Reference-based pricing: where do carriers go from here?

This article was published May 10, 2018 on, written by Alex Tolbert.

Medical Bill

Photo Source: BenefitsPro

Back in 2015, the big topic in health care was insurance company consolidation. This was the year Anthem announced plans to acquire Cigna, and Aetna put out a bid for Humana.

Mergers across four of the country’s biggest insurers would have significantly reshaped the U.S. insurance landscape, and not everyone thought it was a good idea. There were concerns that consolidation would lead to rising costs for consumers. In fact, CEO of electronic medical record company athenahealth, Jonathan Bush, had this to say to CNBC about the potential deals:

“These [mergers] are what happen when industries essentially die. Hopefully what will happen is there will be disruptive innovation and the role of the traditional health insurance company will be obsolete.”

Here in 2018, we know neither of these mergers took place, after facing antitrust scrutiny from the Department of Justice. But even though the mergers fell through, Bush still may have been spot-on about innovation coming along and disrupting the current health insurance business model.

That disruptive innovation is reference-based pricing. This strategy for paying for health care is gaining ground, affecting carriers’ value propositions. It isn’t yet clear whether this reference-based pricing will, as Bush predicted, make insurance companies obsolete, but it could change the face of the health care landscape in the U.S.

What is reference-based pricing?

Reference-based pricing is a new payment model for employer-sponsored benefits plans. Rather than working with a traditional insurance carrier to negotiate price discounts at hospitals, self-funded employers using a reference-based pricing strategy pay hospitals directly, typically in excess of Medicare.

For example, if an employee receives a bill for $20,000, but Medicare would pay $10,000 for the same service, the employer might pay $14,000, and encourage the hospital to accept the payment in full.

To understand why this is so disruptive to insurers, we have to look at how things work now.

Insurance networks

Provider networks are a key part of insurers’ value proposition to employers. In the current health care system, hospital pricing is based around what’s called a chargemaster rate. These prices are not typically shared publicly. Insurance companies negotiate discounts off the chargemaster rate, and pass these discounts on to employers. Insurers compete with each other based on which hospitals are in their “network,” and how significant their discounts are off of the hospital chargemaster prices.

Employers have traditionally been incentivized to select insurers that have broad networks, because patients who visit out-of-network facilities are often charged the full chargemaster rate. But as networks have narrowed and prices continue to rise for both employees and employers, more business leaders are starting to question whether the traditional insurance network discount is meaningful. If you don’t know the amount from which you’re getting a discount, then how can you judge the value?

More employers are finding they can get better value for their health care dollar by negotiating with hospitals directly, and negotiating up from Medicare’s rate, rather than down from the chargemaster price.

By eliminating a key part of the carrier’s value proposition, reference-based pricing represents significant disruption for insurers’ business models.

Where do carriers go from here?

As employers are increasingly demanding more transparency and rationality in health care pricing, insurers are looking for a way forward.

Perhaps recognizing that they will no longer be competing on provider network and group plans alone, carriers like UnitedHealthcare, Humana and Aeta have been rapidly diversifying their service lines by acquiring health care service companies.

For example, witness the acquisition by UnitedHealthcare’s Optum segment of DaVita, and Humana’s recent acquisition of Kindred Healthcare. Carriers are also pursuing retail affiliations—CVS plans to acquire Aetna, and Humana and Walmart are reportedly in talks to partner.

The role of insurers isn’t obsolete, but as employers see less value in networks, carriers will have to compete on different measures. This could prove hard to do. If so, reference-based pricing may turn out to be the disruptive innovation Jonathan Bush was predicting all along.

Walls Closing In On Obamacare Lawlessness

Article written by Grace-Marie Turner and Doug Badger, as seen in Hartfor on May 23, 2016

The Obama Administration is unlawfully diverting billions of dollars from taxpayers to insurance companies that sell Obamacare policies.

That is the conclusion reached in a legal opinion letter released today by former Ambassador and White House Counsel Boyden Gray.

Mr. Gray’s letter reinforces the conclusion of legal experts at the nonpartisan Congressional Research Service who found that the administration’s actions “would appear to be in conflict with the plain text” of the Obamacare statute.

