using a target pricing program.

Would allowing target pricing undermine the maximum out-of-pocket limits set in the Affordable Care Act?

No. As long as health plan members go to a provider who accepts the target price, they would receive the same protection against high out-of-pocket costs as they would without target pricing. The exception for target pricing is limited to only the amounts a plan member spends above the target price. Only that additional amount that a member chooses would count not toward the maximum out-of-pocket limit.

What about the position taken by the Federal Trade Commission (FTC) that target pricing is not a substitute for competition?66

We agree with the FTC’s position—merely changing the manner in which one pays for health care cannot create competition in markets where none exists. We would, however, respectfully observe that the FTC’s blog misses the ability of target pricing to activate pressure on provider prices from consumers that is not present when consumers (or employers) shop for coverage. Because few consumers know what services they will need when they shop for coverage, they tend to prefer health plans that maximize their choices when they need care. Moreover, while plans can anticipate that a predictable number of their members will need a particular service like a knee replacement and negotiate prices for that group of patients in advance, they cannot know exactly how their members will view the list of preselected providers at the time when they need care. That uncertainty causes plans to accept a wider range of providers with an accompanying wider range of prices. Target pricing retains their choice of providers while still letting consumerism constrain prices at the time of health care delivery.

Are the potential savings from target pricing worth the investment for payers?

As with any benefit design change, payers will need to conduct a cost-benefit analysis to determine whether the potential cost savings outweigh administrative and implementation costs. Payers have limited resources to invest in cost savings strategies. However, if estimates of savings on shoppable services of up to 4.8% hold, payers could develop an efficient way to capture the potential savings and ensure a meaningful return on investment.67

Is there a danger that target prices could cause lower-priced providers to increase their rates up to the target price?

When a health plan sets a target price at any amount above lower-cost providers, those providers could be tempted to increase their prices up to the target price. So far, price increases have not in fact been a problem under target pricing, but health plans have three tools at their disposal to prevent it. First, they can set a coinsurance rate of 10% to 20% so that consumers still pay some portion of the cost up to the target price. Second, they can lock-in the prices that providers will charge before they set the target price in order to prevent price increase after the plan sets the target price. Third, they can share with patients some or all of the savings when a patient chooses a provider offering a price below the target price.

End Notes