With health care costs continuing to rise faster than the rate of inflation — and the rate of employee wage increases — one solution has been getting increasing buzz in the industry: reference-based pricing. But as with any radically different approach to health plan design, this strategy requires a well-planned and executed rollout to avoid compliance, legal and employee relations problems.
What Is Reference Based Pricing?
RBP plans set a cap on what they will pay for “shoppable” (e.g., nonemergency) medical procedures and treatments. This cap, or “allowable amount,” is typically based on a percentage of the Medicare reimbursement rate.
How does this differ from a traditional health plan? Most providers today charge a set rate (the chargemaster rate) for their services, and then negotiate a lower, “discounted” rate with insurance companies. Because each provider chooses its own price and each insurer negotiates its own discount with each provider, it’s difficult for employers to predict their health care expenses — particularly if they’ve contracted with multiple insurance carriers.
Under these traditional designs, employers have little control over what they pay over the course of the year. They pay a percentage of the expense a participant incurs, but there’s no way to predict when and where a participant will need care — or choose to receive it. Consequently, RBP — where a given test or procedure will always cost the same because the cost is tied to a reference point — may seem like the perfect solution.
Considerations And Risks
Although RBP can offer substantial cost savings for employers, it is not without its risks. And therefore, brokers should be certain to partner with a consultant who is experienced in RBP to set up and manage the program on an ongoing basis.
One important consideration is the potential impact of an RBP structure on employee recruiting and retention. Introducing an RBP structure might be confusing enough to be off-putting to prospective employees. Furthermore, if not rolled out appropriately, this might result in workers leaving for an employer with a more traditional benefits package that is easier for workers to understand.
Employee relations, therefore, is an important area of concern. For employees, learning a whole new process for obtaining health care, finding providers who will accept RBP reimbursements as payment in full and dealing with balance billing can be extremely stressful, and could potentially result in employees not getting the care they need. Therefore, a comprehensive communications plan and support resources are critical to any RBP rollout.
Not all providers will be open to accepting RBP as payment in full. In fact, some providers may refuse outright to accept patients with RBP plan coverage or may require payment in full upfront. An experienced RBP third-party administrator can help manage negotiations with providers and steer employees to participating facilities.
In addition, there are compliance issues to consider. The Affordable Care Act includes a maximum out-of-pocket limit (currently set at $8,150 for self-only coverage and $16,300 for family coverage for 2020). Current guidance indicates that if reasonable measures are adopted to ensure participants have adequate access to providers that accept the reference price, those providers may be treated as “in-network” and only those charges must be applied to the out of pocket maximum. In addition, plan documents and communication materials must be updated so employees, providers and administrators all understand how covered charges will be paid.
Litigation risk is another concern. To date, there have been eight federal RBP lawsuits across the country. Most have been settled or sent back to the state courts. These suits have typically centered on the following:
» ERISA violations - Hospitals have made claims that the plan document language did not reflect the RBP arrangement, the claims process was arbitrary and the vendor was engaged in prohibited transactions under the Employee Retirement Income Security Act.
» Breach of contract - Hospitals argue that an implied contract was created between the hospital and the plan when services were provided, and that the plan enjoyed the benefit of the services and therefore would be unjustly enriched if the plan pays less than the “contracted” amount.
» Misrepresentation and fraud - There have been allegations that the plan misrepresented the payment amount as a percentage of the billed charges rather than a percentage of the reference price. In addition, there were accusations of fraud relating to statements to participants that providers will accept the reference price payment as payment in full.
Typically, the cases with jury trials resolve in favor of the defendant, as juries tend to be very sympathetic to perceived overcharges.
Finally, there is the question of plan structure. Working with their brokers and RBP TPAs, employers must determine the following:
» The reference point. As noted previously, the most common reference point is Medicare, which is able to set relatively low prices due to its buying power and access to actual hospital cost data. Most RBP plans add a 120%-170% markup to the Medicare reimbursement rate. The Rand Corporation reports many hospitals are billing employer plans as much as 250% of Medicare reimbursement. So, even with a markup to the Medicare rate, the reimbursement is far less than traditional network discounted prices.
