According to a 2016 Glassdoor survey, a company’s health insurance has the most significant effect on how employees rate their benefits. This statistic makes perfect sense if you know the exorbitant costs of healthcare in America. In 2016, U.S. healthcare costs totaled $3.3 trillion, or $10,348 per person.
But it’s not just employees who are bearing the brunt of this cost. Businesses across the country are feeling the pain from continual increases in the cost of healthcare. According to Zanebenefits, employers pay an average of $5,179 annually for single employee health coverage and $12,591 for a family.
So, as a business how are you supposed to do to keep your insurance costs in check? Every year healthcare costs continue to rise. On the other hand, employees value health insurance now, more than ever. Well, the answer may be more straightforward than you realize. Could reference-based pricing (RBP) be your company’s secret healthcare weapon?
What is Reference-Based Pricing?
Reference-based pricing limits cost by setting a fixed amount your health insurance will pay for specific healthcare services, which have wide cost variations. This fixed amount is typically based on a multiple of an industry benchmark such as Medicare’s reimbursement rate.
So, for example, if an employee receives a bill for $10,000, but Medicare would pay $5,000 for the same service, the employer might pay $7,000, and encourage the hospital to accept the payment in full.
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 to know, your company needs a self-insured plan to utilize reference-based pricing.
This stipulation means employers with a fully-insured plan would have to look at an entire plan change if they want to utilize reference-based pricing. So, before you go ahead and switch your plan; let’s dive into the pros and cons of reference-based pricing.
Advantages of Reference-Based Pricing
There are several potential advantages to utilizing a reference-based pricing plan.
1. Less Overall Healthcare Spend for Employers
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. The opportunity to shave your total healthcare spend is evident when you examine what hospitals are currently charging compared to what Medicare pays.
The average for-profit hospital charges greater than 700 percent of what Medicare would pay for services. Non-profit hospitals, on the other hand, charge 550 percent of what Medicare would pay. So, without reference-based pricing, and even after the traditional 50 percent discount provided by PPO, employers often pay 300 percent of what Medicare would, or more.
Essentially, reference-based pricing gives employers more control over their healthcare costs. No longer do they have to accept the year-after-year increases doled out by insurance carriers.
2. Reduced Employee Out-of-Pocket Spend
Through reference-based pricing, both employers and employees can save money. This strategy, per Lockton, can minimize coinsurance rates and deductibles for employees. Additionally, increased savings to employers, from reference-based pricing, can help reduce employees overall out-of-pocket spend.
A decrease in healthcare costs can give employers more flexibility with their total benefits package. Through this reference-based pricing, businesses can use cost savings to reinvest in their employee benefits. This reinvestment can enrich benefits plans with more programs and services to better serve your staff and further reduce their out-of-pocket costs.
3. Protections for Plan Members/Employees
As previously mentioned, any employer wishing to implement reference-based pricing must have a self-insured health plan. Because of this stipulation, most employers using reference-based pricing also have stop-loss insurance. This insurance protects against catastrophic or unpredictable losses in a self-funded health plan.
Stop-loss insurance can also protect plan members from an outsized claim that would otherwise be financially ruinous. Additionally, most reference-based pricing plans come furnished with resources or a support team to assist both employers and employees. Similarly, a majority of these plans are backed by legal counsel to protect employees and advocate on their behalf in case of a balanced-billing scenario (more on this later).
Learn more about self-insurance.
4. Works with Other Cost-Saving Tactics
If your firm does decide to execute a reference-based pricing plan, it’s important to know it doesn’t preclude your business from utilizing other cost-savings strategies. Cost-containment tactics such as using a pharmacy benefits manager or partnering with a medical management provider are good examples of strategies that can work alongside reference-based pricing plans to compound savings.
5. Adds Price Transparency
It’s critical, for a reference-based pricing plan, that both employers and employees know the average or acceptable cost for any given medical treatment or procedure. This information is the basis for operating a fully-functioning reference-based pricing plan. Traditional healthcare models rely on a non-transparent contracting process. Reference-based pricing is dependent on flipping this outdated model and injecting transparency into the process.
Disadvantages of Reference-Based Pricing
As with almost anything, there are both pros and cons to reference-based pricing. Here are the drawbacks.
1. Balanced Billing
Balanced billing, according to BenefitsPro, occurs when a non-direct provider is used under your reference-based pricing plan and the provider bills beyond what the health plan has decided to allocate for a particular service. Hospitals use balanced billing as a means of forcing employer sponsors of health insurance plans to pay more than fair reimbursement for services.
There’s potential, through balanced billing, that your employees suffer adverse financial outcomes. These outcomes can range from a hit to your credit score to bankruptcy. Still, it’s important to know, for any balanced billed employee, most RBP providers include balanced billing and legal support. Additionally, according to SHRM, providers accept the original price offered for a service over 95 percent of the time.
2. High Levels of Education Necessary
Both your employers and employees must be well educated in all things healthcare related, to maximize the effectiveness of a reference-based pricing plan. Your staff should understand fair pricing for their procedures, where to go for the cheapest yet highest quality treatment, and what to do if they’re balance billed.
One critical component to capitalize on your reference-based pricing plan is your employees choosing the right providers at the reference point. Similarly, your leadership team must be able to point your employees to the right resources to ensure they’re paying the lowest amount for the highest quality of care. As SHRM states, for RBP plans to have cost savings, employees must be well-informed consumers.
3. Risk of Higher Than Expected Claims
As previously mentioned, reference-based pricing necessitates your group utilizing a self-insured plan. When using a self-insured plan there’s always a chance your firm faces higher than expected claims at the end of the year. If one, or more, of your employees, is severely injured or ill, these claims may be more than you’re prepared to handle. A high fluctuation in claims could be especially devastating if your firm’s cash flow fluctuates as well.
Still, it’s worth noting any self-insured plan sponsor can purchase stop-loss insurance. As previously mentioned, your firm can purchase stop-loss insurance to protect against catastrophically high claims. Under a stop-loss policy, the insurance company becomes liable for losses that exceed a specific deductible. This insurance can help minimize your firm’s losses in case of a high-claim year.
4. Litigation
As previously discussed, without provider contracts, reference-based pricing can lead to potential litigation for both employers and employees. And, while legal disputes over claims are rare, it’s not unheard of. In Martinsville, Virginia, there is a reference-based pricing lawsuit pending, dealing with this very same issue. Nobody wants to become embroiled in extensive litigation, even with legal support from your plan’s administrator.
The Wrap
If you’re tired of medical and insurance costs eating your company’s revenue and employees’ salaries, reference-based pricing may be for you. Today, Americans pay 2 to 5 times what other developed countries pay for healthcare services. Don’t continue this model of overpayment. There’s a real evidence-based case to implement reference-based pricing as your company’s secret healthcare weapon.
*Top photo courtesy of Vic.