Pros and Cons of Reference Based Pricing for Self-insured

As self-insured employers look for ways to control healthcare costs, they have to evaluate every strategy that might help them accomplish that goal. Reference based pricing is a pricing strategy that eliminates rate negotiation between employers and healthcare providers, and may result in employers spending less on their employees’ medical claims. The financial benefits of reference based pricing can be significant for self-insured employers. But there are also drawbacks. Here are the pros and cons of reference based pricing.

How Reference Based Pricing Works

Reference based pricing solves some of the pricing challenges that affect self-insured employers. With fully funded insurance, insurance companies with millions of covered members have significant bargaining power with healthcare providers. Self-insured employers don’t have that power. And because healthcare systems tend not to be forthcoming about pricing transparency, self-insured employers don’t always know if they’re paying inflated prices for certain services or if they’re paying fair market rates. 

Reference based pricing flips the script. Instead of being beholden to the prices that healthcare providers set, employers that use RBP essentially set their own prices. They establish a set amount that they’ll pay for any given health care service, generally expressed as a percentage of Medicare rates. Anything above that set rate is the patient’s responsibility. 

Let’s say a self-insured employer adopts RBP and sets its reference price at 200 percent of Medicare. An employee covered by its plan gets a minor medical procedure and submits a claim to their employer. The Medicare reimbursement rate for that procedure—or what Medicare would pay the patient’s health care provider if the patient was covered by Medicare—is $1,000. But the patient is covered by a private plan, so the health care provider can charge more. They might bill $2,700 for the procedure. The self-insured employer will only pay $2,000 (200 percent of $1,000). The provider may accept this amount. Or, they may bill the patient for the unpaid $700, a practice called balance billing. 

For the employer in this example, paying 200 percent of Medicare rates could represent significant savings over the course of a plan year. The RAND Corporation has been tracking health care pricing for years, largely using data from self-insured employers. In its 2020 study, RAND found that in 2018 employers and private insurers paid 247 percent of what Medicare would have paid for the same services, up from 230 percent of Medicare pricing in 2017 and 224 percent in 2016. 

Benefits of Reference Based Pricing

While reference based pricing isn’t the right strategy for everyone, the practice can have several benefits for employers. 

  • Lower costs. The possibility of lowering healthcare spending is the primary reason why a self-insured employer might consider adopting reference based pricing. By tying its own healthcare costs to Medicare rates, the employer has confidence that it’s paying fair prices for its employees’ health care expenses and not being fleeced by providers. Depending on what it’s paying for services now and where it sets its reference price, a self-insured employer may stretch its healthcare dollars by adopting reference based pricing. Both medical services and prescription drug prices can be controlled using RBP. 
  • Ease of administration. Some aspects of administering a self-funded health plan are simplified when an employer adopts reference based pricing. For one, paying set rates for services may eliminate the need to use a network system. The employer pays the same amount for a given medical service no matter where the covered individual was treated. 
  • Healthcare budgeting may be easier. Using previous years’ data, self-insured employers may be able to more accurately project their future healthcare spending because they know exactly what they’ll spend for the most common claims. 
  • Reference based pricing isn’t “all or nothing.” Self-insured employers  are often attracted to self-funding because of the flexibility it allows. Reference based pricing can be incorporated into a self-funded plan in different ways. An employer might elect to use RBP just for certain high-cost procedures, for example. Or, it might keep its network system and only use reference based pricing for out-of-network claims. 
  • Stop-loss costs may be reduced. Adopting reference based pricing could potentially lead to spending less money on stop-loss premiums. Lowering its payment levels means a self-insured employer is less likely to reach the deductible set by its stop-loss policy, which may allow the employer to spend less on stop-loss protection in the future. 

Drawbacks to Reference Based Pricing

Balance billing tends to be the most significant downside of reference based pricing. A patient may believe that their health plan is covering the costs of medical treatment they receive at an in-network provider, only to get a surprise bill in the mail later on. Obviously, that’s a stressful and unpleasant experience. (And a common one: A study using 2016 claims data found that one in seven American patients received a surprise bill for medical treatment after being treated at an in-network facility.) 

As a result, balance billing can create conflict between self-insured employers and their employees. Things may get tense at work after an employee receives an unexpected medical bill because their employer didn’t pay a provider’s full rate. This may have a negative effect on employee satisfaction and retention.

All that said, there are ways for self-insured employers to avoid balance billing. For example, one strategy called value-based pricing is a slight alternative to RBP in which the amount that providers are paid is determined by the quality of care they provide. Balance billing can be largely eliminated with a value-based pricing system. 

Stop Loss Insurance, Inc. is here to help employers evaluate all their options around self funding and stop loss insurance. Reference based pricing is just one strategy that self-insured employers may want to consider in their quest to control healthcare spending. Have questions about how self funding might work for your organization? Contact me today.


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