A Health Cost Turning Point? Payers Get Creative — The Reboot Part 2

Frustrated payers are starting to take bold new cost-cutting measures that would have been taboo back in the days when “give patients more choice, regardless of the cost” was the dominant trend in US health care. These new tactics include placing limits on how much they will reimburse for specific procedures, cash rewards for doctors who practice evidence-based medicine and limited networks comprised of lower cost providers.

These trends reflect payers’ growing resistance to health cost increases. The US spends a staggering $2.7 trillion on health care, and on a per person basis, our costs tower above those of other nations. Many have blamed our costs on the fee-for-service payment system, which rewards volume over value. They point to the huge variations in prices for services and the fact that high prices don’t necessarily correlate with better outcomes.

As a result, there has been a major push to shift the country to a value-based payment system that rewards for good outcomes. However, that’s not happening quickly enough for many employers and insurers. Instead, they are adopting radical new approaches that aim directly at high prices.

Reference Pricing

One of the biggest changes on the horizon is the rise of reference-based pricing, which allows payers to put a dollar limit on what they will pay for a particular procedure. This is a game-changer because the cost of medical procedures, especially the more expensive ones, can vary substantially and most patients have historically had no incentive to shop around. Steering patients to good care at a reasonable price makes sense.

With reference pricing the payer determines a fair price for a procedure and identifies quality providers who accept that price. A payer might allow $30,000 for a hip replacement, for example. If a patient selects a hospital that charges more, the patient is on the hook for the difference.

The California Public Employees’ Retirement System (CalPERS) has helped pioneer this practice. A study of their early results showed they cut the total cost of hip and knee replacements dramatically. During the first year the policy was enacted, the volume of CalPERS members using low-price facilities for orthopedic surgery increased by 21.2 percent, while volume of high-price facilities went down by 34.3 percent. [i] Besides saving as much as $2.8 million in a single year, reference pricing also put pressure on providers to lower prices. CalPERS members saw a 5.6% drop in the prices charged by lower-price facilities, while high-price facilities dropped their fees by 34.4%.

A survey by benefits consulting firm Aon Hewitt in 2013 found that although just 8% of employers were currently using reference pricing, nearly two-thirds were considering adopting it in the next three to five years. [II]

At least for now, the Obama administration appears to be opening the door to more reference pricing under the new health law. [III] [iv] The administration says such plans are allowed, despite the law’s out-of-pocket limit rule. Patients who do not consider costs could thus end up with astronomical bills. That will provide much greater incentive for them to shop around, but it could also leave many more at risk of medical bankruptcy if they don’t understand how the system works.

This issue is still being “monitored” and so the rules could change, [v] but for now, this is one of the most powerful new tools insurance companies and employers have to control health costs. CalPERS saw substantial rewards focusing on just two procedures. Insurer WellPoint offers one of the most comprehensive referenced pricing programs. It covers more than 900 different services ranging from lab tests to hip replacements and Bariatric surgery. [VI]

Setting Standards of Care

WellPoint has also recently introduced a daring initiative to convince more doctors to treat cancers, according to evidence-based standards. The WellPoint Cancer Care Quality Program will provide enhanced payments of $350 per patient, per month, to doctors who prescribe according to the program’s recommendations.[vii] In a press release, WellPoint notes that “up to 1 in 3 people” do not receive a chemotherapy treatment plan consistent with current best practices. Meanwhile, the cost of new cancer treatments is rising 25% annually. Oncology is also unusual because the medications are typically administered in a hospital or doctor’s office, and providers get higher reimbursements for administering more expensive drugs. The WellPoint Cancer Care program aims to provide incentives for oncologists to consider less expensive treatments when those are equal or even superior to more expensive alternatives.

Highmark, meanwhile, recently set out to change how it reimburses for chemotherapy drugs in western Pennsylvania. Average reimbursement for administering cancer drugs in a hospital is almost 200% higher than when they are given in a doctor’s office.[viii] Highmark says it will pay the same rate, no matter where the drugs are administered. The insurer said this move would “restore more rational payments for cancer care in western Pennsylvania by eliminating markups to the cost of oncology-related services.” Health systems and large hospitals have been buying up independent oncology practices around the country and then billing patients at higher hospital-based rates, the insurer charges. The company aims to restore “more rational pricing for infusion services” and has addressed this in contract negotiations with hospitals in other parts of the country.

It’s not surprising that cancer costs are getting more scrutiny. The costs of new cancer treatments are growing by 25% annually. [ix] Spending on cancer drugs in the US reached $37.2 billion in 2013, that’s more than any other therapeutic category.[x] And it will likely go much higher.

Limited Networks

With the launch of the Affordable Care Act, there was a surge in limited network health plans. Insurers contend that they can offer better care at lower rates by excluding certain providers from their networks. Premiums for such plans can be between 10% to 25% lower than traditional plans. Typically, that means excluding some big name medical centers. The risk is that patients will either be disgruntled because their doctor isn’t in the network, or they will unknowingly visit a doctor who is not part of their plan: If that happens, the patient could face huge bills. Large employers are unlikely to offer such plans, because they won’t want to deal with employees’ complaints. But for small businesses or individuals, the plans have substantial appeal.[xi]

Limits on Prices and Choice? Or Value-Based Care?

So what makes the trends described above different from all the cost control efforts of the past? Well, for one thing, they may actually encourage competition based on cost and value. They are also straightforward and do not require complex reorganizations, such as many of the value-based care initiatives. As a result, it’s possible to evaluate the impact of these new strategies quickly.

