The Advantages of Reference-Based Pricing in Employee Benefits

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Health care costs for a family of four dropped last year for the first time in nearly 20 years. But there isn’t much to cheer about that; it was only because COVID kept most people away from their doctors.

When it comes to controlling health care costs, reference-based pricing is gaining traction as the new strategy of choice among employers.

As life returns to normal, so will increases in health care costs – as will employers’ frustration in their inability to rein in the expense of a health plan for their employees.

There is a better way, in an emerging cost-containment strategy known as reference-based pricing.

Administered by independent third-party administrators, or TPAs, reference-based pricing plans work by setting a cap on how much they will pay for all medical procedures.

For example, we know that while an echocardiogram may be billed at $1,500, a PPO will have negotiated discounted rates that reduce the price to, say, $900. An RBP plan, however, would pay just $425 because its “allowable” rate is based on how much Medicare will reimburse healthcare providers for their services.

Medicare, in other words, is the “reference” point for the RBP’s price.

Medicare is able to set relatively low prices because of its buying power and access to actual hospital cost data. That’s why most reference-based pricing plans add a 120%-170% markup to the Medicare rate, although even with that, their reimbursement is less than the discounts available via, say, a PPO.

RBP plans’ other reference points include providers’ reported costs, the average “wholesale” price, or data from third-party databases. In each of these cases, the administrator will research local costs and work with the employer to determine the appropriate reference points. Some RBPs will use multiple reference points and pay the higher value to the provider.

The Benefits of RBPs

Less than 20% of employers at the moment are using an RBP. But those that have are realizing substantial savings — cutting costs from 5% to 20%. And because prices are capped in advance, both the employer and the participants are better able to estimate their expenses.

Employers who use RBP plans can expect to not only lower their health care expenses, but also to see higher employee engagement in health care decisions. With established limits on specific services and greater transparency on costs, employees in an RBP plan can begin to consider cost, along with quality, when deciding where to have a procedure.

Doing so does require more work on the part of the employee than traditional plans would. But using a provider that accepts RBP plans means patients are paying a reasonable cost for the services they’ve received. After all, who wouldn’t want to pay 20% of, say, $1,000 instead of 20% of $5,000?

Balance Billing Disputes

No discussion of RBP plans would be complete without acknowledging a practice known as “balance billing.”

Some providers will try to pass the portion of their bill that isn’t covered by the RBP plan directly to the patient. But that’s where the right RBP and TPA team can be especially helpful, jumping in to help find errors in billing – a common occurrence – and manage negotiations with providers to resolve disputes without dragging the employer into the middle of things.

A stop-loss insurance policy – part and parcel of any health plan that includes RBP – also will help manage large, complicated claims and will work with the RBP and TPA to resolve balance-billing issues.

As importantly, the TPA can help steer your employees to participating health facilities rather than allowing them to run into issues with the wrong providers in the first place. Indeed, educating employees about your RBP plan will be important to its success.

The Milliman Medical Index, a well-know measure of health care costs for people enrolled in employer-sponsored plans, says the cost of health care this year is projected to be $28,256 for a family of four.

That figure in 2020 was $26,078, or about 8% less.

Moving to an RBP plan no doubt means doing things differently. For some employees, it can be a dramatic, even traumatic, change. But a solid HR communication plan can help ease the transition and the result is significantly better than the alternative: year after year of financial trauma to your entire organization, thanks to unrelenting inflation in health care costs and no end to any of that in sight.

The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the nation. Contact us at or 480-730-4920.

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.

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