This year, it’s estimated employees will spend an average of $14,642 on healthcare expenses, which includes premiums and out-of-pocket costs. In 2020, this total is expected to increase to an average of $15,375 per employee. Of these expenses, the average large employer covers around 70 percent of costs, which leaves employees to cover the remaining 30 percent, or nearly $4,500.
This total may not seem like a lot. But for a lot of Americans, this sum would be ruinous to their finances. According to the Federal Reserve, 40 percent of adults said they couldn’t pay an unexpected bill of $400. Similarly, a 2018 LendingTree survey found 52 percent of Americans don’t have enough put away to handle a $1,000 emergency expense.
So, if healthcare expenses are increasing, and your employees don’t have the necessary savings to cover these costs, what should employers do to decrease the amount employees spend on healthcare? One option has been to push more of the cost-sharing to employees through tools such as a high-deductible health plan. But this strategy does nothing to reduce the total cost of healthcare, boost employees’ cash flow, or improve quality of care.
In this article, we’ll cover just one strategy your firm can use to reduce your healthcare expenses and enhance quality of care. We’ll define reference-based pricing (RBP), tell you how it can help your organization, and give you five questions to ask yourself to maximize the strategy’s effectiveness.
What is Reference-Based Pricing?
Reference-based pricing limits healthcare costs by setting a fixed amount your health insurance will pay for specific healthcare services. These services can have extremely wide cost variations. Reference-based pricing reimburses patients based on fixed, set prices outside of what’s set by traditional insurance carriers. The fixed amounts are based on a multiple of an industry benchmark, typically using Medicare’s reimbursement rate.
Prices set through reference-based pricing, are usually set between 120 to 170 percent of Medicare’s reimbursement rate. So, for example, if an employee is billed $10,000 for a knee replacement, but Medicare would pay $5,000 for the same service, the employer might pay $7,000.
Through reference-based pricing, employees get to bypass traditional insurance carrier contracts and pay hospitals directly. Avoiding these contracts allows your employees to receive more transparent and cost-effective care. Though it’s important you know your company needs a self-insured medical plan to utilize reference-based pricing.
In addition to a self-insured plan, your firm will also need a stop-loss insurance plan. Stop-loss insurance helps self-insured employers avoid some of the liability for losses arising for their insurance plan. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles.
So, if you’re self-insured and want to reduce healthcare costs, keep reading to find out how reference-based pricing can serve you.
Why Choose RBP?
You and your employees can gain numerous advantages through reference-based pricing, but the most significant benefit of this strategy is a reduction in healthcare costs. A typical insurance network achieves a 50 – 60 percent discount on most procedures. After this discount, the cost of care is still usually triple the amount of what Medicare pays for the same service.
Additionally, Medicare usually increases payments to hospitals by just 1 – 3 percent each year. These small increases are unheard of for typical insurance networks. It would be unusual for an employer under a standard insurance network to see a year-to-year increase as low as 1 – 3 percent. Tying your healthcare prices to Medicare’s through RBP helps you avoid drastic year-to-year increases for services.
Establishing Reference-Based Pricing
When deciding whether reference-based pricing is the right choice for your organization, there are five major questions your firm should consider.
1. How Will You Use RBP?
Are you going to use reference-based pricing for high-cost claims, such as inpatient and outpatient procedures? If so, which providers will you use for professional provider services? None of the four main, national carriers allow access to their networks under the RBP model. How will a network change impact employees?
2. What Type of Reimbursement Model Will You Use?
There are two main models of reimbursement under reference-based pricing: defined contribution and defined contribution with negotiation. Under a defined contribution model, employers work closely with an RBP administrator to set prices on services. In defined contribution with negotiation, a third-party administrator sets prices but will negotiate balance bills when the provider disputes the cost until both parties reach an agreement.
3. What’s Your Administrator’s Model for Pricing?
As previously discussed, most pricing models are based on Medicare or the Centers for Medicare & Medicaid Services reimbursement, plus a percentage. A higher margin means more providers are likely to accept the defined payment as payment in full, without balance billing.
4. How Does Your Stop-Loss Coverage Play a Role?
Will your stop-loss carrier allow adjustments for “negotiated” costs, or will they pay costs only as outlined in the plan? Failure to coordinate how reimbursements are defined by both your plan document and the stop-loss vendor could expose employers and employees to additional costs.
5. How Will You Educate Employees?
Educating your employees about their plan is necessary to maximize the effectiveness of your reference-based pricing plan. Deciding how you educate your employees is vital too. One-on-one consultations, group meetings, online training, cost databases, or a medical management provider are all examples of methods your firm can use to educate employees about the RBP process.
As an employer, one of the biggest questions you’ll face over the coming months and years is how you can reduce the cost of healthcare for employees while simultaneously improving the quality?
Well, according to BenefitsPro, businesses, on average, can save up to 30 percent of their total healthcare costs in the first year of using reference-based pricing alone. Similarly, RBP can reduce employer Rx costs by an average of 20 percent per year.
You don’t need a reference to start a reference-based pricing program of your own. Contact one of The Olson Group’s Benefits Consultants today to see how reference-based pricing could work for you.