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Stunning Results From California

(John C. Goodman, Ph.D., Psychology Today) Like other third-party payers, WellPoint discovered that the charges for hip and knee replacements in California were all over the map, ranging from $15,000 to $110,000. Yet there were 46 hospitals that routinely averaged $30,000 or less. So WellPoint entered an agreement with CalPERS (the health plan for California state employees, retirees and their families) to pay for these procedures in a different way.
WellPoint created a network (I am informed that this is not technically a “network” but I’m going to call it that anyway) consisting of the 46 facilities. There was no special negotiation with these hospitals, however. WellPoint simply encouraged their enrollees to go to there. Patients were free to go to elsewhere, but they were told in advance that WellPoint would pay no more than $30,000 for a joint replacement outside the network. (At all the hospitals, patients pay a 20% copayment up to $3,000.)
Take a look at the graph below. The patients in this graph have been adjusted for case severity and geographical diversity in a study by Berkeley health economist James Robinson and his colleague Timothy Brown. The bottom two lines show patients who went to the 46 hospitals. The red line reflects the average cost for CalPERS patients who, beginning in 2010, were enrolled in WellPoint’s new program. The blue line is the control group. As the figure shows, there is not that much difference between the two populations in terms of the cost of their procedures.
Now look at the top two lines. The red line represents the average cost for CalPERS patients who went outside the network (about 30% of the total). Beginning in 2010, they undoubtedly told the providers they had only $30,000 to spend. As the figure shows, the cost of care at these hospitals was cut by one-third in the first year and continued heading toward the average “network” price over the next two years…
Now ask yourself this very important question: Who is more powerful at controlling health care costs? Huge third-party bureaucracies negotiating with providers? Or patients paying the marginal cost of their care?
 
Community: But may I add that only under threat of intervention by a huge third-party bureaucracy did CalPERS and its insurer decide to come up with a cost-saving plan.
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