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Wednesday, June 20, 2018

Reference-Based Pricing Brings Transparency to Health Care Costs

By Dan Cloyd

Adding a reference-based pricing component to an employer’s health plan brings an element of clarity to benefit costs by determining, from the start, what should be paid for medical services and procedures. It’s no surprise that reference-based pricing is a hot topic in the market today, especially when claims exceeding $1 million are more and more common. Reference-based pricing is part of a greater movement toward transparency, helping to establish some type of a standard for what is paid for medical care.

And, it’s working! (Especially in the mid-West and Texas where we’re seeing self-funded groups more frequently writing it into their plans, with providers agreeing to the defined reimbursements.) Why? Because it’s viewed as fair. Groups are stating what they believe is a reasonable price for a procedure, and providers are accepting that price because they already have been. Most plans are designed to reimburse providers 20 percent to 50 percent more than what the provider is reimbursed for services provided through Medicare.

Aligning Awareness

The thing to remember, though, is that for reference-based pricing to be truly successful for the long-term, not only must there be transparency in the pricing, there must be transparency among those involved. All parties managing costs play a role in the successful management of the program – the plan sponsor, the plan participants, the TPA, the provider, the repricing vendor and the Stop Loss carrier. Everyone must be on the same page to achieve the desired results. Thorough review of the plan details and approach, along with open communication, are essential to help ensure the plan is adhered to and administered appropriately.

How Reference-Based Pricing Works

Using reference-based pricing, plan sponsors state up-front what they are willing to pay providers for health care services under their benefits plans. This is accomplished through a repricing method that uses established sources – what Medicare reimburses; a provider’s costs as they are reported to the federal government; or other industry pricing benchmarks – instead of relying on a traditional PPO network to obtain discounts on a provider’s billed charges that begin at an unknown starting point.

Self-funded employers who wish to use reference-based pricing to help control costs include specific language in their plan documents to define payment levels, such as “Medicare plus 50%.” This can be used on hospital and facility claims only, or it can include physician charges as well. Then, third party administrators typically work with a vendor to reprice the claims based on the model in place.

Vetting Vendors

Plan sponsors who wish to consider incorporating reference-based pricing into their plan design need to work with vendors who have an established process for determining the reference-based price and experience in working with providers on agreeing to it. Not all vendors approach reference-based pricing the same way, so employers must understand what their fees are for their services, what is covered in the agreement and if there are any potential limitations. Employers also should know if the chosen vendor has member advocacy services in place to help ensure plan members are not targeted for a difference in cost for services rendered, frequently referred to as balanced billing.


Since reference-based pricing is a relatively new concept, employers will need to educate their plan members about how it works and help them to identify locations for care that accept their benefits under this model. A commitment to proper education can help to ensure the program is used properly. Then, once the plan is steadily utilized, plan sponsors can gain information of their own about the spending trends within the plan, something that can play an important role in determining cost containment practices for the future.

Incorporating Stop Loss

Savvy brokers know the options available to their self-funded clients and make recommendations accordingly. They will work to ensure that the Stop Loss carrier providing reinsurance protection to the plan is aware of the intricacies of the reference-based pricing program in place and work with them to determine proper coverage. The broker should be aware of vendor repricing fees and ensure that the plan sponsor and the Stop Loss carrier have agreed upon who is paying for the repricing services.

At HM, we know it is immensely important to vet those providing reference-based pricing services to help ensure our customers are protected from any gaps in coverage. We work with our TPA partners to help make sure they also are minding the gaps for our mutual clients. Sharing information is essential when additional negotiations may come into play and keep claims open past policy expiration dates. The key concept behind reference-based pricing is transparency, after all, so all parties must be clear on the details if they are to contain costs for the plan at hand.

Why HM

A strong, experienced carrier, HM responds to market changes and works with clients to ensure their coverage needs are met through expert risk assessment and exceptional delivery of benefits.