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Reference-based Pricing Offers Health Coverage Alternative

Sept. 27, 2019
Successful self-insurance requires managing medical costs.

For the right employer, a good alternative to expensive health insurance coverage might be a form of self insurance called reference-based pricing (RBP).

Typically, an insurance carrier is not involved, nor does a provider network negotiate covered services for the plan operator. Instead, the employer sets a fixed limit on the maximum amount its plan will pay providers for certain healthcare services.

Employers should take a close look at implementing an RBP solution because it allows them to reduce their total healthcare costs by up to 30%, according to Steve Kelly, CEO of ELAP Services, an RBP healthcare solution provider for employers, primarily those in the manufacturing sector.

“With this model, employers pay either the actual cost it takes to deliver a medical service, or the Medicare reimbursement rate, plus a reasonable profit, instead of the inflated and variable charges common in the current Preferred Provider Organization (PPO)-based environment.”

Employee contributions to healthcare are rising faster than wages and at an unsustainable pace, Kelly says. A recent RAND Health study shows that, on average, private employer-sponsored health plans are paying hospitals 241% of Medicare. “It’s raising a lot of questions and outrage among employers who are tired of paying unfair prices for healthcare,” he adds.

For example, the average cost of a CT scan in the U.S. can vary by over $1,000 among hospitals. Medicare pays about $200, but on an RBP plan, the employer could pay about $240, Kelly points out.

He explains that an RBP cuts the cost of care not by reducing coverage, as a limited-benefit plan would, but instead it identifies the actual cost and gives a fair margin above that cost to the medical provider. The fixed limit is often based upon a percentage or multiplier of what Medicare would pay the provider.

However, the question then is whether the healthcare provider will be willing to accept these fixed limits, which can be much less than what a traditional insurance carrier or provider network would pay, warns Melissa Shimizu, an attorney with the law firm of Fisher Phillips.

One example: A participant needs a certain kind of surgery, and a hospital would expect to be paid $2,500 for it even if some insurance carriers may have contracted to pay less than that. The Medicare rate is $500, and the RBP plan’s fixed limit is 200% of the Medicare price, which comes out to $1,000.

With RBP, the hospital may perform the service and expect to receive $2,500. Once the hospital is only paid $1,000 from the employer, it may seek the $1,500 balance from the patient. This concept is referred to as “balance billing.”

The patient, the employer, or a third-party administrator may then help negotiate down the amount of the balance billing. Of course, there are varying degrees of success for these negotiations.

“From the employee’s perspective, however, this situation may not be ideal—they may feel uncertain about the amount they will end up paying out of pocket for a procedure, and figuring out the cost ahead of time may require significant research,” Shimizu adds. For RBPs to generate cost savings, she stresses that employers have to make sure that their employees are well-informed consumers.

Obamacare Sets Limits

The Affordable Care Act limits the amount of an individual’s out-of-pocket expenses for in-network healthcare costs. Because RBPs do not have traditional networks, government agencies managing implementation of the new act issued target guidance on this approach in an effort to ensure employers did not use RBPs to circumvent out-of-pocket maximums.

The agencies agreed that, in general, a plan could treat any healthcare provider who accepts RBP negotiated prices as an in-network provider, and all other healthcare providers can be considered out-of-network, as long as participants have access to quality healthcare.

When determining whether quality healthcare is available, these agencies will evaluate:

● The types of services that are subject to RBPs. For example, RBP will not typically work for emergency services since the employee does not have an opportunity to select or shop for a service provider.

● Whether the plan offers reasonable access to an adequate number of providers. This can be a particular challenge in rural areas where provider options may be limited.

● Whether the providers meet reasonable quality standards.

● Whether the plan has an easily accessible exceptions process for participants who have special circumstances.

● Whether the plan has adequately disclosed information to participants regarding the RBP, such as providing a list of services and pricing.

While there certainly have been payment disputes between employers, participants and healthcare providers over RBP, there has been little litigation over the matter, Shimizu notes. Disagreements over these issues are typically resolved via negotiation, and employers will often cover any balance billing.

Of course, there is always a wrinkle. One lawsuit currently is being heard before a federal appeals court over an RBP dispute. “If the hospital prevails, RBP may become more difficult to implement because providers may start to seek the entirety of the balance billing, rather than engage in extensive negotiations,” Shimizu says.

In this case, the employer using an RBP did not have a negotiated contract with the hospital. The employee was treated by the hospital for a heart attack and received a bill of nearly $100,000. The employee and the plan paid about 25% of the bill and encouraged the hospital to accept the payment in full, in part, because the hospital had accepted that amount as full payment for other uninsured patients.

The hospital, however, continued to seek payment for the balance. It argued that the employee signed an agreement consenting to the full price of the services, so the patient should be contractually required to pay the full amount despite the fact that the hospital accepted lesser amounts from other uninsured patients.

“Regardless of the outcome of this case, employers who are intrigued by reference-based pricing should do their research to learn more about how RBP will work for their employees,” Shimizu says. “Employers should pay particular attention to employee education and communications regarding RBP, since a surprise six-figure balance bill could quickly become a significant employee relations issue.”

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