Reference Based Pricing: The Promise & The Pitfalls

By David Bottoms, REBC, RHU, CLU, ChFC


Ask any employer what they think about health insurance and you are very likely to get a very predictable and short response…”It’s too expensive.”  

Typically, insurance carriers are the primary recipients of blame for the high cost of health insurance coverage; however, discerning individuals will quickly recognize that, in a healthcare market as complex as the one in place as the United States, hospital pricing, pharmaceutical costs, and government regulation are also key contributors to the ever increasing cost of care.

That being the case, one concept gaining at least conversational traction among employers currently offering self-funded health insurance plans to their employees is one called “reference based pricing.”  Reference based pricing is a broad topic comprised of many different specific approaches managed by a variety of administrators; however, the core premise of these programs is that the cost of insurance is higher than it ought to be in large part due to significant variances in the amounts charged by specific hospitals for specific procedures.

Reference based pricing attempts to tie reimbursements under the health plan back to some specified reference point.  Sometimes reference points are set by the plan for specific procedures in an attempt to incentivize employees to become better consumers and utilize facilities that have average or lower cost within a given geographical area.  In these cases, employees who utilize a higher cost facility may have to absorb a higher portion of the claim expenses than they would otherwise have to incur with a more affordable provider.  

In other, even more complex cases, often referred to as “Medicare Plus” plans, the reference point upon which hospital reimbursements are based is the Medicare rate the facility accepts for the specific procedure performed and/or care rendered.  Since hospitals generally contend that Medicare rates are significantly below their cost of providing care, and thus decline to accept a Medicare based reimbursement knowingly, these plans in effect try to take the hospitals by surprise.  

In order to do this, the programs are structured to specifically exclude network coverage for inpatient hospital care.  This means that when an employee visits a hospital for care, since there is no network in place, the employee is under no obligation (at least in the contention of the health plan) to pay typical rates charged to insurance plans and rather should have the ability to negotiate pricing with the hospital with target pricing being somewhere between 12% and 40% in excess of the Medicare reimbursement the facility currently accepts for the treatment provided.

As you can imagine, these “Medicare Plus” plans in particular have a lot of sizzle in sales presentations; however, employers considering these plans need to carefully consider the pitfalls inherent in the approach that these plans rely upon in order to drive results.

First and foremost, Medicare Cost Plus plans can put employees in the legal and financial crosshairs of an inevitably complex and pricey standoff between the health plan and the hospital.  If the hospital refuses to accept the offered payment from the plan, the employee’s credit can be impacted and lawsuits result.  

Furthermore, the biggest challenge that can result from these plans is one of access.  This is due to the fact that while hospitals with an emergency room are under obligation to accept and treat patients presenting with an emergency or active pregnancy regardless of the individuals ability to pay they are under no such obligation to provide treatment for non-emergency care.  They can simply decline to provide care and suggest that the patient find another facility for their healthcare.

This means that, as hospitals become aware of employers who have implemented Medicare Cost Plus plans, they have a reasonable incentive to decline treatment when the hospital ascertains during the pre-authorization process that payment for the diagnostic procedure, cancer treatment, or surgery is uncertain.  

That said, as health care becomes increasingly more expensive and complex it is only reasonable to look for creative solutions.  It is just important to always keep in mind that the devil is in the details.

David is a monthly columnist in the Cobb Business Journal. To read other articles like this by David Bottoms, you can subscribe to the online edition of the Cobb Business Journal.

Our corporate calling of helping others, along with our embedded employee benefit and life insurance specialties, intersects with our client’s desire for ongoing financial security and protection.

David Bottoms, REBC, RHU, CLU, ChFC



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