The Fundamental Problem with Reference Based Pricing
Let’s talk about Reference Based Pricing (sometimes called Medicare Plus). Over the last three years, the popularity of Reference Based Pricing (RBP) benefit plan design has grown exponentially. Initially positioned as a fast-growing alternative to the PPO plans, RBP plans are a newly popular option for self-funded employers looking to utilize a group benefits plan.
Here’s the challenge: we need to understand what these plans consist of, how they affect providers, and their short- and long-term implications.
Reference based pricing health plans do not contract with a network of doctors or hospitals. Instead, the health plans attempt to dictate the price they will pay providers directly at steeply discounted rates by simply sending a check for their chosen amount with the hope that the provider will accept payment. Marketing themselves as a lower-cost alternative to a more traditional health insurance plan, RBP plans tell employers that their employees can access healthcare services from any provider with no network limitations. Furthermore, employers hear that the cost of the services received will be based on a percentage of what Medicare costs are (125% or 150% for example). Because the RBP plan pays all providers at the exact same percentage of Medicare as one another, the employer will pay the same amount for services regardless of which provider is utilized. In most cases, the RBP health plan does not negotiate their pricing with providers. Prices are simply set.
Assuming the provider bills the RBP health insurance plan, the health plan simply sends a check for the reference based amount (125% or 150% of Medicare pricing in this example), not the actual patient bill. The payment is typically accompanied by clever language stating that cashing the check constitutes an agreement to accept the money as payment in full. If the provider is astute enough to send the check back and bill the patient, the insurer provides the patient with tools to contest the amount billed. The essence of RBP is that health insurance companies dictate what they believe to be fair pricing for healthcare services, all without negotiating any price with providers. This dynamic essentially gives health plans unilateral control over the price of healthcare services. And the long-form consequence could be devastating.
We believe that RBP is completely contrary to the way healthcare providers and established insurance companies should do business. Government payors, such as Medicare and Medicaid, dictate pricing without negotiation, but commercial payors do not and should not. The free market must be based on a balanced negotiation dynamic.
Employers who choose RBP plans, and patients using RBP plans, put themselves in a position to pay out-of-pocket costs that they did not necessarily realize they were liable for. In fact, patients may be under the impression that their premium payments cover all costs. When these patients receive a bill for out-of-pocket costs, they are likely to be are caught off guard and frustrated. Employers may be targeted with blame and may even be financially liable in certain situations. The truth of the matter is: RBP health insurance plans do not cover the real costs of care.
While RBP appears to be patient-friendly on the surface, it has a domino effect for payors, providers, employers, and patients. These plans are inherently misleading to patients because patients are liable for more out-of-pocket costs (of which they are woefully ignorant). Self-funded employers believe they are giving their employees a great plan that protects against catastrophic events and lowers their monthly premiums — but below the surface, problems are building. Providers need to work proactively to identify health plans offering RBP products and make—then communicate—decisions about whether or not they will accept those RBP plans as full payment.
We do not see this phenomenon slowing down, and large employers are looking for ways to keep healthcare costs down. North Carolina’s state treasurer, for example, hopes to put state workers into such a pricing plan by next year, offering to pay 177% of Medicare. The plan has ignited a firestorm from hospitals. Montana recently got its hospitals to agree to such a plan for state workers, paying 234 percent of Medicare on average.
Perhaps RBP could work if accompanied by other systematic changes. Perhaps RBP can never work. One thing is certain – RBP is a trend that providers must take seriously.
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