Mr. Gray’s letter documents how the Centers for Medicare and Medicaid Services is diverting $3.5 billion that it was legally obliged to remit to the Treasury and instead providing it to sponsors of Obamacare policies to compensate them for medical expenses of high-cost policyholders.

This unlawful diversion is occurring through the Transitional Reinsurance Program (TRP), established to smooth out losses for insurance companies selling Obamacare policies in the individual market. The TRP compensates these insurers for the costs of large medical claims incurred by their customers. CMS picked up the entire cost of medical claims between $45,000 and $250,000 for individuals enrolled in Obamacare individual policies in 2014, relieving insurers of the burden of paying these high medical bills.

The money for the TRP comes from an annual assessment on all individual and group insurance policy holders—primarily people with employer-based coverage—of $63 in 2014, $44 in 2015 and $27 in 2016.  In addition to financing the TRP program, the Affordable Care Act (ACA) requires CMS to remit $5 billion of these collections to Treasury.

When these collections came up $3.5 billion short over the first two years, CMS made a fateful and unlawful decision: the agency decided to fleece taxpayers in order to pay insurers.

According to the Gray legal opinion letter, “by the time the books close on TRP for the 2014 and 2015 benefit years at the end of 2016, reinsurance-eligible issuers will likely have received 98% of expected payments ($15.6 billion out of an expected $16 billion), whereas Treasury will likely have received only 12% of expected payments ($495 million out of an expected $4 billion).”

“The HHS allocation scheme prioritizing payments to reinsurance-eligible issuers over payments to Treasury violates the ACA,” Gray concludes.

HHS initially issued regulations that would provide taxpayers with their legal share of the reinsurance taxes, but it quickly changed course to put taxpayers last in line for funding. In a March 2014 rulemaking, CMS said Treasury would get its share of the funds even if collections fell short. But 10 days later, the agency reversed its position and said, essentially, it would stiff the taxpayer if there was a shortfall.

Which is just what it is doing. Unlawfully, as Gray’s legal opinion demonstrates.

The administration is flatfooted in its defense. Acting CMS Administrator Andy Slavitt testified before the House Energy and Commerce Subcommittee on Oversight on April 15 but was at a loss to explain why the agency changed its rules so swiftly and dramatically.

Gray explains that HHS failed to set the tax rate at a level that would produce the required revenue, saying “the ACA requires the implementation of a collection methodology” to produce the $5 billion owed to Treasury. “Congress,” he emphasizes, “did not make contributions for payments to Treasury ‘secondary’ to contributions for payments to reinsurance-eligible insurers.”

Gray’s letter references multiple legal precedents to demonstrate that CMS does not have any leeway to ignore this statutory language, as it has done. “[T]he statute does not use ‘permissive language’ with respect to collections for payments to Treasury,” his letter says. In addition, “HHS’s prioritization scheme is not a permissible interpretation of the law. None of the rationales HHS has offered in support of its prioritization scheme withstand textual scrutiny.”

“Congress specifically protected Treasury’s share of each contribution, declaring that it ‘may not be used’ for payments to reinsurance-eligible issuers,” the letter declares.

The ACA requires the administration to remit a total of $5 billion of its reinsurance tax collections to the Treasury, reserving the rest for reinsurance subsidies. The administration chose to bilk the taxpayers to keep health insurers in the game, even as the billions of dollars they are receiving through the TRP and other subsidies subsidies are inadequate to stem their losses for coverage they are offering in the Obamacare exchanges.

University of Houston Prof. Seth Chandler sums it in Forbes: “It’s a scheme in which the Obama administration collected less in taxes from health insurers (mostly off the Exchanges) than they were required to do under the Affordable Care Act, created a plan to pay insurers selling policies on the Exchange considerably more than originally projected, and stiffed the United States Treasury on the money it was supposed to receive from the taxes.”

Congress and the courts are rapidly losing patience with the agency’s pattern of malfeasance.  In a separate but related case, a federal judge earlier this month ruled that CMS was unlawfully providing billions of dollars in cost-sharing subsidies to insurers, spending money that Congress did not appropriate.

