IN AN EFFORT to encourage health plan participants to shop around when deciding on where to have a procedure, more insurers are starting to use a system known as “reference pricing.”
With reference pricing, the health insurer imposes a limit on the amount it will pay for a particular procedure – a limit that is reasonable and allows access to care for patients.
Typically, a large claim will be priced at either “cost plus 12%” or “Medicare plus 20%,” whichever is higher.
Reference pricing models offer a smart alternative to the typical PPO plans that barely generate cost savings in a world where the average mark-up for hospital goods and services is 300% to 2,000%.
What makes this possible is the health insurer having a unique partnership with an aggressive third party administrator and ELAP, a cost-management services firm. Together, they work to shield plan participants by auditing claims riddled with exorbitant charges from health care facilities, and provide legal defense if balance billing or a collection attempt occurs.
Use of reference-based pricing rose from 11% to 13% among large employers in 2015, according to a study by Mercer Benefits.
This type of arrangement benefits both your plan participants as well as employers that offer the plan to their staff.
Limits of reference pricing
Reference pricing cannot be applied to all procedures. It should only be used for procedures that health plan enrollees can shop for, and when they have time to compare based on price and quality, like:
- Scheduled procedures such as knee replacements
- Ambulatory surgical procedures
- Lab tests
What it should not be used for:
- Emergency procedures
- Unique components of care that a patient can’t select independently, like a lab test during a visit to a doctor
- Complex medical conditions
How Employees Benefit
- Lower contributions and improved benefits
- Legal support and protection in the event of balance
- billing or collections
- Member access to physicians through a national network
How Employers Benefit
- Lower cost for entire medical benefits program
- Significant stop-loss premium reduction compared to traditional PPO pricing
- Allocate fiduciary responsibility to ELAP
- Receive same legal protection as members
- Organizations that have implemented reference pricing report lower outlays for procedures
How It Works: A Success Story
Huffines Auto Dealerships in Texas signed on to a similar program a few years ago.
The company, which provides coverage to 300 employees and their families, first worked with ELAP on charges for an employee’s back surgery. The worker had spent three days in a Dallas hospital. The bill was $600,000.
The dealership, a self-funded that pays worker health costs directly, was working with a third party administrator that had set up a traditional PPO network with agreed-upon hospital discounts. The TPA said it could get the bill knocked down to $300,000.
After ELAP analyzed the bill, the firm estimated costs for the treatment based on the hospital’s financial reports filed with Medicare.
Then it added a cushion so the hospital could make a modest profit. The final tab: $28,900.