Using newly public information about medical costs, CalPERS saved itself thousands because ‘higher cost does not mean better quality.’

A longtime complaint about the U.S.’s $2.87 billion healthcare system is its cost. Since information about the amount the government reimburses hospitals for common medical procedures became public last month, one group has been able to reduce its spending by shopping around.

The California Employees’ Retirement System (CalPERS), which has more than 356,000 PPO members insured though WellPoint, Inc., shopped around using the government’s price data to find the cheapest hospitals for knee and hip replacement surgeries. In two years, they were able to lower costs by nearly 20 percent without any loss of care quality.

“The outcomes of this program further support what we know to be true, that higher cost does not mean better quality,” Ann Boynton, deputy executive officer for Benefit Programs Policy and Planning for CalPERS, said in a press release. “Current spending levels are not sustainable and we must continue to find ways to provide quality services at lower costs now and into the future.”

In May, the Obama administration released data from more than 2,000 U.S. hospitals, giving the country its first peek at the prices Medicare pays for the 100 most common medical procedures. The data showed vastly different charges for the same procedure performed at different hospitals. Prices for joint replacements, for instance, differed by more $200,000.

The data was released to allow for more transparency in an otherwise shielded pricing market. While the data is typically kept secret to maintain a competitive edge among private hospitals, in practice this policy allows the U.S. healthcare system to operate less like a market and more like the Wild West—hospitals can charge whatever they like because patients are rarely notified about the prices before they have procedures.

Using the data about varying charges at California hospitals, the CalPERs administrators saw that knee and hip replacement surgeries ranged from $15,000 to $110,000, without any evidence of different patient outcomes.

In a pilot program, CalPERS gave their clients a list of 46 accredited hospitals that performed total knee and hip replacements for less than $30,000, meaning that the clients would pay little to no out-of-pocket costs beyond their deductibles.

After two years, the cost of CalPERS health plans dropped 19 percent, from $35,408 to $28,695, while out-of-pocket costs for members did not increase, according to an assessment by HealthCore, Inc. of data from 2010-11. Moreover, other hospitals that were not included on the CalPERs list ended up lowering their prices for joint replacement surgeries for CalPERs members as well.

“We were not surprised to find that the program caused overall reductions in cost for CalPERS members,” Winnie Li, senior research analyst for HealthCore, said this week at the AcademyHealth Annual Research Meeting in Baltimore. “However, it was amazing to see how costs fell for CalPERS members among the facilities that were not part of the original designation list. This demonstrates that a program used by a group with considerable buying power can influence costs at facilities not originally part of the intervention.”