By Ralph Weber
Referenced Based Pricing
Early in May 2014, the administration released guidelines http://www.dol.gov/ebsa/faqs/faq-aca19.html that stated that balanced billing which exceeds the reference price is not subject to the employee out of pocket limit of $6,350 for single people, and $12,700 for those with dependents (in 2014). This means that if your plan sets the reference price for a procedure at $5,000, and the provider bills $25,000, the insured may have to cover the additional $20,000 out of their own pocket, in addition to any plan deductibles, co-pays, and co-insurance.
On the surface, this sounds like a bad thing, and if your health plan is poorly set up, it could be very costly to your employees. However, for a properly set up plan, this could represent an opportunity to apply market forces and healthcare consumerism to your health plan, and significantly reduce your costs. The difference to a BAD Reference based pricing plan which simply shifts unaffordable costs to employees, and accounts receivable (or litigation) to providers, and a GOOD Reference based pricing plan which actually reduces costs for everyone and ensures that providers are still paid fairly is all in the details.
Hospitals routinely bill privately insured patients 4 to 9 times the amount they receive from Medicare for the same procedure. Even though PPOs often discount the billed rate, the plan is usually charged several times the Medicare rate. Yet often providers receive less than the health plan is billed. Through reference pricing this spread of costs can be greatly reduced.
In order to set up a good Reference pricing plan, you need to give your employees not only transparency, but also tools which they can use to obtain medical care at or below the reference price. Some plans will simply make the employees pay any excess over the reference price, but a well-designed plan may include the safety of a PPO network subject to the regular plan deductibles and co-insurance, with rewards for employees who obtain the procedure at or below the reference prince.
Naturally you will need to inform employees what the reference price is. In addition, an online shopping and transparency tool such as www.MediBid.com which allows providers to compete for your business will allow your employees to select the quality provider they want, at a price which ensures they are not balance billed. Financial incentives can include waiving all or part of the plan deductible for any procedures performed at or below the reference price.
Well-designed Reference based price programs can reduce your healthcare costs by over 38%. Those are savings worth exploring, as long as the plan is properly designed and easy to use for employees. Otherwise, it may back fire and create employee dissatisfaction, and morale problems.
How to Implement Reference Pricing: Carrot or Stick Method
Once you have decided to embrace a Reference Based Pricing model for your employee benefits, you must take the following steps:
Step 1: Decide on a reference price. This could be a factor of the Medicare rates; for example, 150% of Medicare etc. You could also select the lowest price in your PPO network and add a percent to that; for example, lowest price plus 50%. The third method is to have an actuary examine your claims and decide on a reference based on that. For example, if your range in pricing for knee replacements is $12,000 to $65,000 with an average of $30,000, you may decide on $22,000 as your reference price because one third of the procedures were completed at that cost or lower. The fourth, and likely the most difficult method is a “cost-plus” method. For example, cost plus 50%. The problem with this method is how “cost” is determined. The Center for Medicare Services (CMS) published the “cost” of every hospital and this information is online, but it is hard to stand this up in court.
Step 2: Decide which procedures will be subject to reference pricing. You could choose all, or only those that are pre-planned, or you could decide on only a handful of procedures.
Step 3: Create a tool, preferably online, where your employees can not only find the reference price, but a place they can find providers willing to accept that reference price with no balanced billing. This step is important because a method of pre-negotiated or posted pricing may not yield the best results. Providers may, for example, set a price just below the reference price. Medical bidding such as www.MediBid.com has been shown to always yield the best results, as providers are constantly competing for your business on every episode of care.
Step 4: Decide on A) Carrot Method, B) Stick Method, or C) Hybrid Method
Assuming your reference price is Medicare plus 50%, and the Medicare price for a given procedure is $10,000, the plan will pay providers up to $15,000.
Using the Carrot Method, you would waive deductibles, co-insurance etc. if the employee finds a price below $15,000 and apply regular cost sharing if they have it don’t for over $15,000. Some employers also reward their employee with a percentage of the savings to the plan.
Stick Method: Using the above assumptions, the employee would be responsible for any costs above $15,000.
Hybrid Method: You might waive deductibles etc. if the employee has the procedure performed for a certain percent below the reference price, let’s say 20% below for example. If they have it done at the reference price, regular deductibles would apply, and if it were completed for a certain percent above the reference price, the employee would be responsible for the over charges in addition to the deductible.
At the time of this article, 2 states (North Carolina and Montana) have adopted reference-based pricing plans for their state employees.
(Ralph Weber, author of “MediCrats: Medical Bureaucrats that Rule your Health Care” and President of MediBid Inc., discusses the rising costs of medical care in the U.S. and how Obamcare is exacerbating the problem.)
For more information contact
Ralph Weber AEP, CLU, ChFC, CFP, REBC, GBA
Phone: 888-720-8889 Ext 102