What is Reference-Based Pricing?

Reference-based pricing (RBP) may be the most powerful tool employers have ever had to control costs and demand value for their healthcare plan spend. 

We can loosely think of modern health insurance in a few phases:

·        1980 – 2000:  The Age of the Health Maintenance Organization (HMO)

o   This was a time of ‘managed care’ where patients were required to get referrals to specialists and a primary care physician was at the center of care delivery.  Employees largely reject HMO’s because they did not want restrictions on choice regardless of the cost containment provided by HMO’s.

·        2000-2010: The Age of the Preferred Provider Organization (PPO)

o   In reaction to employees rejection of HMO’s, carriers and employers shifted to a PPO-centric approach.  These plans had few cost containment mechanisms and allowed employees to go straight to a specialist without a referral.

·        2010-2020:  The Age of Obamacare and rising deductibles

o   The Affordable Care Act (aka Obamacare) was passed in 2010 and ushered in an overhaul of the health insurance industry.  Insurance carriers could no longer underwrite for pre-existing conditions, all plans had to include a baseline of benefits, employers with over 50 employees were required to provide health insurance to employees, and much more.  As a result of these new requirements, premiums skyrocketed and employers increased deductibles to help moderate the increases in premiums.

What will this decade mean for health insurance?  We think this is the decade where employers step in and take control of their health plans back from insurance carriers.  It will be a necessity for many employers who must provide coverage but cannot absorb continued rate increases.  Regardless of one’s opinions of insurance carriers, we do know that they have not been able to stop healthcare costs from growing at the rate of inflation or less.  The network model for health insurers appears to becoming obsolete as hospitals consolidate and the carrier’s believe they must pay any reimbursement to keep all major hospitals in their network.

The primary tool for employers to take back control is called Reference-based pricing (RBP).  The concept is simple.  Instead of relying on an insurance carrier’s network, employers will set reimbursement for medical services on a benchmark, typically Medicare.  This allows for transparency and most importantly, greatly reduced unit prices for the employer’s health plan. 

Under an RBP plan, an employer would set a reimbursement rate, commonly 150% of Medicare, and reimburse providers based on this rate.  That means that providers will get 50% more than they do from Medicare for the same services.  Medicare is used as a benchmark because it is tasked with determining a fair and reasonable reimbursement for providers.  RBP can drastically reduce costs and the reason is that major carrier networks are typically reimbursing hospitals 300-500% of Medicare! 

RBP is the most powerful and cleanest tool employers have had to control healthcare costs.  It removes the hassles of staying in-network for employees, it sets a maximum for what the plan can pay providers, it mitigates the cost of shock claims, it stabilizes renewals, and it allows for further customization by doing things like Direct Contracting between the employer and a provider.

If moving from a standard plan with a major network, an employer can maintain the identical benefit design, maintain the same financial structure (no additional financial risk), and often reduce premiums by 30-40%. 

While the advantages are huge, there are risks.  The key risk in RBP is the risk of a balance bill.  Balance bills are rare, generally occurring in 1-2% of claims, but the risk does exist and can create consternation among employees.  This scenario occurs when an employee receives services from a provider and the provider rejects the reimbursement from the plan after the fact and chooses to bill the member directly for the difference of what the provider expects to be paid and what the plan paid.

RBP plans build in many defense mechanisms to address balance bills.  First, an RBP plan typically contracts with a firm providing Negotiation Services for providers.  Often, providers simply do not understand how an RBP plan works and will accept reimbursement after learning about the plan.  Some plans allow for a corridor to increase reimbursement to providers in order to settle the balance bill.  In exceptionally rare cases, a plan uses legal services built-in to the plan to settle the balance bill with the provider.  These settlements can be acrimonious, but to date, there is no precedent for a case going to court.