What is reference-based pricing (RBP)?

If you're seeking a budget-friendly approach to providing health benefits, you might find fully-insured plans less than appealing. They're expensive and don't offer transparency. A 2022 RAND study¹ found that U.S. hospitals can sometimes charge patients 200-300% of what someone with Medicare would have paid for the same services.

Reference-based pricing (RBP) is a compelling alternative to traditional healthcare pricing models that often leave patients in the dark. With this pricing strategy, employers or health plan administrators set a standard or benchmark for the costs of medical services and procedures.

In this article, we'll explore whether RBP is a viable option for controlling healthcare expenses while maintaining quality care for employees. We'll also present a more efficient solution for managing healthcare spending.

In this blog post, you'll learn the following:

• How RBP works.
• How it sets reimbursement rates for medical services and procedures.
• Any advantages and challenges it might present for your organization.

What is another term for reference-based pricing?

Like many health insurance terms, RBP can go by many names. While this can make your research a tad bit confusing, don't let it throw you off. They're all talking about the same pricing methodology.

Here are some other common terms for RBP to look out for:

• Reference pricing
• Metric-based pricing

How does reference-based pricing work?

An RBP plan is self-funded, although employers with a level-funded plan may also implement reference-based pricing.

Under this type of plan, an employer, typically with the assistance of a third-party administrator (TPA), will set the maximum dollar amount that the plan will reimburse providers for each type of healthcare service. This amount is based on a benchmark.

When employees seek healthcare, they have the freedom to choose any provider they want. There's no concept of a "network" in an RBP plan. However, employers often establish agreements with particular healthcare providers or hospitals and incentivize their employees to use those providers when they seek access to care.

Once the employee receives care, the employer or administrator reimburses the provider at the predetermined price.

How are reimbursement rates calculated?

TPAs and reference-based pricing software collect data from CMS’s Healthcare Provider Cost Reporting Information System. Then, they benchmark it using a formula.

The formula is: Reimbursement rate = Benchmark rate x percentage.

Here's an example:

• The established benchmark for a specific medical procedure is set at $800.
• The reimbursement rate percentage is set at 150% of the benchmark amount.
• The reimbursement rate would amount to $1,200.

Reference-based pricing advantages to employers

This approach to healthcare pricing offers several advantages for employers looking to manage healthcare costs more effectively.

Here are some of the benefits to employers:

• Cost savings: RBP can significantly reduce employers' out-of-pocket expenses by limiting the amount they pay for certain medical services while still ensuring that employees have access to necessary care. This helps to control rising healthcare costs, which can negatively impact a company’s bottom line.
• Increased price transparency: With RBP, your employees know the cost of care upfront. This transparency allows patients to make informed healthcare decisions.
• No out-of-network fees: RBP plans offer greater flexibility by eliminating the restrictions of provider networks. This can open up healthcare options for employees, resulting in higher employee satisfaction with your health benefit.

Reference-based pricing disadvantages to employers

RBP can present several disadvantages that may outweigh its intended cost-saving benefits.

Here are some potential concerns for employers to be aware of:

• Fewer provider options: In many cases, employers may set up agreements with specific healthcare providers or hospitals. This can make employees feel limited in which providers they can go to.
• Balance billing: If a provider doesn’t accept the RBP reimbursement rate, they can bill the patient for the remaining amount. This can lead to surprise medical bills that can cause financial hardship or even medical debt for your employees. Many employees may be unaware of the risk of these surprise bills.
  • While RBP can lead to balance billing, some TPAs offer patient advocacy services. They can negotiate medical bills to prevent excessive medical debt.
• Administrative burden: Creating and upholding precise benchmarks, along with handling contracts with provider networks, can pose significant challenges for self-insured employers who choose to design and manage their own health plans.

A better alternative to reference-based pricing

If you're looking for an easier solution to offering affordable health benefits, the health reimbursement arrangement (HRA) should be your first choice.

An HRA is an employer-funded health benefit. It's a lower-cost alternative to traditional health insurance plans. Instead of buying a one-size-fits-all group policy for your entire team, you can offer employees a tax-free allowance for their individual health insurance coverage and out-of-pocket expenses. This gives you more cost control and employees more choice and transparency.

You can reimburse more than 200 out-of-pocket costs with an HRA, such as:

• The monthly cost of individual health, dental, and vision plans
• Preventive care
• Emergency care
• Prescription drugs
• Over-the-counter medication
• Mental health counseling

Employers also have choices when it comes to the HRA they offer. The qualified small employer HRA (QSEHRA) is for small businesses with fewer than 50 full-time equivalent employees (FTEs). It's a great choice for employers who are new to offering health benefits. There's also the individual coverage HRA (ICHRA), which is available to small and larger employers. It offers more flexibility than the QSEHRA since it doesn't come with annual limits on employer contributions. Employers can also vary allowance amounts using 11 employee classes.

Now, let's go over five reasons why an HRA is a better alternative to a plan with RBP:

1. HRAs empower employees. HRAs allow employees to manage their healthcare spending using tax-advantaged funds their employer provides through reimbursement. This empowers employees to make informed decisions about their healthcare. They can choose plans and providers based on their needs and financial situations.
2. HRAs provide flexibility. HRAs offer greater flexibility in the types of expenses that you can reimburse. They can cover a wide range of healthcare costs, including premiums, deductibles, and other out-of-pocket expenses. This isn’t always the case with RBP, which typically focuses on pricing for specific services and procedures.
3. HRAs offer cost control for employers. Employers funding HRAs can set stricter contribution limits. They can manage overall healthcare costs while still providing essential benefits to employees. A RPB plan with RBP may cost more if employees see providers who haven't agreed to the set rates.
4. HRAs offer simplified administration. HRAs can streamline the claims process, especially when you work with an HRA administrator like PeopleKeep. We handle employee reimbursement requests on your behalf. In contrast, RBP can lead to complex negotiations with providers over pricing. This could result in administrative burdens for both employers and employees.

Conclusion

Reference-based pricing (RBP) helps control healthcare costs for employers by setting payment limits for medical services and procedures.

While RBP aims to manage health benefit spending, HRAs can provide more flexibility, employee satisfaction, and cost control for employers while minimizing complications and risks associated with healthcare pricing. This makes an HRA an easier and more affordable option for your organization.

Interested in offering an HRA? Schedule a call with one of our PeopleKeep HRA specialists to learn more!

1. 2022 RAND Study