Last week, the House Energy and Commerce Committee moved one step closer to issuing a subpoena to CMS to obtain documents explaining how the agency came to adopt its unlawful approach to the TRP program. Senator Ben Sasse (R-NE) has introduced a bill to address the agency’s actions.

The walls are closing in on CMS’s lawlessness.

Key arguments in the legal opinion letter from Boyden Gray & Associates

Boyden Gray’s letter analyzes five key areas in which the administration’s justification for its actions involving reinsurance fails legal tests:

  1. The ACA requires HHS to implement a collection methodology that fully finances the transitional reinsurance program, rendering irrelevant its silence with regard to allocation of insufficient collections.
  2. None of HHS’s rationales for prioritizing payments to reinsurance-eligible issuers over payments to Treasury withstand scrutiny. A) the statute does not use “permissive language” for payments to Treasury; and B) HHS distorts the ACA’s text by asserting that collections for payments to Treasury are secondary because they are to “be collected ‘in addition to’” contributions for payments to reinsurance-eligible issuers.
  3. The Secretary does not have “general authority” to “design the method for determining the contribution amounts” that go “toward reinsurance payments.”
  4. HHS’s reliance on the ACA’s policy goals of market certainty and premium stabilization to justify its prioritization scheme impermissibly ignores the act’s competing policy goal of protecting the federal fisc.
  5. HHS’s use of notice-and-comment to adopt its regulations prioritizing payments to reinsurance-eligible issuers does not render them lawful.


Push to save small-biz health plan gains urgency

Article is by Erik Engquist, as seen in Crain’s New York Business

Fears of an insurance death spiral are misplaced, according to industry insiders fighting to preserve stop-loss policies for companies that self-insure.

The Assembly and the Cuomo administration have concerns that letting small businesses self-fund—that is, pay their workers’ health-care bills directly—depletes the risk pool and leads to an insurance death spiral.

In that scenario, known as “adverse selection,” small companies with relatively healthy employees would self-fund, while those with sickly or oft-injured workers would choose regular insurance policies. The latter group would run up huge medical bills, and insurers would respond by raising premiums, causing employers with healthy staffs to drop out. The downward spiral would accelerate until the risk pool was uninsurable.

But in reality, that doesn’t happen, said Cigna’s director of state government affairs, Patrick Gillespie. Cigna’s internal studies determined that employees’ medical costs are about equal whether their companies self-fund or use standard insurance.

“We found the risks to be the same,” he said. “No material difference.”

If small businesses were allowed to keep self-funding, said Mr. Gillespie, “we don’t believe this will in any way harm the small-group risk pool.” The state Department of Financial Services is doing its own research on the issue.

Bit of the Cuomo administration and state Assembly cannot be convinced, workers at thousands of small businesses face “sticker shock” because their employers would have to change health care plans, another Cigna executive argues in a Crain’s op-ed.

The author, Scott Evelyn, the insurer’s tri-state general manager, and others in his industry are pushing Albany to pass bills that would allow businesses with 51 to 100 employees to continue purchasing stop-loss insurance, which is essential for companies that self-fund their workers’ health benefits. On Jan. 1, because of a clause in the Affordable Care Act, those midsize employers will be roped into New York’s 23-year-old ban on stop-loss insurance for businesses with two to 50 workers. The pending bills would prevent that.

But while the Senate version of the legislation is poised to pass, the Assembly’s has been bogged down in the chamber’s Insurance Committee for nearly four months. This year’s legislative session is scheduled to end June 17, and insurance companies are getting nervous that the measure will die.

Some business owners self-fund because they think their workers are less likely to get sick or injured, but in reality, the savings in self-funding comes from not paying as much for a health insurer’s administrative costs and profit, which can represent up to 20% of premium costs in a standard policy.

Companies that self-fund typically still use insurers to run their self-funded plans, but can bargain down the cost. “Our margin to administer those claims is a lot less than 20%, and it’s negotiable,” one insurance industry insider said. “There’s no guaranteed 20% margin, unlike in the insured world.”

Click to Read the Entire Article on Crain’s New York Business