Reference-Based Pricing: Setting Price Limits on Healthcare

Healthcare costs continue to rise, so employers are searching for techniques to contain or reduce their group health plan expenses. Reference-based pricing (RBP) is one self-funded strategy that health plan sponsors should understand. While it may not be right for every employer, plan sponsors should at least be aware of this approach since it can yield significant savings on hospital and other facility-based services. However, you must also be aware of this approach's potential disruption to your employees and their family members.

What Is Reference-Based Pricing?

RBP is a method for calculating payment to certain providers (i.e., hospitals) using a “reasonable fee” based on a reference point. The most common reference point is the Medicare fee schedule. For example, reimbursements for hospital or diagnostic services may be set at 125% or 140% of the Medicare fee schedule. It is not unusual for employer-sponsored health plans using traditional PPO networks (e.g., BCBS, UnitedHealthcare, Aetna, CIGNA, etc.) to pay from 200% to 500% of Medicare or more. RBP is designed to bring payments to providers closer to that of Medicare and make payments more uniform across healthcare systems.

How Reference-Based Pricing Works

As with any self-funded health plan, the employer contracts with a third-party administrator (TPA) to manage the health plan. Rather than using a typical PPO network, the plan sponsor also contracts with a reference-based pricing provider who will work with the TPA to price hospital and facility-based claims. The RBP vendor will negotiate with providers that may not accept the standard pricing (i.e., 125% or 140% of Medicare).

Some TPAs work more closely with certain preferred RBP vendors to streamline the integration between TPA and RBP. This integration can reduce the amount of disruption that covered members may experience. When evaluating RBP options, it is important to understand the relationship between the TPA and the RBP vendor.

It is also important to understand the geographical nature of this methodology. While RBP works in certain markets, other geographies may be problematic. The geographic distribution of your membership is a key consideration when evaluating reference-based pricing. As RBP has evolved, some vendors have negotiated direct contracts with hospitals to reduce member disruption in certain areas. This is done in markets where RBP disruption is greatest to produce a more member-friendly experience. Plan sponsors should review a detailed disruption analysis before proceeding with RBP.

Employer Value with Reference-Based Pricing

The main benefit of RBP is cost containment. By limiting payments to 125% or 140% of Medicare rather than 200% to 500% of Medicare, plan sponsors can significantly reduce payments to hospitals and other facilities. With reference-based pricing, employers do not risk paying exorbitant prices at certain hospitals for services that could be done more inexpensively elsewhere.

Quality of care is also an important consideration, and higher-quality RBP vendors have begun integrating quality metrics into their models. When self-funded plan sponsors can identify and encourage using high-quality, low-cost healthcare providers, the plan sponsors and their covered members should both derive more value.

Potential Challenges with Reference-Based Pricing

Given the complexity of the model, several potential challenges must be considered when implementing RBP. You must work with a reliable and experienced vendor who can ensure a smooth transition into this model. Otherwise, you risk disrupting highly utilized providers.

Three significant risks of reference-based pricing include the following:

1. Balance Billing

Employees may be required to pay the difference between the provider’s charge and the allowed payment under the RBP fee schedule. Most viable RBP models have mechanisms to handle and reduce the member impact of balance billing, so it is important to understand how each vendor manages these situations.

2. Provider Response

Large healthcare systems are beginning to push back on RBP in some markets. In many cases, they actively pursue large balances owed by employees or refuse to allow care in their facilities. As mentioned previously, it is important to understand how major health systems handle RBP in markets where your members reside. While this member disruption is not frequent, it can be impactful when a member experiences delays or disruption in their care.

3. Employee Reaction

Employees can be caught in the middle of balance billing and provider conflicts at the point that they need care. You should consider how your RBP vendor will insulate and protect employees from legal entanglements with providers and impact their credit ratings.

Conclusion

As the market evolves, employers are tasked with developing creative strategies for saving money. RBP is an innovative strategy for lowering healthcare costs. It is unique in its ability to reduce costs while simultaneously promoting employee health literacy, but it does have inherent risks that must be considered carefully.

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The above information does not constitute advice. Always contact your employee benefits broker or trusted advisor for insurance-related questions.