Introduction
As health care costs continue to rise, employers with self-funded health plans are looking for new and innovative ways to control their spending. To lower spending on medical costs, self-funded employers may consider moving from a traditional provider network strategy to a strategy that allows them to set their own prices for health care. This cost-containment strategy is called reference-based pricing (RBP).
In general, a health plan using RBP places a fixed limit on how much it will pay for specific health care services, regardless of how much providers charge for those services. This fixed limit is based on an established benchmark, such as Medicare’s reimbursement rate, with a percentage added (for example, 140% of Medicare). An employer’s potential cost savings with RBP depend on a wide variety of factors, including how RBP is incorporated into the health plan, how employees utilize their health care benefits and how much providers charge for their services in the areas where employees live.
Although RBP can potentially help employers lower their health care spending, it is not the right fit for every self-funded employer—especially those with employees who are mostly based in rural areas or areas where access to quality health care is otherwise limited. Employers interested in RBP need to closely analyze the advantages and disadvantages before making a final decision.
Furthermore, providing different options, including a traditional network plan and a lower-cost RBP plan, can appeal to employees and serve as a recruitment and retention strategy.
What is Reference-Based Pricing?
RBP is a strategy that can be used by employers with self-funded health plans to help lower costs by capping how much the plan pays for specific health care services. Unlike traditional plans, where payments are based on prices negotiated with provider networks, RBP uses a benchmark—or reference price—as a fixed payment amount. In general, a health plan with RBP will only pay the reference price for a specific healthcare service, regardless of how much the provider ordinarily charges.
An RBP plan generally will pay providers a percentage above what Medicare pays for the same service (for example, 140% of Medicare). Other benchmarks may also be used, such as the provider’s actual cost to deliver the service plus a fair profit margin. However, paying at a percentage above Medicare’s payment rate is the most widely used standard.
Unlike traditional health plans, RBP plans do not use provider networks. There is no such thing as in-network and out-of-network. An employee can see any provider. However, employees are encouraged to use providers who accept the plan’s reference-based pricing as payment in full. Otherwise, the employee may have to pay the difference between the amount charged by the provider and the amount paid by the plan.
Incorporating RBP Into Health Plans
There are several ways that RBP can be incorporated into a self-funded health plan. To minimize disruption to employee care, self-funded employers often use RBP just for specific high-cost procedures or providers and keep their provider networks and traditional payment approach for all other health care services. Another common approach is for employers to use RBP just for out-of-network providers.
Employers should carefully consider their employee demographics before moving to an RBP plan. Employers who see the most savings with RBP are generally those with older employees (or employees with expensive medical conditions) who live in areas where providers’ prices tend to be higher than the plan’s reference-based price or where providers’ prices vary widely.
To minimize the risk of balance billing, employers considering RBP should confirm that there are a sufficient number of quality providers in the area who will accept the plan’s reference-based price as full payment.
Furthermore, as a best practice, employers who adopt an RBP model, should contract with an experienced vendor who can help determine the reference-based price, administer the program, identify cost-effective providers, and intervene on employees’ behalf to negotiate with providers in the event of a balance bill. These are things that RMC Group can help with!
Cost Savings Potential with Reference-Based Pricing
RBP is appealing because it can help self-funded employers take control of their health care spending and protect against health care inflation and arbitrary provider charges.
Prices for health care services vary widely across the United States, even within the same region. Employers with self-funded plans may struggle to control their health care spending when they have employees living in areas where providers charge more for their services. This can be particularly frustrating when the higher prices are not linked to better health outcomes.
To reduce health care spending with RBP, the plan’s reference-based price should be lower than the average price the plan had been paying for the same type of care but high enough so that a reasonable number of qualified providers in the area will accept it as full payment.
A study by the American Academy of Actuaries from 2018 estimates that RBP could reduce spending for shoppable health care services by as much as 28%, depending on an employer’s specific circumstances. “Shoppable” health care services are those for which individuals are able to select (or shop for) a provider based, in part, on price.
The potential for RBP to reduce health care costs also largely depends on how much prices for health care services vary within geographic areas. The wider the variation, the greater the potential for savings, as providers become motivated by competition to lower their prices. Accordingly, employers with employees who are mostly based in rural areas or areas where access to quality health care is otherwise limited may not see significant cost savings with RBP.
Employers who realize cost savings with RBP can share some of those savings with employees by reducing the premiums paid by employees, lowering cost-sharing, such as deductibles, or enhancing other employee benefits. Sharing cost savings can help offset employee dissatisfaction with RBP and the risk of balance billing.
Conclusion
Reference-based pricing is a cost-containment strategy that may be useful for employers with self-funded health plans struggling with rising health care costs. Depending on how RBP is implemented, it has the potential to generate significant cost savings because it protects employers from arbitrary or inflated providers’ charges for specific health care services. However, this approach has some significant drawbacks, namely the increased risk for balance billing and the resulting strain on employee relations.
Employers who are interested in using RBP should work with an experienced agency that can guide them through the implementation process, including determining the reference-based price and the type of RBP design.
The most important step to ensure that a company makes the best choice is to have an experienced professional aid in the decision-making process. RMC Group welcomes the opportunity to help your business assess its plan designs and make recommendations for improvement. Contact us today to schedule a free review with one of our Health Professionals at 239-298-8210 or rmc@rmcgp.com.
