Reference-Based Pricing: Does it Have Legs?

I was on my way to visit a new client this morning to discuss my “Idea Book” – our proverbial bag of tricks that gives clients a peek into cutting-edge cost containment strategies – when on the radio I heard a story about an insurance industry vet who took on the healthcare industry and drove down costs for her organization. Click the link in the previous sentence, and if benefits aren’t your everyday job, you’ll read a story that frames Ms. Bartlett as a combination of a healthcare finance savant, a crusader, and a back alley brawler – a real Grandma vs. Goliath story. But if you work in benefits, you’ll know that what Ms. Bartlett is doing in Montana is a concept that has been around for a number of years, and it’s called Reference-Based Pricing (RBP). It happens to be on page 2 of the “Idea Book," and your company can implement it today.

For the TL;DR crowd who don’t have patience to read the tale of Ms. Bartlett above, here’s a very brief summary of how RBP works. Most employers today provide a network of healthcare providers via an insurance carrier (e.g., Blue Cross, United Healthcare, etc.). This network arrangement is built by the carrier to ensure insurers, plan sponsors and members receive discounts off of providers’ “list price” for a given service. It’s not uncommon for a good network to provide discounts – in aggregate – in excess of 50% off “list prices.” While a 50% discount sounds impressive, the truth is this: Medicare pays healthcare providers even less… and physicians and hospitals accept it. Reference-Based Pricing just means that we toss out the network arrangement, and instead pay for members’ claims by referencing a different fee schedule – almost always a percent of Medicare.

RBP is about the only thing I know I can quote and save a plan sponsor in excess of 40% on their healthcare spend. But there is a reason it hasn’t been adopted on a widespread basis. The main reason is that – as you might expect – healthcare providers hate this scheme and are scared to death of it. The system of commercial insurance pays providers more because the public system (i.e., Medicare) doesn’t pay them enough to cover their costs. In other words, commercial payers subsidize public payers. Providers realize that if lots of commercial payers start basing their reimbursements off the Medicare schedule, their financials are going to get ugly.

That’s the reason I don’t stress RBP to clients unless they are in financial straits – I am just not sure the strategy has legs. From day one, my thought was that this is a strategy that will work for a while – but if/when it becomes popular, healthcare organizations will sniff it out and take action to cut off patients. Your member’s doctor might get “fooled” once when they accept the insurance card for a RBP plan. But will they be “fooled” a second time after they receive a lower reimbursement check than expected for the first visit? Your member may find themselves having to find a new doctor... or with a stack of balance bills from their physician. Indeed, there are recent rumblings that some hospitals and large physician groups have taken notice of RBP and are hitting the issue head-on: asking patients upfront to agree that they are responsible for paying the “list price” of a service, even if their insurance only pays a fraction. Ms. Bartlett is apparently willing to park herself in the middle of this maelstrom and try to stare down providers... but the reality is that despite the article's optimistic title, the vast majority of employers do not have the will nor the market clout to do the same.

Still, I think RBP is worth talking about in general, because it lays bare some of the underlying craziness of the way our healthcare system is built. Don’t get me wrong – I’m no advocate for single-payer healthcare – but the RBP experiment exposes fissures that (in my opinion) are going to have to be addressed sooner or later. Eventually commercial payers are going to say “enough’s enough” and exert pressure for more transparent, rational pricing of healthcare.

In the meantime, the “Idea Book” has about a dozen pages full of other cost containment ideas. Want to get a peek at it? Reach out to us at bayoubenefits@gmail.com