Reference-based pricing is gaining momentum

This article was published on July 17, 2018 on Employee Benefit News, written by John Kern. Photo Source: Employee Benefit News.

In my 25 years in the insurance business I’ve seen many changes. But there’s always been one constant: Healthcare and pharmacy costs continue to accelerate and no regulatory action has been able to slow this runaway train. The problem is that we have focused on the wrong end of the spectrum. We don’t have a healthcare issue; we have a billing issue.

At the root of this national crisis is a lack of cost transparency, which is driven by people who are motivated to keep benefit plan sponsors and healthcare consumers in the dark. Part of the problem is that most cost-reduction strategies are developed by independent players in the healthcare food chain. This siloed approach fails to address the entire ecosystem, and that’s why we continue to lament that nothing seems to be working.

But that could change with reference-based pricing, a method that’s slowly gaining momentum.

getting blood work

Here’s how it works.

Reference-based pricing attacks the problem from all angles and targets billing — which is at the heart of the crisis.

Typically, a preferred provider organization network achieves a 50-60% discount on billable charges. However, after this 50-60% discount, the cost of care is still double or triple what Medicare pays for the same service. For example, the same cholesterol blood test can range from $10 to $400 at the same lab. The same hospitalization for chest pain can range anywhere from $3,000 to $25,000.

Reference-based pricing allows employers to pay for medical services based on a percentage of CMS reimbursements (i.e. Medicare + 30%), rather than a percentage discount of billable charges. This model ensures that the above-mentioned hospitalization cost an employer $3,000 rather than $25,000.

“Negotiating” like Medicare

Reference-based pricing is becoming increasingly popular as more organizations consider the move to correct cost transparency issues as they transition from fully-insured to self-funded insurance plans.

One well-known and considerable example is Montana’s state employee health plan. The state employee health plan administrator received a notice from legislators in 2014 urging the state to gain control of healthcare costs. Instead of beginning with hospitals’ prices and negotiating down, they turned to reference-based pricing based on Medicare. Instead of negotiating with hospitals, Medicare sets prices for every procedure, which has allowed it to control costs. Typically, Medicare increases its payments to hospitals by just 1-3% each year.

The state of Montana set a reference price that was a generous 243% of Medicare — which allowed hospitals to provide high-quality healthcare and profit, while providing price transparency and consistency across hospitals. So far, hospitals have agreed to pay the reference price.

Of course, there is still the risk that a healthcare provider working with the state of Montana health plan, or any other health plan using reference-based pricing, could “balance bill” the member. But a fair payment and plenty of employee education about what to do if that happens could help you curb costs.

If balance billing does occur, many solutions include a law and auditing firm to resolve the dispute. In one recent example, a patient was balance billed almost $230,000 for a back procedure after her health plan had paid just under $75,000. An auditing firm found that the total charges should have been around $70,000, and a jury agreed. The hospital was awarded an additional $766.

Reference-based pricing is a forward-thinking way to manage costs while providing high-quality benefits to your employees. It’s one way to improve cost transparency, which may eventually transform the way that we buy healthcare.

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

This article was published May 10, 2018 on BenefitsPro.com, 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.