The pitfalls of referenced-based pricing

Employers are looking for creative ways to save money on insurance, and reference-based pricing is the latest strategy to promise savings. However, the switch to reference-based pricing poses a number of challenges, all of which lead to decreased employee satisfaction and retention, and possibility litigation and additional troubles for employer groups.

How does it work? 

Reference-based pricing attempts to bypass traditional health insurance by eliminating the traditional provider network in order to potentially save more on costs. With reference-based pricing, employees can seek care from whichever providers they choose.

Without a network contract, the employer reimburses hospitals and facilities based on a percentage of Medicare pricing, typically anywhere between 120–300%. This may be less than traditional insurance amounts, and potential savings can vary by provider and service.

Reference based pricing, in a nutshell

• Eliminates the traditional provider network
• Pays a certain percentage above Medicare reimbursement
• Patients can be balance billed
• Creates complexity for health plan members
• Providers may choose to deny care

How much can employer groups save?

It’s hard to pinpoint exactly how much employer groups can save with reference-based pricing, and it also varies across the country. Third-party sources who promote the plans claim they can save employers as much as 20–30%.

How popular is reference-based pricing?  Nationwide, it’s estimated only 5% percent of employers are using reference-based pricing.

How does reference-based pricing get its savings?

The following example is oversimplified, but provides a basic idea of how reference-based pricing may help employers save money:

• Let’s say a certain surgery costs $30,000. 
• Traditional insurance negotiates a discount on the price, which is reduced, let’s say by 50%, to about $15,000. 
• Medicare reimbursement for this procedure is $6,000. 
• In this case, let’s say the reference-based pricing plan reimburses 200% of Medicare reimbursement. So, the employer pays $12,000 for the service. 
• The employer avoids insurance and network contracts, and saves a total of $3,000. 

Depending on the medical service or procedure, the reimbursement may be less than traditional discounted prices, resulting in savings.

What are the pitfalls?   

• Patients may be on the hook for additional costs through balance billing. If the provider isn’t satisfied with the payment, there is nothing to stop them from billing the patient for the unpaid portion of the claim. An employee may believe that their health plan is covering the costs of medical treatment, only to get an unexpected medical bill because their employer didn’t pay a provider’s full rate. 

Using the example provided above, the provider could balance bill the employee an additional $3,000, which reflects the difference between the amount the provider billed and the amount the member was reimbursed by the plan. Surprise medical bills lead to medical debt, unhappy employees, and potential conflicts and problems for employers.

• Adds complexity to employees’ decision-making. With reference-based pricing, employees must learn an entirely new process that profoundly changes how they access medical care. Without a provider network, they are free to see anyone. However, they may want to find providers who accept reference-based pricing payments without additional charges. This adds a layer of complexity to employees’ decisions about where to access healthcare and is likely to reduce employee satisfaction with the plan.
• Providers may choose to deny care. Without protections from a provider contract, and because reimbursement rates with reference-based pricing are so low, providers may choose to opt out of these arrangements, leaving employees unable to receive the medical care they need.

What do hospitals have to say about reference-based pricing?

The following is a statement from the American Hospital Association about reference-based pricing:

Reference-based pricing is bad for patients and the hospitals and health systems that serve them because it:

• Is a cost-containment strategy that simply pushes more of the cost of care away from the payer and onto patients and providers.
• Often leaves patients unaware that they may be subject to additional costs, making them financially vulnerable.
• Does not consider quality in the equation, as the reference price does not help direct patients to higher-quality providers.
• Creates “pain points” for consumers by leaving them stuck with unexpected bills and greater costs.
• Increases bad debt for providers, making it more difficult for hospitals to meet their mission of caring for communities.
• Undermines broader health care planning, as providers have less ability to predict their patient mix and volume and their health care needs.
• Increases consumer demand for price and quality transparency, and reliable tools are not yet widely available.
• Ignores one of the largest drivers of growth in health care spending: prescription drugs − by excluding them from reference-based pricing programs.
• Will favor lower-cost alternatives and further erode society’s ability to finance social good activities, such as:
• training the future workforce;
• conducting research;
• caring for the uninsured and underinsured; and
• maintaining emergency stand-by capacity in every community.

 You can find the complete AHA fact sheet about reference-based pricing here.