By Katie Kerwin McCrimmon

The costs for basic hip and knee surgeries were staggering, but even more confounding were the wild variations in charges for these common procedures.

When analysts at Colorado PERA, the Public Employees Retirement Association, tracked exactly what they and their younger retirees had paid for knee and hip replacement surgeries in 2013, they found stunning variations.

The cost to PERA ranged from about $18,000 to $100,000 for nearly identical procedures in the Denver area. Patients forked over co-pays ranging from about $6,000 to $13,000.

“We were seeing literally 600 percent variances in hip and knee replacement costs. And they weren’t based on quality,” said Gregory W. Smith, executive director and CEO for PERA.

For successful business owners who aggressively try to keep costs in check, health care long has been a black hole of mystery price hikes. Employers have felt frustrated and angry, but ultimately powerless as average premiums skyrocketed from about $5,000 per year for a family in 1996 to nearly $14,000 in 2010.

“We are driving into the gas station, filling our tanks, and three months later, we get a bill in the mail and find that we paid $11 per gallon and we don’t even know that everybody else in town paid $2.50,” said Donna Marshall, founder and executive director of the Colorado Business Group on Health, a membership organization that helps high-level Colorado business leaders tackle quality and costs in health care.

“We really have to take back ownership in the marketplace,” Marshall said. “Business owners pay for two-thirds of the health care costs for working-age adults.”

New transparency in health costs is finally making it possible for patients and employers to get a sense of what some health procedures cost and how much the charges vary from county to county, provider to provider and hospital to hospital. (To see some price comparisons for Colorado, check out Colorado’s All Payer Claims Database: https://www.comedprice.org/#/home )

At PERA, managers decided to offer younger retirees an option that sounds simple, but until now, has been unheard of in Colorado: a fixed price surgery.

“I just can’t reconcile having that kind of cost differential and doing nothing about it,” Smith said.

PERA managers worked for well over a year with actuaries, consultants, hospitals and doctors to negotiate a package price for knee and hip replacement surgeries for retirees under age 65 who have not yet qualified for Medicare. About 10,000 of these retirees and their dependents get their health insurance through a plan that PERA funds and Anthem Blue Cross and Blue Shield of Colorado administers.

Under the new program called PERACare, the retirees can choose the fixed rate option. In return, they can save thousands out of pocket.

“We will waive the co-pay to the extent possible. That was a very important piece of the puzzle,” Smith said. “We were willing to change our plan design and give our retirees an incentive to go to these locations.”

Orthopedists and hospitals in Denver, Englewood and Thornton have signed on to offer the package deal.

PERA officials declined to share the fixed price they negotiated. In the past, Smith said that the average price per procedure was about $30,000.

“My current pricing is significantly below my average cost even after the consideration that no money is coming from the member. It’s going to save me money in the vast majority of cases,” Smith said.

But he was careful to point out that the goal of the program is not simply to save cash.

“I’m not interested in denying people care or minimizing care,” Smith said.

He does, however, want retirees to know what study after study has confirmed: that in health care, higher cost rarely correlates with higher quality.

PERA picked the providers based on their outcomes thus far, but is also counting on higher volume to result in better quality. In addition, if the doctors and hospitals get poor results, they’ll have to pay the price.

“If there are massive complications, they’re on the hook for those costs. They’ve got skin in the game. That’s how we build contracts with other providers,” Smith said.

For instance, a money manager who generates poor investment results for PERA gets paid less while one who generates fat profits gets rewarded.

“We’re bringing that model of consumerism to health care. I’d really like to get our members to be better consumers,” Smith said. “The reason (these providers) can give us this price is that they’re doing (procedures) efficiently and consistently to know they have the quality not to have complications.”

So far, two patients have signed on for the new program. PERA officials plan to hold an information session in late August where retirees can visit with doctors and hospital representatives to learn more about how the fixed-price option works. Patients can still choose a different doctor or hospital, but will owe a co-pay if they do.

Smith said the surgeries went smoothly for the first patients. One of the biggest challenges will be making sure that the patients understand exactly what is and isn’t included in the fixed cost. For instance, PERA managers deliberately excluded physical therapy costs because they hope some PERA members who live outside the Denver area will travel to the metro area for their surgery. But they won’t want to do so for therapy during their recovery.

“We have work to do about the bright lines of what’s in and what’s out,” Smith said. “We have had good results on the first two and we will have more to learn from them.”

In the U.S., the California public retirees system, known as CalPERS, has led the way on what health policy experts call “reference pricing.” (Click here to read an evaluation of the California program in Health Affairs.)  California retirees who elected to have procedures done at lower-priced facilities saved money. The results were impressive with prices falling and traffic to “high-price” hospitals declining by one-third.

As always, however, the devil is in the details. It was hard for CalPERS to measure quality. Patients can get confused or face high travel costs. And administrative costs can be high. (Click here to read more.)

While making changes to payment models in health care is complex, Marshall of the Business Group on Health, saluted PERA managers for challenging the status quo.

“It’s very bold. It’s an uphill battle,” she said. “Expecting a top-quality product with a warranty at a top quality price is pretty revolutionary.”

Marshall noted that cab drivers didn’t invent Uber. And it’s unlikely that the people who are benefiting from high health care spending will do anything radical to undercut their own paychecks.

For too long, employers have relied on health insurance companies, doctors and hospitals to dictate health costs.

Now better data promises to bring change.

“The availability of this information is peeling back the covers (on health costs). It’s an egregious pricing scandal that employees and employers cannot know the price of common medical procedures and tests,” Marshall said. “Employers are starting to ask different questions.

“When people understand that they’re paying seven or 10 times more for the exact same service and that their health premiums have doubled every 10 years, they should be mad as heck. It’s a scandal. They should be concerned and upset and they should be ready to take action,” she said.

Marshall said the dramatic cost variation that PERA found is the norm, not the exception.

Even for customers in Denver with the same health plan, Business Group analysts found that variations were dramatic. She gave two examples. A colonoscopy could cost as little as $1,321 and as much as $4,127, a variation of 312 percent.

The bottom price for ear tubes was $1,737 while the top price was $12,765, a variation of 735 percent.

Patients aren’t getting more, Marshall said.

“Often the data show that high-priced providers have worse-than-average results,” she said. “When it comes to health care, there’s a perception that if I pay more, I’ll get a better service or a better outcome. That’s just not the case.”

For PERA, the hip and knee surgeries mark a beginning to a new way of negotiating for health services.

These surgeries amount to just a fraction of PERA’s health costs. And the PERACare program focuses on young retirees since PERA will directly recoup any savings for them. The federal government would get savings if government managers drive costs lower for surgeries for retirees who are 65 or older.

“It’s a sliver of the pie. But imaging and radiology are pretty low-hanging fruit, too,” said Smith, PERA’s CEO. “There’s a lot of fixed pricing we might be able to drive there, too. We see some things we’re going to do in the next couple of years. We’re not stopping.”

Marshall is finding that same sense of urgency when she gives presentations across the state.

“When it comes to health care, we’ve been closing our eyes, throwing the dart and hoping for the best,” she said.

The new mantra is: “Let’s go shopping.”