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Reference-Based Pricing in Health Insurance
An alternative to the typical healthcare network
As companies continually search for ways to manage rising healthcare costs, alternative insurance models like Reference-Based Pricing (RBP) are gaining traction. Unlike traditional network models such as PPOs, HMOs, and EPOs, RBP offers a unique approach to controlling healthcare expenses. However, before committing to this type of plan, businesses must weigh the pros and cons and conduct thorough research.
What is Reference-Based Pricing?
Reference-Based Pricing is a health insurance model where reimbursement rates for healthcare services are based on a fixed reference point, often tied to Medicare rates or another benchmark. Instead of negotiating rates with a predefined network of providers, RBP plans pay providers a percentage above these benchmarks. This model aims to bring greater transparency and predictability to healthcare costs.
In practical terms, RBP focuses on setting fair and reasonable payment standards for medical services. For example, if a hospital procedure costs $10,000 under a traditional insurance plan, an RBP plan might reimburse $6,000 based on Medicare’s pricing, leaving the remaining balance open to negotiation. This approach helps employers avoid the unpredictability and high costs often associated with traditional network contracts.
How does RBP differ from Traditional Networks
Traditional health networks contract with various hospitals, doctors, and other providers. The two groups set a contracted price that insurance company will pay for everything covered under the plan. As the insured, you are required to stay inside the this network if you want to receive the contracted price.
With RBP, instead of talking directly to all the providers, the insurance company looks at a table called the Medicare Allowable Charge (or other similar table, such as Usual, Customary, and Reasonable). These tables contain a standardized list of all procedures and test, as well as a base dollar amount that these test should cost based on zip code. These dollar amounts are what the insurance company agrees to pay to the hospital.
Lets look at how RBP looks compared to the other more traditional health network.
PPOs (Preferred Provider Organizations)
- Network Structure: PPOs feature a wide network of contracted providers offering discounted rates.
- Flexibility: Members can see both in-network and out-of-network providers, though out-of-network care is more expensive.
- Cost: Typically higher premiums and out-of-pocket costs compared to other models.
HMOs (Health Maintenance Organizations)
- Network Structure: HMOs require members to choose a primary care physician (PCP) and use a strict in-network provider list.
- Flexibility: Little to no coverage for out-of-network care unless it’s an emergency.
- Cost: Generally lower premiums and out-of-pocket costs but with limited provider options.
EPOs (Exclusive Provider Organizations)
- Network Structure: Similar to PPOs but with no out-of-network coverage.
- Flexibility: Members can see any provider within the network without a referral.
- Cost: Lower premiums than PPOs but fewer choices for providers.
RBP (Reference-Based Pricing)
- Network Structure: No predefined network; reimbursement is based on a reference point (e.g., Medicare rates).
- Flexibility: Members can see any provider, but providers may choose to balance bill the patient for the difference between the RBP rate and their billed charges.
- Cost: Offers significant savings on premiums and claim costs but introduces potential risks for balance billing and provider acceptance.
What are the Pros of RBP?
Why should you consider a reference-based pricing plan?
Cost Savings
- Employers can significantly reduce healthcare expenses by tying reimbursements to transparent benchmarks like Medicare rates, which are often much lower than traditional network-negotiated rates.
- The cost savings extend to employees as well, as lower overall claims can translate to lower premiums and out-of-pocket costs.
Transparency
- RBP plans provide clearer insights into how much services cost and how reimbursements are calculated, empowering employers and employees to make informed decisions.
- Transparency also fosters competition among providers, encouraging them to offer fair pricing for their services.
No Network Restrictions
- Employees have the flexibility to see any provider, as there is no defined network. This can increase access to care and reduce frustration over limited provider options.
- In rural or underserved areas, where traditional networks may be limited, RBP can provide greater flexibility for accessing necessary healthcare services.
Potential Cons of RBP
Like everything, RBP does have it’s potential downsides.
Balance Billing Risk
- Providers may bill employees for the difference between the RBP reimbursement and their standard charges. This can lead to unexpected out-of-pocket expenses for members.
- In extreme cases, balance billing disputes can result in collections actions, causing stress and financial strain for employees.
Provider Acceptance
- Not all providers accept RBP rates, and disputes over reimbursement amounts can lead to friction between providers, patients, and insurers.
- This lack of widespread acceptance can make it challenging for employees to confidently seek care without worrying about billing disputes.
Complexity
- Without a traditional network, employees may struggle to determine which providers will accept RBP rates without balance billing.
- This complexity places a greater administrative burden on employers and insurers to provide support and guidance.
Employee Education
- Companies must invest in educating employees about how RBP works, how to navigate potential disputes, and how to find providers willing to accept RBP rates.
- Without proper education, employees may feel overwhelmed and dissatisfied with their healthcare options.
Why Companies May Want to Consider RBP
For companies looking to control healthcare costs, RBP can offer a significant reduction in expenses. By moving away from traditional network contracts, employers can avoid paying inflated rates for healthcare services. This approach is especially appealing to self-funded employers, who bear the financial risk of claims and stand to benefit the most from reduced reimbursement rates.
Additionally, RBP aligns well with the goals of cost-conscious companies aiming to provide competitive benefits without compromising financial stability. By leveraging RBP, businesses can allocate more resources to other areas of employee benefits, such as wellness programs or retirement plans.
Research and Preparation Before Committing
While the cost-saving potential of RBP is attractive, companies must conduct thorough due diligence before adopting this model:
Analyze Claim Data
Review historical claims data to understand how RBP reimbursement rates compare to your current network rates. Second, assess which types of claims or services are most frequently used by employees to identify potential areas for savings.
Engage an Experiences TPA
Partnering with a quality third-party administrator (TPA) that specializes in RBP is crucial to setting your team up for success. You will want a TPA that will help manage claims, negotiate with providers, and educate employees. A skilled TPA can also assist in resolving disputes and ensuring smooth implementation of the plan.
If you are working with a broker, the plans they are discussing should have a list of TPAs already.
Educate Employees
Because RBP is different than what most people are used to, it is important to provide robust resources and training for employees to understand how RBP works, how to handle balance billing, and where to seek care. Consider offering regular workshops, webinars, or one-on-one sessions to address employee concerns and build confidence in the new plan.
*Tip- your broker should be able to provide these services for you and your team.
Pilot the Program
Consider rolling out RBP as an option alongside traditional plans to gauge employee response and identify potential challenges. Use the pilot program to gather feedback, refine processes, and address any issues before full implementation.
Takeaways
Reference-Based Pricing offers a compelling alternative to traditional health insurance networks, with the potential for significant cost savings and greater transparency. However, it’s not without its challenges, including the risks of balance billing and provider disputes. By conducting thorough research, partnering with experienced administrators, and educating employees, companies can successfully implement RBP while mitigating potential downsides. For businesses committed to controlling healthcare costs, RBP is worth exploring as part of a comprehensive benefits strategy.
Ultimately, the success of an RBP plan depends on careful planning, effective communication, and ongoing support. With the right approach, companies can leverage RBP to provide affordable, high-quality healthcare benefits that meet the needs of their employees while keeping costs in check.
If you want more information, or if you’re ready to talk, feel free to reach out to us directly.
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