Reference-Based Pricing: Your Employer’s Solution to Healthcare Costs?
BY: Nathan Carroll & Adi Y. Segal
As healthcare costs continue to skyrocket, employers are looking for increasingly creative ways to control costs. Today I’m examining Reference-Based Pricing, an emerging business solution to controlling healthcare costs. Follow the money and you’ll quickly see why employers are looking for ways to stem the rising tide of healthcare expenses. As we’ve been covering in previous articles there’s a tremendous amount of bloat and markup in healthcare pricing. Few people realize that rising premiums have out-stripped increases in wages and inflation. Although large employers may have more bargaining power to reduce premium costs, all of them are still feeling the crunch brought about by a lack of pricing transparency.
The Kaiser Family Foundation reports that in 2018 the average annual premium for employer-sponsored family health coverage was $19,616, with employees covering $5,547 of that. So every employer was essentially covering an average of 71.72% of the healthcare costs of their workers. Here’s where it gets a little more complicated and lot more interesting. According to the International Foundation of Employee Benefit Plans, 59% of employers offer high deductible plans and 39% offer them exclusively. The federal reserve says 40% of people can’t pay a $400 emergency out-of-pocket and stats on how many people are actually hitting their HDHPs are hard to come by. All of this incentivizes employers to find ways to squash costs.
Enter Reference-Based Pricing. With ever-increasing healthcare insurance costs some employers have decided to set caps on how much they’ll pay. It works like this, a company reaches out to a third-party administrator (TPA). This TPA negotiates with providers in the area on behalf of the company. Established TPAs may already have large pre-existing networks of providers, some may even offer creative solutions that provide lower costing coverage without networks. The employers agree to pay a portion above medicare cost for the care, the providers make money on the margin, and there can be a significant a net savings over paying list prices.
Referenced-Based Pricing does have some notable problems. It’s not particularly suited for emergency, acute care, complex, or care away from home. Smaller employers may not be using a TPA which means the burden of finding a provider that accepts negotiated payments may be on the patient. Obviously in these cases the problems with finding acute care are compounded.
As healthcare costs spiral out of control employers are finding themselves increasingly in the healthcare business. Just like the rest of us they are being increasingly stymied by the opacity in the system. At its heart Reference-Based Pricing is an attempt to bring increasing transparency and consistency to healthcare expenses. However this solution is limited by the fact that it’s not driven by supply, demand, or the free market. It’s driven only by an employer’s insistence that they won’t pay more than 20% — 50% over medicare pricing. Instead of a lasting solution to the problem of pricing transparency we’re simply creating one more barrier, perhaps it’s a slightly more appealing barrier, but it’s still just another barrier between patients and affordable care.