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Employers Cut Health Plan Costs with Reference-Based Pricing (SHRM)

By Stephen Miller, CEBS

The U.S. health care system is notorious for its lack of price transparency. Some self-insured employers are responding by using reference-based pricing (RBP) with doctors and hospitals—in effect, setting their own prices for health care services.

RBP is a cost-containment strategy that pays doctors, labs, clinics and hospitals a percentage of an established benchmark. Most often, the reimbursement rate is 120 percent to 300 percent of Medicare pricing for a given service, “based on what’s reasonable in terms of the local health care market,” said Marty Joseph, president of Chicago-based BAS Benefits Administrative Systems LLC, a third-party administrator (TPA) of self-funded plans.

A May 2019 report by the RAND Corp., a research think tank, found that prices paid to hospitals by private health plans averaged 241 percent of what Medicare would have paid, with wide variation in prices among states. Based on their findings, the RAND authors suggested that employers design coverage using “contracts based on a multiple of Medicare or other prospective case rates.”

No Networks

Unlike traditional preferred provider organization (PPO) coverage, an RBP approach typically has no in- and out-of-network payment tiers, explained Joseph when he spoke May 1 at the World Health Care Congress in Washington, D.C. Plan members can “go anywhere they choose for service, and the plan will pay the provider a fair and reasonable amount based off of Medicare plus a percentage, which is a profitable arrangement for a physician, hospital or other facility.”

RBP often reduces employers’ health care claims spending by 20 percent to 30 percent, he said.

While more employers are becoming aware of RBP, adoption remains limited. A 2019 survey of more than 1,300 U.S. employers by Lockton, a benefits broker and consultancy, found that 2 percent of respondents currently use reference-based pricing for targeted health care services, and an additional 10 percent are considering it for the future.

[SHRM members-only toolkit: Managing Health Care Costs]

Controlling Costs

Employers can negotiate contracts with physician practices and hospitals to accept RBP for services, Joseph said.

Absent a contract, doctors and facilities will still be paid RBP rates, but these providers may then “balance bill” the patient for what the provider considers the remainder of its fee. In those cases, “patients should be educated to immediately contact the plan TPA, who will intercede with the provider,” Joseph said. Most often, the provider ends up accepting the RBP amount as payment in full, he noted. In those instances where providers won’t accept the RBP rate, the plan will negotiate a settlement or pay the outstanding bill.

With health plans using RBP, primary care physicians will typically be paid fees for their services on par with what they receive from a standard health plan. “The big savings comes from care received at hospitals and other facilities,” said Matt Lund, CEO and president of Seattle-based Fortune Management Inc., a benefits brokerage that specializes in self-funded health plans.

Hospital prices for the most part are not pre-negotiated, said Lund, who co-presented with Joseph at the conference. “If there are balance-billing issues that we can’t resolve, we pay the difference. But in most instances, we can resolve them,” he said, because the payment rate is competitive.

“There is no transparency in health care,” Lund noted. “Even when a PPO has negotiated a discount on services, that is a discount against a price the provider sets.”

RBP, in contrast, leads to more-predictable claim costs, he said, and because it reduces employers’ spending, “it’s an alternative to shifting costs to employees.”

What HR Should Know

Eileen Clark, vice president of HR at Wayne, Pa.-based ELAP Services, which provides health care solutions for self-funded employers, also is enthusiastic about RBP.

“Employers can reduce their total health care costs by up to 30 percent while also reducing out-of-pocket expenses for their employees,” she said.

“While the move to RBP can seem like a change that’s mainly to the employer’s benefit, we’ve seen employers pass on cost savings to their employees” by lowering deductibles and premiums or by increasing spending on other benefits, Clark noted.

The key to a successful RBP rollout is education, she said, which “starts well before open enrollment, with HR teams being fully trained on the plan details, its benefits and what it will change for employees.” HR should then be prepared to explain the new approach to plan participants and to answer their questions—and to allay any misperceptions they may have.

Helping employees become well-educated health care consumers and advocating for plan members is key to a successful RBP program, Clark said, adding, “While it’s often perceived that RBP will cause a lot of disruption, in the end there’s more transparency and support for employees.”

Targeting Drug Prices

“Some large employers and plan sponsors are taking matters into their own hands and lowering their pharmaceutical costs with a technique similar to international benchmarking: pharma-based reference pricing,” said David Henka, president and CEO of ActiveRADAR, a pharmacy benefits management company. “Where international benchmarking negotiates deals based on what other countries pay for certain drugs, reference pricing programs compare all prices in the formulary to identify the lowest-cost option within each therapeutic category.”

An August 2017 study in the New England Journal of Medicine looked at The RETA Trust, a national association that purchases health care for employees at 55 Catholic organizations. When the trust adopted an RBP program for prescription drugs in which payment was limited to the price of the least-costly drug in each therapeutic category, it saved 12.2 percent on drug spending after the first year and 18.7 percent during the second year.

Negative Perceptions

A study in the February issue of the Journal of Managed Care found that while few employers are using RBP benefit designs, there is broad awareness of its potential for delivering savings, said the authors, from Harvard University and Boston’s Beth Israel Deaconess Medical Center.

Employers identified several concerns that kept them from implementing RBP designs, including plan complexity, fear of catastrophic out-of-pocket costs and worries that RBP could hurt employee recruitment in a tight labor market.

“Our interviews revealed that although employers were aware that RBP could lower spending, the difficulty they expected to face to put RBP in place and the possible risks for employees, both current and future, left them deciding it was not worth it,” said lead author Anna Sinaiko, of Harvard’s T.H. Chan School of Public Health.

