As employers search for opportunities to save on healthcare costs, what are the pros and cons of reference-based pricing?
A popular focus for employers has been eliminating high-cost providers from networks. This process, known as narrowing networks, is making a name for itself in the self-funded benefits community and among accountable care organizations. The most aggressive trend that achieves the savings gained through narrowing networks is reference-based pricing. This strategy all but eliminates the traditional “network,” driving savings for employers as they agree to pay a certain percentage above Medicare price for healthcare services.
Traditional models rely on a non-transparent contracting process in which insurance companies negotiate discounts off of over-inflated charges. To illustrate this trend, Medicare recently released a massive dataset of charges and Modern Healthcare has created a searchable database to show the discrepancy between charge amounts and what Medicare will pay.
For example, the average charge for a major joint replacement at a hospital in North Carolina is $59,622. Typical big insurance discounts will slash that price by 50 percent to around $30,000. At first glance, the discounted price seems fair until compared to the Medicare price: $9,264. Medicare often reimburses at cost, leaving no margin for the facility and providers. Reference-based pricing plans have addressed this issue by adding on to Medicare reimbursements to account for the profit margin, which is sometimes more than 100 percent.
In the example above, by avoiding big insurance and network contracts, and using a reference-based pricing model, the reimbursement to the hospital would result in a savings of 38 percent. In every medical service delivered, the reimbursement is less than traditional network discounted prices. As a result, reference-based pricing plans can promise significant employer savings.
There are, however, pitfalls to this strategy. Many employers who have implemented reference-based pricing plans do not see the desired results because they fail to take into account the following considerations.
Due to the complexity of these plans and the potential pitfalls, successful implementation requires careful planning. When considering a reference-based pricing plan, choose a vendor with experience, as well as clear, transparent processes and safeguards in place to protect your employees. Make sure that proper planning is conducted up front—such as holding conversations with highly utilized providers—to minimize potential disruptions.
Reference-based pricing may work for some employers, but it’s important to consider all possible implications on your workforce and employees. It may also be helpful to consider alternative approaches that guide employees to the most competitive facilities in your network. In contrast to a traditional reference-based pricing plan, these approaches limit disruption while still directing care to fair-price facilities. In one example, a member and the health plan saved over $20,000 through transparent pricing and proper member guidance.
To see if Reference-based pricing is a good fit for your workforce, contact a member of our health plan administration team.