If medical pricing were a “Jeopardy!” category, few Americans would be willing to ring in. The subject is notoriously confusing and differences between providers often seem arbitrary. One medical office charges $300 for a diagnostic test; another charges $2,200. One person’s insurance plan fully covers a certain prescription drug; a similar plan may not cover it at all. Then the questions of paying for it, like what is reference based pricing, and should your self-funded plan use it?
The lack of transparency around medical pricing puts self-insured employers and their employees at a disadvantage. Without the bargaining power that major insurers have, self-insured employers can’t be certain that they’re getting the best possible prices for the services that their plan members need.
Enter reference based pricing. It’s a pricing strategy that more and more self-funded employers are using to control costs. Traditionally, hospitals and health care providers set inflated prices for services and insurers negotiate lower rates for their members. A procedure that a hospital charges $10,000 for may only be billed at $5,000, depending on the patient’s insurance plan. If the patient has Medicare, that same procedure may only cost $1,000 because Medicare programs negotiate low prices that give providers a slim profit margin.
With reference based pricing, prices aren’t negotiated down from what the provider charges. Instead, they’re calculated in relation to the prices that Medicare has negotiated. Reference based pricing rates are generally determined as a percentage of Medicare rates. For example, an employer sets its reimbursement rate at 200 percent. The same procedure that costs $1,000 for a Medicare patient would cost the employer $2,000, a significant savings compared to the $5,000 that traditional insurers would be billed for that procedure.
Employers implement this strategy as a cost-cutting tool. Using a fixed rate – like 200 percent of Medicare rates, as in the prior example – allows employers to better predict health care costs. The same tests and procedures will always cost the employer the same amount because the cost is tied to the set Medicare rate.
This strategy does have drawbacks, which largely affect the covered employees. An employer that adopts reference based pricing sets caps on what it will reimburse for services, but if that cap is below what the provider is willing to accept, the patient/employee will be charged for the difference. In the above case, the employer caps its reimbursement for the procedure at $2,000, but the hospital may expect to be paid $5,000 and bill the patient for $3,000. This practice (called balance billing) puts tremendous financial strain on employees, especially because they may not realize that they owe anything until long after they receive services.
Balance billing is one of the factors that has contributed to reference based pricing-related court cases in recent years. Some cases have involved individual patients who are unable or unwilling to foot the bill for services that their employers don’t fully reimburse. Several major cases also involved hospitals that argued reference based pricing was inequitable because the hospitals were expected to perform services that plan administrators knew wouldn’t be fully reimbursed. Unclear plan language has also been a factor in some court cases. In all cases, plans using reference based pricing must provide patients some reasonable way to avoid being balanced billed , or , if they are, make patient advocates available to their members.
Ultimately, reference based pricing is a strategy that works wonderfully for some employers. And while balance billing is a real concern, RBP is not necessarily a bad system for employees. In some cases, being part of a plan that using this pricing strategy means access to more providers. Employers managing their health care costs well also benefits employees in the long run.
This is just one of the options that self-insured employers need to consider when making choices about coverage. The experts at Stop Loss Insurance Brokers, Inc. can help your organization weigh its options and make the best choice for you. Contact us with any questions.