Reference-based pricing (RFB) strategies are increasing in popularity as employers seek more affordable options for their health benefit plans. Although PPO networks and their negotiated discount agreements have been in place for decades, they provide very little transparency to the true costs of services provided.

How can an employer control health care costs when the base charges for services for the same procedures can vary dramatically between physicians and hospitals in the same region? For example, depending upon which hospitals is providing the service, hip surgery can cost anywhere from $20,000 to $100,000 (all incorporating PPO discounts).

Reference-based pricing is a strategy that drives plan enrollees to find and use a provider (usually a hospital) that has agreed to accept a fixed amount for certain procedures. These amounts can be directly negotiated with providers using the average fees charged within the same geographic region by providers of similar training and experience or, more often, calculated as a percentage over and above current Medicare reimbursement rates.

The U.S. Department of Health and Human Services (HHS) is comfortable with this new approach, as it provides much greater transparency to the true cost of services – with the caveat that care must be taken to ensure plan participants are provided with “adequate access to quality providers” and are not just forced to choose the least costly alternative.

A Perfect Complement to Self-Funding

Self-funded plans are particularly well-suited to this approach and many TPAs are already offering their clients alternatives that incorporate some form of reference-based pricing. With experienced plan administrators guiding the implementation and administration, self-funded employer groups can finally know the true cost of care – something that few fully-insured organizations have ever been able to identify.

Although there is a concern that plan participants may be “balance billed” – charged the different between the provider’s retail or network pricing and what they are being paid under the RBP agreement – some TPAs take steps to ensure plan members are protected against this.

Far outweighing these considerations is the potential for savings. It is not uncommon for reference-based pricing to yield savings in the range of $150,000 for every 100 covered employees. To learn more about reference-based pricing alternatives, contact Diversified Group today.