Reference-Based Pricing Is On the Rise

Are employees ready?

 
With health care costs continuing to rise faster than the rate of inflation—and the rate of employee wage increases—the need to manage both the cost of coverage and out-of-pocket health care expenses for employers and employees has never been greater. One increasingly popular solution is reference-based pricing. But, as with any new approach to health plan design, this strategy requires a well-planned and executed rollout to avoid confusion and potential employee relations problems.

 

What Is Reference-Based Pricing?

A health plan using reference-based pricing sets a cap on what the plan is willing to pay for medical procedures and treatments. It bases this cap, or “allowable amount,” on its chosen metric, or “reference” point. 

How does this differ from a traditional health plan? In the case of network-based plans:

• For in-network care, the health plan (usually through an insurance carrier) negotiates significant discounts through their network contracts. For example, a hospital might bill $1,500 for an echocardiogram, and the insurance company might negotiate a 40% discount, to $900. Under that network contract, the hospital agrees to accept the $900 as payment in full—and that cost is shared by the plan and the participant. Of course, a different hospital might charge $2,500 for that same echocardiogram, and that same insurer might only be able to negotiate a 50% discount with that provider. This difference in pricing, and the fact that each insurer negotiates its own discount, is why there is no one set price for any given procedure or treatment—even in the same town.
• For out-of-network care, insurers also set a limit on what they will reimburse. Typically, it is a percentage of the “reasonable and customary (R&C)” or “usual, customary and reasonable (UCR)” rate--the average price charged by health care practitioners within a geographic area for a given procedure. For example, if a provider charges $600 for a test but most other providers charge $400, the plan will reimburse at a percentage of $400. 
• Indemnity plans, of course, have no network. They typically base their reimbursements at a percentage of the R&C or UCR rate. 

Because they typically reimburse a percentage of whatever expense a participant incurs, under these traditional types of plan structures, employers have little control over what they pay. There’s no way to predict when and where a participant will need care—or choose to receive it—making budgeting a challenge for self-insured plans. Consequently, reference-based pricing—which gives employers far more control—may seem like a no-brainer. 

How Reference-Based Pricing Cuts Costs for Employers

With reference-based pricing, a specialized vendor will work with the employer to identify the reference point, then negotiate with area providers. The most common “reference” point for reference-based pricing is Medicare, which is able to set relatively low prices due to its buying power and access to actual hospital cost data. Most reference-based pricing plans add a 120-170% markup to the Medicare reimbursement rate. Many hospitals are billing employer plans as much as 250% of Medicare reimbursement—so, even with a markup to the Medicare rate, the reimbursement is far less than traditional network discounted prices. For example, the Medicare cost for a given expense might be $1,000—yet the hospital’s chargemaster rate for that expense might be as much as $2,500. A 40% ($1,000) insurer-negotiated network discount would drop that $2,500 down to $1,500—which is still 50% more than the Medicare cost!

As a result, employers have realized substantial savings on health care with reference-based pricing—cutting anywhere from 5-20% of health care costs. Additionally, because prices are capped ahead of time, the plan and participants are better able to estimate health care expenses. 

It is no surprise, then, that reference-based pricing is becoming more popular. Depending on which study you read, between 2-13% of employers are currently using reference-based pricing, and another 10-18% are considering moving to this model in the future.
 
There are advantages to employees, as well. By using a provider who accepts reference-based pricing, they can be certain they are paying a reasonable cost for the services they’ve received—and can find out exactly how much that service will cost them. After all—to use the example above—who wouldn’t want to pay 20% of $1,000 instead of 20% of $1,500?

A Note of Caution

While reference-based pricing can help both the employer and employee save money, it can cause employee relations issues if not communicated properly. 

Not every health system or provider will accept capped payments such as those under a reference-based pricing plan. And, because payments are capped, employees who do not do their research ahead of time might be more likely to receive a balance bill (the difference between what the provider charges and what the plan will pay). While participants in network-based plans might be familiar with balance bills already (if they’ve intentionally, or inadvertently, used an out-of-network provider), depending on how the RBP plan is structured, they may see more—and larger—“surprise” bills than ever before.

Reference-based pricing can make the health care system even more confusing, because it may only apply to certain procedures or to out-of-network claims. If employers don’t explain all these nuances (and how they impact coverage), employees are at risk of paying even higher out-of-pocket expenses. 

Educating Employees on Reference-Based Pricing

As RBP becomes more popular as a benefits strategy, employers must educate employees on how the health plan works and how to use it cost-effectively. Before employees enroll in a referenced based pricing plan, employers must ensure they understand: 

• Which model the employer has adopted. Not all RBP plans are structured the same. Some plans eliminate networks completely, while others retain a traditional PPO network and apply reference-based pricing only to out-of-network claims. Still, other plans apply RBP only to certain procedures, such as joint replacements, colonoscopies, MRIs or dialysis. Regardless of the model, it is critical that employers update their plan documents and communications materials, so employees, providers and administrators all understand how covered charges will be paid.
• Where employees can find a list of providers that accept reference-based pricing rates. For employers adopting the “no network” approach, employees can see any provider they choose—but the burden falls on the employee to shop for their care. For participants in network plans, maintaining a list of participating providers will depend on which pricing model the employer has adopted. And even with the list, there is still some risk that providers who accept reference-based pricing will deny care—or even require full or partial upfront payment—because the number of patients using the reference-based pricing plan is too high. It’s important to have a back-up plan in place—and to communicate it—in case this happens.
• How the employer will support employees who receive balance bills. When a procedure costs more than the reference-based pricing limit, the employee could be balance billed for the difference. Employers must establish if (and under what circumstances) they will cover the balance, if they will negotiate on the member’s behalf or if the employee will be left to pay the balance on their own. A comprehensive, year-round communications plans is critical to ensuring employees and their family members learn how to use their plan appropriately. In addition to print or online materials that can serve as references during open enrollment and throughout the year, employers should offer—even require—one-on-one meetings with benefit experts during open enrollment. 

This will allow employees to discuss their individual needs, ask specific questions about reference-based pricing and ensure they have the information they need to make cost-conscious health care decisions throughout the year. A frequently-asked questions document—compiled ahead of time and supplemented by questions asked during those one-on-one sessions—can also be a valuable reference tool for employees as they use their plan during the year.

Beyond explaining reference-based pricing, employers must help employees become more educated health care consumers so they can minimize the risk of surprise medical bills. Because a reference-based pricing plan won’t pay more than a set amount, employees will undoubtedly have many questions about how their care is covered—both at enrollment and during the year as they use their plan. Resources, such as patient advocates, can answer these questions from employees, help them find providers that meet their needs and resolve claims and billing issues, in real-time. Employees should also be encouraged to shop around for care, so they can find an option that doesn’t exceed the amount the employer is committed to paying. Many employers offer transparency services, which enable employees to research the potential cost of care and compare prices across several providers in their area. 

Despite its challenges, reference-based pricing can be an effective tool for employers to tackle rapidly rising health care costs. By providing transparent pricing, provider referrals and assistance with billing issues, employers can help employees navigate the risk of balance bills while realizing significant cost savings.

Author Bio

Kim A. Buckey is the Vice President of Client Services for DirectPath.  Connect Kim Buckey Follow @SPDkim