Other common reference points include providers’ reported costs, the average “wholesale” price or data from third-party databases. In each of these cases, the administrator will research local costs and work with the employer to determine the reference points. It’s worth mentioning that some TPAs will use multiple reference points and pay the higher value to the provider.
» Plan design. There are many different “flavors” of RBP, ranging from “no network” designs (where all services are considered “out of network”) to a preferred provider organization structure where RBP is applied only to out-of-network claims to plans that apply RBP only to certain procedures, such as joint replacements, colonoscopies, MRIs or dialysis.
» Balance bill support. Employers must establish if (and under what circumstances) they will (or will have their TPA) cover the balance, if they will negotiate on the member’s behalf, and whether they will take the provider to court or the employee will be left to pay the balance on their own.
RBP is still a relatively new solution to a long-term problem. Depending on which study you read, between 2% and 13% of employers are currently using RBP, and another 10%-18% are considering moving to this model in the future.
Although there is certainly a great deal to consider when evaluating whether an RBP approach makes sense for your clients, it’s important to remember the potential advantages. Employers have realized substantial savings on health care costs — cutting anywhere from 5% to 20%. And because prices are capped in advance, both the employer and the participants are better able to estimate their expenses.
From the employee perspective, RBP enables patients to know — in advance — just what a service or treatment will cost them. And using a provider that accepts RBP can provide assurance that patients are paying a reasonable cost for the services they’ve received. After all, who wouldn’t want to pay 20% of, say, $1,000 instead of 20% of $5,000?
Educating Workers On RBP
If your client chooses to adopt an RBP plan approach, you and the RBP TPA must work with your client to educate employees on how the health plan works and how to use it cost-effectively. Ideally, communications will begin well in advance of the plan’s rollout in order to educate workers about the following:
» Why the employer has chosen this approach. Although workers still may not welcome the change, understanding the rationale behind the change may minimize complaints and concerns.
» How the plan works. This, of course, will depend on the structure and reference point selected.
» Where workers can find a list of providers that accept RBP rates. For employers adopting the no-network approach, workers can see any provider they choose — but the burden falls on workers to shop for their care. For participants in in network plans, maintaining a list of participating providers will depend on which pricing model the employer has adopted.
» The advantages to the worker — the answer to the ever-important question “What’s in it for me?”
» What to do if a provider refuses care, wants upfront payment or balance bills. Workers will need to learn to contact the TPA, who ideally will intercede with the provider on their behalf.
A comprehensive, year-round communications plan is critical to ensuring employees and their family members learn how to use their plan appropriately. Help your client prepare print or online materials — such as FAQs — that can serve as reference tools during open enrollment and throughout the year as they use their plan.
You might want to recommend that your client offer — or even require — one-on-one meetings with benefit experts during open enrollment. This provides an opportunity for employees to discuss their individual needs, ask specific questions about RBP and ensure they have the information they need to make cost-conscious health care decisions.
Beyond explaining RBP, employers must help their workers become more educated health care consumers. Because an RBP plan won’t pay more than a set amount, workers will undoubtedly have many questions about how their care is covered — both at enrollment time and during the year as they use their plan. Resources such as patient advocates can answer these questions from employees, help them find providers that meet their needs, and resolve claims and billing issues in real time.
Workers should also be encouraged to shop around for care so they can find an option that doesn’t exceed the amount the employer is committed to paying. Consider partnering with a transparency service, which will allow employees to research the potential cost of care and compare prices across several providers in their area.
Despite its challenges, RBP can be an effective tool for employers to tackle rapidly rising health care costs. By providing transparent pricing, provider referrals and assistance with billing issues, employers can help their workers navigate the risk of balance bills while realizing significant cost savings. And by helping your clients create an effective communications plan, you can showcase your value as a trusted advisor.