Surowiecki on Health Care Costs
5 December 2013

¶ We are thrilled to see that James Surowiecki has alighted on what, in our view, is the most urgent health-care problem in the United States — crazily capricious costs. We didn’t know that California was a bit ahead of the game (no surprise).

For consumers, this means higher deductibles and co-pays, and having to think more about prices. A peculiar feature of the American health-care system is the enormous variation in prices that hospitals charge for a procedure, which often are not correlated with quality. So in 2011 California adopted a system of “reference-based pricing” for state workers and retirees. If you needed hip-replacement surgery, say, the state would cover you for the amount charged (minus a deductible) at forty-one “value” hospitals in the state. If you went for a costlier option, you had to make up the difference. Most people chose one of the value hospitals, and their outcomes were similar to those of people who chose the more expensive hospitals. The state saved money, and the threat of losing customers, in turn, led the more expensive hospitals to cut prices; one study found that the price of joint-replacement surgery fell by about a third.

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