Many experts have instead been touting the potential of Accountable Care Organizations (ACOs), which aim to provide better-coordinated, higher-quality care at a lower cost. But the ACO model is extremely complicated, sometimes requires collaboration between different types of organizations (i.e. Hospitals, insurers, and employers). Experience to date suggests that some will succeed, but it could take years to determine which those organizations are.

Finally, it’s not clear how much overall costs can be controlled through ACOs if most doctors and hospitals are still in a traditional fee-for-service arrangement. Savings from one system could essentially be offset by increased costs at another.

Other pundits believe high deductible health plans (HDHPs) are the secret sauce that will fix the US health care system. Such plans aim to encourage patients to become cost-sensitive health consumers by making them pay for more of their care own care. The theory is that this discourages overuse and encourages price sensitivity.

HDHPs have led to cost savings, but it appears that those are relatively short-lived. [xii] Only so much care, after all, is truly avoidable, and it is unavoidable care that is often the most expensive. In contrast to HDHPs, reference pricing should be able to deliver big savings year after year, just by focusing on procedures with the highest price tags.

Besides, the fundamental flaw in HDHPs is that despite years of complaints about the lack of price and quality transparency in health care, the vast majority of patients in the US still do not have access to the information they need to make good decisions about health care services. Most patients don’t want to shop for care anyway. They feel poorly prepared to weigh the risks and benefits.

Insurance companies and employers have the data to help patients make better decisions already in hand, and the expertise to analyze it. While patients have long resisted payers’ efforts to rein in costs, we may have reached the crucial tipping point where now even patients realize that cost has to come into the equation.

Price competition is finally coming to US health care and is likely to play an increasingly important role. It’s critical to recognize, however, that if all we do is rein in prices, we will have lost the chance to achieve the most important goal of real health reform: Improving patient outcomes. The United States has the golden opportunity to be a global leader in how health care should be practiced. Unnecessary services and inefficient care delivery account for almost half the estimated $750 billion the US wastes annually on health care. [xiii] Tackling those twin beasts should be the priority. Price competition will help, but that alone won’t get us where we need to be. We need to have the fortitude to take the next step and make certain that we aren’t just lowering costs, but also improving quality.


[i] Robinson, JC and Brown, TT. Increases in consumer cost sharing redirect patient volumes and reduce hospital prices for orthopedic surgery. Health Affairs, August 2013; 32: 1392–1397. http://content.healthaffairs.org/content/32/8/1392.abstract

[ii] Aon Hewitt, 2013 Health Care Survey. http://www.aon.com/attachments/human-capital-consulting/2013_Health_Care_Survey.pdf

[iii] FAQs about Affordable Care Act Implementation (Part XIX). United States Department of Labor. May 2, 2014. http://www.dol.gov/ebsa/faqs/faq-aca19.html

[iv] Jost, Timothy. Implementing health reform: Third-party payments and reference pricing. http://healthaffairs.org/blog/2014/05/22/implementing-health-reform-third-party-payments-and-reference-pricing/

[v] Alonso-Zaldivar, R. Cost-control plan for health care could cost you. Associated Press, May 15, 2014. http://abcnews.go.com/Health/wireStory/health-cost-controls-ahead-feds-23733071

[vi] Wilde Mathews, A. WellPoint helps cut employers’ health costs. The Wall Street Journal, June 25, 2013. http://online.wsj.com/news/articles/SB10001424127887323998604578567982013011300

[vii] Wilde Mathews, Anna. Insurers push to rein in spending on cancer care. The Wall Street Journal, May 27, 2014. http://online.wsj.com/articles/insurer-to-reward-cancer-doctors-for-adhering-to-regimens-1401220033?tesla=y&mg=reno64-wsj&url=http://online.wsj.com/article/SB10001424052702304587704579588170876612100.html

[viii] Innovation in cancer care and complications for health systems, the Global oncology trend report. IMS Institute for Healthcare Informatics, May 2014 .

http://www.imshealth.com/portal/site/imshealth/menuitem.c76283e8bf81e98f53c753c71ad8c22a/?vgnextoid=19b381d71adc5410VgnVCM10000076192ca2RCRD

[ix] WellPoint’s new quality initiative aims to improve cancer outcomes, promote access to evidence-based and cost-effective care. May 28, 2014. http://ir.wellpoint.com/phoenix.zhtml?c=130104&p=irol-newsArticle&ID=1934999&highlight=

[x] Innovation in cancer care and complications for health systems, Global oncology trend report. IMS Institute for Healthcare Informatics, May 2014 .

http://www.imshealth.com/portal/site/imshealth/menuitem.c76283e8bf81e98f53c753c71ad8c22a/?vgnextoid=19b381d71adc5410VgnVCM10000076192ca2RCRD http://www.imshealth.com/deployedfiles/imshealth/Global/Content/Corporate/IMS%20Health%20Institute/Reports/Secure/IMSH_Oncology_Trend_Report.pdf

[xi] Appleby, Julie. HMO-Like plans may be poised to make comeback in online insurance markets. Kaiser Health News, Jan. 22, 2013. http://www.kaiserhealthnews.org/stories/2013/january/23/hmo-limited-networks-comeback-in-exchanges.aspx

[xii] Frakt, Austin. Healthcare cost-sharing works: Up to a point. The New York Times, May 26, 2014. http://www.nytimes.com/2014/05/27/upshot/health-care-cost-sharing-works-up-to-a-point.html

[xiii] Fung, Brian. How the US healthcare system wastes $750 billion annually. The Atlantic, Sept. 7, 2012. http://www.theatlantic.com/health/archive/2012/09/how-the-us-health-care-system-wastes-750-billion-annually/262106/