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How to Cut Medical Costs 101

Give consumers an incentive to care about the cost of medical care and the cost of medical care will decline. That’s economics 101 (a course Barack Obama obviously didn’t take), straight out of Adam Smith.

A beautiful illustration of that is reported in today’s Wall Street Journal regarding a new concept called “reference pricing.” With traditional health insurance (which ObamaCare mandates) patients needing a procedure pay a deductible and then the insurance covers the rest of the cost, whatever that might be. This is, of course, an open invitation for care providers to jack up the prices, which they have been doing far in excess of inflation for decades. With reference pricing, the insurance company pays a certain amount and anything above that is the patient’s responsibility, concentrating their minds wonderfully.

Calpers, the giant California state retirement system, handles health insurance for its hundred of thousands of public employees, dependents and retirees and noticed that knee and hip replacements cost anywhere from $20,000 to $120,000 depending on the institution where they were performed but with no difference in outcomes:

In January 2010, the retirement organization established a $30,000 reference-price limit on what it would pay, and the administrators identified 41 hospitals that charged less than the limit while scoring well on quality criteria. Calpers launched an outreach program informing employees that they had their usual coverage at these “value-based” facilities but would have to pay the extra money charged elsewhere.

Well, guess what:

The percentage of Calpers patients selecting low-price hospitals increased to 63% in the year after reference pricing was introduced, from 48% in the year before, and the trend continued into the second year after the introduction.

Even more striking was the effect on pricing strategies. Half of the high-price hospitals cut their rates, many by a considerable amount. (Guess which number they were trying to hit.) Across all hospitals, prices charged to Calpers for joint-replacement surgery declined by 26% in the first year and by even more in the second. The combination of changes in market share and cuts in prices reduced Calpers’ expenditures over two years by $6 million, . . .

The fact is, 315 million consumers of health care saying, “How much is this going to cost” will rein in healthcare expenditures far more effectively than 315,000 government bureaucrats meddling in the marketplace.



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