Applying Effective In-Network Incentives at CalPERS

Sidebar: Health plan tiers at The Kroger Co.

By Stephen Miller, CEBS Feb 15, 2012

Updated 3/8/2012

Ways to prompt employees to choose cost-efficient, high-quality health care providers were highlighted at the 2012 Employer Health & Human Capital Congress, held in Washington, D.C.

Kathleen Donneson, chief of the office of health plan administration at the California Public Employees Retirement System (CalPERS), described how the organization uses value-based purchasing in its plan designs "to deliver efficient, high-quality services at lower uniform costs by incenting members to make wise purchasing decisions."

CalPERS is the largest purchaser of public employee health benefits in California and the second largest public purchaser in the U.S. after the federal government. It spends approximately $7 billion a year to provide care to more than 1.6 million state and local government employees, retirees and their family members.

According to Donneson, CalPERS typically has spent $55 million a year paying for elective hip and knee replacements. In California, "the costs for elective hip and knee replacements vary from $15,000 to $111,000 per admission with no measurable quality or outcome difference," she noted.

In 2010, mean hip replacement costs were $33,000, while mean knee replacement costs were $31,200 (taking into account all costs per episode), according to two CalPERS population health studies.

Cost Thresholds

Anthem Blue Cross manages the CalPERS self-funded preferred provider organization (PPO) health plan. For 2011, the plan was designed to pay a maximum of $30,000 for elective knee and hip joint replacements in-network at 46 high-quality facilities. "Members can go elsewhere, but they must pay anything above $30,000 if they do," Donneson said, highlighting the incentive for employees to remain in the network. "The potential plan savings equaled $16 million in the first year, with consistent quality," she reported.

The health care rate package adopted by the CalPERS board for 2012 expands the CalPERS PPO’s value-based purchasing design program implemented for knee and hip replacements to include arthroscopies, colonoscopies and cataract surgery performed in centers found to be as effective but less expensive than outpatient hospitals. The plan now applies the following cost thresholds:

Colonoscopies: $1,500.

Cataract surgeries: $2,000.

Arthroscopies: $6,000.

Members pay any amount above the threshold when they don't use designated in-network ambulatory surgery centers for these outpatient procedures. Donneson expected that CalPERS will see several million dollars of additional plan cost savings from these value-based design changes.

Health Plan Tiers at The Kroger Co.



The innovative use of health plan tiers at The Kroger Co. was explained by Theresa Monti, vice president for corporate benefits at the national supermarket and convenience store chain, at the National Business Group on Health's Business Health Agenda 2012 conference, held March 7-9 in Washington, D.C.

Health coverage at Kroger, which has 75,000 employees eligible for company-sponsored benefits, incorporates network tiers based first on quality data and then on the average cost for procedures by facility.

Network Steerage

Tier 1:90 percent of costs covered at highest quality/cost-efficient Centers of Excellence (members of the Blue Distinction Centers of Excellence Network plus additional nationally recognized quality sources such as U.S. News & Work Report's ranking of top hospitals, along with volume data by facility by procedure and geographic proximity to the covered population).


Tier 2:
75 percent of costs covered at all other Centers of Excellence.


Tier 3:
50 percent of costs covered at non-Centers of Excellence in-network facilities.


Tier 4:
0 percent coverage out of network.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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