CalPERS Reference Pricing Policy Yields Big ROI

A reference pricing policy for elective surgeries, implemented by Anthem and the California Public Employees' Retirement System (CalPERS) returned $5.5 million in aggregate savings and a 26 percent reduction in price paid for the first two years of the policy's existence.

The model, used by CalPERS' self-funded preferred provider organizations and highlighted by the Agency for Healthcare Research and Quality's Innovation Exchange, was originally put in place for elective knee and hip replacements and has since been expanded to outpatient elective cataract surgeries, colonoscopies, and arthroscopy procedures. For each procedure, CalPERS sets a maximum allowable charge (the reference price) at a level that ensures enrollee access to an array of high-quality, low-price providers.

The reference price is based on a review of hospital pricing and outcomes, with the threshold chosen to ensure that the vast majority of enrollees have multiple high-quality, low-price providers from which to choose. For example, with hip and knee replacement surgery, CalPERS adopted a reference price for the facility fee of $30,000.

Enrollees who choose providers offering a price below the threshold pay according to the plan’s traditional cost-sharing formula. Those who choose a higher priced provider pay this amount, plus the full difference between the hospital price and reference price. To inform their choice for hip and knee replacements, enrollees receive a list of hospitals designated as “high-value” providers that meet established quality criteria and charge at or below the reference price.

The policy took effect on Jan. 1, 2011, for hip and knee replacement procedures and yielded the following results:

  • The proportion of CalPERS–Anthem enrollees choosing a high-value hospital for hip and knee replacement surgery increased from roughly 50 percent in the three years before program implementation (2008–2010) to 62.6 percent in 2011 and to 64 percent in the first 9 months of 2012. During this same time period, Anthem enrollees not covered by CalPERS exhibited little or no change in their choice of facilities.
  • A significant number of hospitals not initially designated as high-value providers meaningfully cut their prices after implementation of the program, presumably in an effort to minimize any potential loss of market share. The average price charged by these hospitals to CalPERS–Anthem enrollees fell from more than $42,000 in the two years prior to implementation to $28,465 in 2011 and to $27,148 in the first nine months of 2012. In total, 15 additional hospitals agreed to the reference price and met the quality and volume criteria, thus also becoming designated as high-value facilities.
  • Reference pricing for hip and knee replacement procedures saved CalPERS approximately $5.5 million in its first two years, with the average price paid by CalPERS falling by 26 percent (more than $9,000 per procedure). The vast majority (86 percent) of savings came from the lowering of costs by hospitals, with the remainder being due to enrollees switching from higher to lower priced facilities.


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