Choosing an insurance plan for your employees can be challenging due to the influx of options now available. One of the biggest decisions you will have to make as an employer is between fully-insured and self-insured health plans. A fully-insured plan is a more traditional option where the company pays a premium to the insurance carrier. With a self-insured (self funded) health plan, employers are able to operate their own insurance plan which can save money and give companies more control over their finances. Reference based pricing is one method to priceclaims option for a self-funded plan.
What Exactly is Reference Based Pricing?
With the goal of decreasing their spending on employee benefits, many employers are turning to reference based pricing to reduce their claims spend. Unlike a traditional “networks”, which aims to negotiate a lower fee off the hospital/provider’s billed charge, reference based pricing (RBP) is a revolutionary concept that differs from more traditional pricing options.
Today’s healthcare pricing model is flawed. Hospitals and other healthcare providers start with an artificially inflated starting point, and from there, a health plan negotiates a significant “discount” through their network contracts. The question is whether this is a good deal, and if starting with an artificially inflated price could ever result in a good deal for insured members.
Through RBP, the employer is able to better control the cost of claims, by starting at their cost basis with “bottom up” pricing. These often include the most expensive claims, such as hospital stays, surgeries and other types of treatments that can significantly vary in price as well as outcomes.
It is important to understand that the amount that a healthcare provider bills does not always reflect the true cost of the service provided. In addition, the cost billed may not properly reflect the market value of the treatment. With traditional health insurance network contracts, each insurance provider sets a pre-negotiated price or discount that they are willing to pay for each service.
The exception is Medicare-negotiated prices which are typically much lower, due to Medicare’s buying power and access to actual cost data that hospitals must report. In comparison, reference based pricing pays a percentage above the Medicare-negotiated price which allows for a more competitive cost paid by the plan/employer. This is one of the key ingredients that are involved in “bottom up pricing” since the Medicare is one of the largest payors of all health claims.
How Does Reference Based Pricing Work?
Reference based pricing refers to pricing outside of those set by traditional insurance carriers or rented networks. Traditionally, these carriers or networks negotiate discounts from provider-billed charges resulting in a ‘contracted-rate’ or ‘allowed amount’ that the health plan pays the provider. With reference based pricing, provider reimbursement is based on a percentage of what Medicare would typically pay the provider which often ranges from 120 to 170 percent of Medicare reimbursement. By comparison, many hospitals are billing roughly 350 percent of Medicare reimbursement to a traditional PPO plan.
For example, an employee may undergo an echocardiogram, a procedure that typically takes 15 to 20 minutes to complete with an additional 5 minutes to interpret the results. If the hospital bills $1,500 for the procedure and the insurance company negotiates a 40 percent discount, the final contracted-rate would be $600. Traditionally, if the health plan does cover the entire cost of the procedure or if the patient has not met his or her deductible, they may be responsible for paying this cost out-of-pocket. With reference based pricing, the health plan would pay about $225 of the cost. While the risk of balance billing may occur, as it does in a traditional, fully-insured plan, a good TPA suggested by your benefits broker will assist with such issues.
What are the Benefits of Reference Based Pricing?
What makes reference based pricing different than traditional funding arrangements is its cost transparency. Employers who choose to go with RBP typically have more control over rising healthcare costs and can deal with these increases in costs without interfering with their bottom line. However, it is important to inform your employees that not all healthcare systems accept capped insurances like reference based pricing. To ensure that your employees understand how balance billing works, it is also a good idea to hire an experienced vendor with strong patient advocacy.
One of the biggest benefits of reference based pricing is the ability to know how much a specific procedure or treatment will cost. Agreements with in-network healthcare providers can ensure that as long as an employee visits a provider that is in-network, the total cost will be covered at the established price. While an employee can still choose to see a provider that is out-of-network, they may have to pay a portion of the bill out-of-pocket. Reference based pricing allows employers to save money on health care expenditures and fixed stop loss premium. These savings can be passed onto the employees.
Reference based pricing has also been proven particularly useful for services like scans and lab testing. The average CT scan can range from $250 to more than $4,000 depending on the provider you go to. With RBP, you can help reduce this broad cost gap which can be highly beneficial to both patients and healthcare insurers. This same concept applies to other types of one-time procedures, such as casting a broken arm or undergoing a knee replacement. However, reference based pricing can be less useful for chronic illnesses which require frequent medical appointments or routine treatments.
Reference based pricing not only benefits employees but also employers. With RBP, an employer does not have to risk paying exorbitant costs for medical services that could be completed more inexpensively. Setting a cap on certain types of procedures allows employers to encourage employees to take charge of their own healthcare. Employees are then forced to consider both cost and quality when choosing where to have their procedure done, which often requires research and individual participation in one’s own health care. The healthcare industry is one where most people do not know the cost of a particular service until the bill arrives weeks later. RBP creates higher employee engagement in health care decisions.
Contact a Benefits Consultant for More Information
By utilizing the popular healthcare payment model known as reference based pricing, employers now have the opportunity to bypass traditional insurance carrier contracts in favor of a more mutually beneficial arrangement. Reference-based pricing continues to generate a lot of interest among employees as the benefits are undeniable. Are you interested in learning more about reference based pricing or other type of self funding health group insurance? If so, then you will want to contact an experienced benefits consultant today to learn more about your health insurance options.