Simplifying the plans, setting out-of-pocket maximums to protect patients from catastrophic costs and using turnkey solutions for communicating the changes to employees could help increase adoption rates of RBP plans, the authors wrote.

“Solutions that can eliminate employers’ biggest concerns about RBP, such as these, are likely needed if there is to be broader uptake of RBP benefit design than what we are currently seeing in the market,” Sinaiko said.

Related SHRM Articles:

Employers Can Help with ‘Surprise’ Out-of-Network Medical BillsSHRM Online, May 2019

Small and Midsize Employers Can Contract with Health ProvidersSHRM Online, May 2019

Direct Contracting with Health Care Providers Can Lower CostsSHRM Online, October 2018

Reference-Based Pricing: Another Self-Insured Option for Employers,SHRM Online, June 2018

Self-Insurance Is Just the Start, Say Health Plan InnovatorsSHRM Online, May 2018


Chad Harris

Chief Executive Officer

 

Chad Harris serves as the CEO of HealthComp and is a values-driven healthcare leader with over twenty years of experience running business process and information technology businesses as a senior executive. Chad has a reputation for creating and controlling rapid growth by focusing on the intersection of customers, market dynamics, and the new digital world.

 

Chad has held many senior executive positions and led global teams of more than 10,000 people across dozens of counties. Chad has grown both large and small businesses, from those with less than $100M of revenue to those producing multiple billions of revenue, focusing on delivery, customer satisfaction, and innovation to create market leadership.

 

Chad's philosophy is to inspire change by doing what comes naturally, putting the needs of others before his own, working incredibly hard, and focusing on "how" to accomplish things, never "if they can be accomplished."

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Tom serves as the Chief Growth Officer at HealthComp. In this role, Tom focuses on strategic initiatives aimed at accelerating HealthComp’s growth nationwide. His passion lies in assessing market and enterprise structures and creating efficiencies that enable teams to deliver best-in-class performance.

 

Previously, Tom led Cigna’s largest employer segment, largest region which was comprised of several health plans including the two largest health plans. He worked closely with Market Presidents and their leadership teams to develop and execute local market strategy and deliver growth for the enterprise. Tom earned his degree from Saint Anselm College and holds certifications from The Wharton School and the Darden School of Business at the University of Virginia. In his spare time, he enjoys sailing and holds a Master Captain’s license with the U.S. Coast Guard. He is also active in community outreach programs including local food bank and shelter services.

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Chief Technology Officer

 

Sanoj Balakrishnan serves as the Chief Technology Officer at HealthComp. In this role, he oversees the company’s overall technology strategy and architecture, building secure and highly scalable distributed systems.

 

Most recently, Sanoj served as Head of Healthcare Digital Business and Technology at Cognizant, working with payers and providers in developing solutions that reduced healthcare costs and provided a best-in-class experience for members. Earlier in his career, he worked at technology organizations in a variety of software engineering and architecture roles. Sanoj earned his B.S. from University of Mumbai and Computer Systems Management from National Institute of Information Technology.

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Justin serves as the Executive Vice President of Product at HealthComp. He has 8 years of experience in developing and delivering solutions that reduce health care costs, improve quality, and provide a best-in-class experience for members. Most recently, Justin was an Associate Partner and business unit leader at McKinsey & Company where he helped large carriers and healthcare technology companies build new clinical services and solutions for fraud, waste, and abuse. Justin earned his B.S. in Accounting and Data Informatics from Indiana University, Bloomington.

Tucker Stein

Chief Financial Officer

 

Tucker serves as the Chief Financial Officer of HealthComp. Tucker previously worked for The Boeing Company in a number of finance and strategy roles, most recently as a finance lead for the Transactions and New Business Development group. In this role Tucker led investments and strategic partnerships for Boeing’s Space and Communications portfolio. Tucker earned his MBA at Stanford’s Graduate School of Business and his Bachelors of Science at the University of Redlands.

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Tom is involved in multiple areas of HealthComp including Operations, Compliance and Legal Affairs. Tom was admitted to the California Bar in 1990 and started his legal career with Stammer, McKnight, Barnum and Bailey, LLP. When he left the firm to join HealthComp in 2014, he was the Managing Partner (he had represented HealthComp since 2003). In private practice Tom’s areas of focus included healthcare and transactional work. Tom holds a Bachelor of Science Degree in Business Administration-Finance from California State University Fresno and received his Juris Doctorate from San Joaquin College of Law.

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Rishab serves as the Chief Transformation & Operating Officer at HealthComp. Rishab focuses on transforming and modernizing HealthComp’s operations to provide delightful and distinctive experiences to its members, providers, and clients. His agenda includes integrating all entities towards a One HealthComp vision, driving profitable growth, and delivering value and business outcomes.

 

In his former work over the last 2 decades, he has helped clients across industries to transform themselves by bringing industry-leading practices and digital and data-led disruption. As the trusted advisor to the C-suite, Rishab helped his clients leapfrog on their transformation journey to accelerate business outcomes and helped them unlock new opportunities to drive profitable growth, profitability, and enhanced experience for their employees and clients.

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Chief Human Resources Officer

 

Elaine Davis serves as CHRO for HealthComp. Elaine previously served as CHRO for Continuum Global Solutions and has served in executive leadership positions for Xerox and GlaxoSmithKline. Elaine holds Bachelor’s and Master’s degrees from the University of California at Berkeley.