Reference-based pricing is emerging as a way for self-insured employers to control substantial costs associated with the three highest cost items in an employee health plan, hospitalization, out-patient surgery and advanced imaging.  How do the savings happen?

There are typically large discrepancies between what providers list as their charges for care and what is finally paid by the insurance carrier and designated as “savings”.

However, even after the promised discount, the paid amount is often significantly greater than what Medicare pays. Medicare payments are based upon the actual cost for medical services submitted by the health care providers on their own services.   Some for-profit health systems charge up to 10 times what Medicare pays.

In a reference-based pricing model, the employer sets a maximum amount that they’ll pay for a claim. While there are variations,   most reference priced vendors reimburse claims based on what Medicare pays plus a specific percentage, such as +30%.  Plan sponsors cut costs by capping what the plan covers for certain medical procedures where fees can vary by 3 to 4 times from the lowest fees.  Example: joint replacement surgery.

Reference-based pricing is established in a self-insured program and includes:

Administration and payment of eligible claims

Audit and re-pricing of claims

Stop loss insurance to protect against individual high claims

Legal support to plan participants in the event of claims disputes

Employee education and communications

In the plan design there is usually an end of networks and artificial medical care costs, since all providers are treated equally. This approach also supports consumerism. Employers for the first time will see the actual cost of health care payments. Employees will understand the amounts that a plan will pay, and then seek out providers that provide the right level of care at or around that cost, can potentially achieve lower their annual out-of- pocket and deductible  healthcare spend.

Employer savings are averaging over 25% in healthcare expenditures. An employer should understand the rewards and challenges in a reference based pricing plan. We have the experience to assist you in the review and establishment of a program if right for you.

The information and opinions expressed are those of the author.  TeBG, LLC provides general information and background on selected topics.  Please seek professional legal and tax advice from your own advisors.