In the never-ending quest to decrease employee benefits spending on healthcare, some employers are turning to a somewhat revolutionary concept called reference based pricing. This switch is most common among large employers (500 employees or more) who are self-funded, and is gaining popularity rather quickly. For those who may be interested in implementing such a program, it’s important to understand how it differs from traditional healthcare plans, as well as how it will affect those enrolled in it.
Reference based pricing (RBP) is a system that some employers have started to use for cost containment purposes. This method is different from more traditional pricing options in that the employer caps the amount they’ll agree to cover for certain non-emergent medical procedures that can vary greatly in price yet not in outcome, such as hip or knee replacements.
Generally speaking, the amount that providers bill is not necessarily indicative of how much the service actually cost the provider to perform, nor is it believed to be a reflection of market value. Traditionally, each insurance provider would have a pre-negotiated price they’re willing to pay for services. The only universally accepted payment across most providers is the Medicare-negotiated price, which is essentially just barely enough to cover the service with minimal margins for the doctor or hospital.
Reference based pricing agrees to pay a percentage above the Medicare-negotiated price to account for the lack of margin and better satisfy the providers. This approach is largely seen as “reasonable.” With the assistance of their employee benefits broker, fixed payments are negotiated with providers in the region via third-party administrators (TPAs) or reference-based pricing specialists.
Reference based pricing follows a similar principle of consumer driven healthcare in that the policyholder is empowered to make informed decisions regarding his or her own care. Pricing in healthcare can greatly vary from provider to provider and across hospital networks, so shopping around truly can save money.
For procedures or tests that are less time sensitive (such as knee or hip replacements), it can save everyone money if the employee takes some time to research various providers and choose the one that he or she is most comfortable with, rather than simply the first one that is recommended. It’s important to stress that this system cannot be used with emergent procedures, as time is crucial for the savings structure.
The thought process behind reference based pricing is that if enrollees use less expensive providers that have agreed to accept RBP, it will cost the self-insured company less, which in turn allows the employer to save on premiums, the savings of which may be passed through to the employee in the form of lower costs or a richer benefit plan.
RBP relies on cost transparency, which is commonly difficult to obtain. Oftentimes, asking a hospital or doctor how much a procedure will cost results in lots of shrugged shoulders and billing departments saying that it “might” cost about “this much.” The best way for employers to get around this issue is to work with specialty vendors who agree to a price and are willing to disclose it.
In addition, these types of plans are often complex and therefore more difficult for consumers to wrap their heads around, especially because they differ so drastically from traditional forms of healthcare. For these reasons, it’s extremely important that employers are communicative and provide plenty of opportunities for employees to ask questions — especially during implementation and when new people are hired.
Lastly, with many of these plans, employees are typically liable for “balance billing,” which is any portion of the cost of the procedure that is above the fixed payment. Here too, employee education is critical to effectively communicate how this can be avoided.
If you are interested in transitioning to this type of health plan — one that provides pricing transparency and adopts fair market value, then talk to your employee benefits broker to learn more about how RBP works and how it could benefit your workforce. Remember that it will take quite a bit of effort on upper level administration’s part during implementation so employees understand the changes in the plan and how it will affect the way they use insurance.
What questions do you have about reference based pricing? Leave us a comment below or contact us. We’re happy to provide answers!