New health cost controls get OK from feds

WASHINGTON -- The Obama administration has given the go-ahead for insurers and employers to use a new cost-control strategy that puts a hard dollar limit on what health plans pay for some expensive procedures, such as knee and hip replacements.

Some experts worry such a move would surprise patients who pick more expensive hospitals. The cost difference would leave them with big medical bills that they'd have to pay themselves.

That could undercut key financial protections in President Barack Obama's health-care law that apply not just to the new health insurance exchanges, but to most job-based coverage as well.

Others say it's a valuable tool to reduce costs and help check premiums.

Some federal regulators appear to be concerned. A recent administration policy ruling went to unusual lengths, acknowledging the cost-control strategy "may be a subterfuge" for "otherwise prohibited limitations on coverage."

Still, the departments of Labor and Health and Human Services said the practice -- known as reference pricing -- could continue.

HHS spokeswoman Erin Shields Britt said in a statement the administration is monitoring the effects of reference pricing on access to quality services and will work to ensure that financial protections for consumers are not undermined.

One way the new approach is different is that it sets a dollar limit on what the health plan will pay for a given procedure. Most insurance now pays a percentage of costs, and those costs themselves can vary from hospital to hospital. Now if you pick a more expensive hospital, the insurance still pays the same percentage.

The new strategy works like this:

Your health insurance plan slaps a hard limit on what it will pay for certain procedures, for example, hospital charges associated with knee and hip replacement operations. That's called the reference price.

Say the limit is $30,000. The plan offers you a choice of hospitals. If you pick one that charges $40,000, you would owe $10,000 to the hospital plus your regular cost-sharing for the $30,000 that your plan covers.

And that extra $10,000 doesn't count toward your plan's annual limit on out-of-pocket costs.

That's crucial because under the health care law, most plans have to pick up the entire cost of care after a patient hits the annual out-of-pocket limit, currently $6,350 for single coverage and $12,700 for a family plan. Before the May 2 administration ruling, it was unclear whether reference pricing violated this key financial protection for consumers.

Some experts are concerned.

"The problem ... from the patient's perspective is that at the end of the day, that is who gets left holding the bag," said Karen Pollitz of the nonpartisan Kaiser Family Foundation. Previously she was a top consumer protection regulator in the Obama administration.

The new pricing approach is not yet on consumers' radar, but it's gaining ground. The Mercer benefits consulting firm said 12 percent of the largest employers were using reference pricing last year, nearly double the 7 percent who relied on it in 2012.

The approach has been pioneered in California by CalPERS, a giant agency that manages health and retirement benefits for public employees, and is the nation's second-largest purchaser of health benefits after the federal government.

CalPERS started with knee and hip replacements in 2011, steering patients to hospitals that had been vetted for quality and charged $30,000 or less.

Ann Boynton, CalPERS' health benefits director, said the program has been a success, with patients able to choose from about 50 hospitals.

"People do not feel like we went to bargain-basement hospitals where the quality is not good," she said. "The quality is the same, and in some instances, better."

Economist James C. Robinson of the University of California at Berkeley studied the CalPERS experiment and found not only that many patients shifted to lower-cost hospitals, saving money, but that expensive hospitals responded by cutting their prices.

Although insurers don't appear to be using reference pricing on the new health exchanges, Robinson said he thinks it's only a matter of time.

"The vast majority of people buying on the exchanges are price sensitive," he said. "People, when they are spending their own money, tend to go for thinner benefits."

However, the strategy appears to be suitable only for a subset of medical care: procedures and tests that are frequently performed, where the prices charged vary widely, but the quality of results generally does not. In addition to knee and hip replacements, that could include such procedures as MRIs and other imaging tests, cataract surgery and colonoscopies.

Robert Berenson, a physician and health policy expert at the Urban Institute think tank, said he worries that advocates of reference pricing may be overlooking quality differences.

"There are differences in MRIs and in how a hip replacement is done," he said. "If you are going to say `Our judgment is better than your doctor's,' then you've got to meet tests that you are actually assuring quality and safety."