Although referenced-based pricing (RBP) is a strategy some self-insured employers use to lower health care costs, it’s not the right fit for every organization. This Benefits Toolkit serves as a guide to RBP and aims to help employers decide whether to use RBP.

Table of Contents

• Introduction**
• Overview** -- What Is Reference-based Pricing? -- Incorporating RBP Into Health Plans -- Cost Savings Potential -- Design Options -- Risk for Balance Billing --- How to Minimize Risk for Balance Billing -- ACA Compliance Issue—Out-of-Pocket Maximum
• Comparison With Traditional Payment Strategy** -- Traditional Payment -- Reference-based Pricing 11 --- Example
• Pros and Cons** -- Advantages of RBP --- Lower Health Care Costs --- More Control Over Health Care Spending --- Benefits for Employees -- Disadvantages of RBP --- Balance Billing --- Access to Quality Health Care --- Complexity
• Determining if RBP Is Right for You**
• Conclusion**
• Appendix** --- Reference-based Pricing Implementation Checklist --- Key Questions for Selecting a Reference-based Pricing Vendor

Introduction

As health care costs continue to rise, employers with self-insured plans are looking for new and innovative ways to control their spending on this necessity. To lower spending on health care claims, self-insured employers may consider moving from a traditional provider network strategy to a strategy that allows them to set their own prices for specific health care services. This cost-containment strategy is called reference-based pricing (RBP).

In general, a health plan using RBP places a fixed limit on how much it will pay for specific health care services, regardless of how much providers charge for those services. This fixed limit is based on an established benchmark, such as Medicare's reimbursement rate, with a percentage added (for example, 140% of Medicare). An employer's potential cost savings with RBP depend on a wide variety of factors, including how RBP is incorporated into the health plan, how employees utilize their health care benefits and how much providers charge for their services in the areas where employees live.

The biggest disadvantage to RBP is the increased risk for balance billing, which occurs when a provider does not accept the plan's fixed price as full payment and sends the employee a bill for the difference between the provider's charge and the plan's payment. Employers can take steps to decrease the risk for balance billing, such as helping employees identify lower-priced providers and working with an experienced RBP vendor that can successfully negotiate payment disputes with providers.

Although RBP can potentially help employers lower their health care spending, it is not the right fit for every self-insured employer—especially those with employees who are mostly based in rural areas or areas where access to quality health care is otherwise limited. Employers interested in RBP need to closely analyze the advantages and disadvantages before making a final decision. Furthermore, providing different options, including a traditional network plan and a lower-cost RBP plan, can appeal to employees and serve as a recruitment and retention strategy.

This toolkit aims to help employers' decision-making and serves as a guide to RBP. It explains what RBP is, how it can be incorporated into a plan and how it differs from traditional payment strategies. This toolkit also summarizes the advantages and disadvantages of RBP to help employers determine if this payment strategy is right for them.

Overview

What Is Reference-based Pricing?

RBP is a strategy that can be used by employers with self-insured health plans to help lower costs by capping how much the plan pays for specific health care services. Unlike traditional strategies where payments are based on providers' billed charges, RBP uses a benchmark—or reference price—as a fixed payment amount. In general, a health plan with RBP will only pay the reference price for a specific health care service, regardless of who the provider is, where it is located or how much it charges.

As their reference price, plans with RBP often pay providers at a percentage above what Medicare pays for the same service (for example, 140% of Medicare), based on what is reasonable for the local health care market. Other benchmarks may also be used, such as the provider's actual cost to deliver the service plus a fair profit margin, although paying at a percentage above Medicare's payment rate is the most widely used standard.

Unlike traditional payment strategies, health plans with RBP do not use provider networks for health care services that are paid using the reference price. With RBP, employees are encouraged to use providers who accept the plan's reference price as payment in full, regardless of whether the provider would be in or out of network. An employee's selection of a provider for a health care service subject to RBP is a crucial decision that may impact how much an employee will have to pay out of his or her own pocket for the service.

Consider the following examples:

• If employees use providers who accept the plan’s reference price as full payment, they will not be required to pay anything for their health care services (other than the normally required cost-sharing under the plan, for example, deductibles or coinsurance).
• If employees use providers who do not accept the plan’s reference price as full payment, they will pay the normally required cost sharing and possibly an additional cost, which is typically the difference between the provider’s charge and the plan’s payment. This “balance billing” can put a strain on employee relations and is one of the main drawbacks of RBP.

Transparency Is Key

Health care transparency is essential to successfully implementing RBP, as employees must be able to identify quality providers who will accept the plan’s reference price as full payment. While new federal laws and regulations require more health care transparency from providers and payors, most employers will rely on their RBP vendor to help employees find lower-priced providers. It is common for RBP vendors to negotiate payments with specific providers in advance so that employees who use these providers do not receive a balance bill.

Incorporating RBP Into Health Plans

There are a number of options for incorporating RBP into a self-insured health plan. To minimize disruption, self-insured employers often use RBP just for specific high-cost procedures or providers and keep their provider networks and traditional payment approach for all other health care services. Another common approach is for employers to use RBP just for out-of-network providers.

Employers should carefully consider their employee demographics to assess whether moving to RBP will generate significant cost savings. Employers who see the most savings with RBP are generally those with older employees (or employees with expensive medical conditions) who live in areas where providers' prices tend to be higher than the plan's reference price, vary widely between providers and are not closely linked to the quality of care.

To minimize the risk of balance billing, employers considering RBP may want to confirm there are a sufficient number of quality providers in the area who will accept the plan's reference price as full payment.

As a best practice, employers who adopt an RBP model for their health plans should contract with an experienced vendor who determines the reference price, administers the program, identifies cost-effective providers and intervenes on employees' behalf to negotiate with providers in the event of a balance bill.

Cost Savings Potential

RBP is appealing because it can help self-insured employers take control of their health care spending and protect against health care inflation and arbitrary provider charges.

Prices for health care services vary widely across the United States, even within the same region. Employers with self-insured plans may struggle to control their health care spending when they have employees living in areas where providers charge more for their services. This can be particularly frustrating when the higher prices are not linked to better health outcomes.

Private Health Plans Pay Significantly More Than Medicare

A 2022 report from the research organization RAND Corporation found that self-insured health plans and insurance carriers are paying significantly more than Medicare for the same hospital services, with wide variations based on location. According to this report:

Employers and private insurers paid 224% of what Medicare would have paid for the same services at the same facilities in 2020, across all hospital inpatient and outpatient services.Some states (Hawaii, Arkansas and Washington) had relative prices below 175% of Medicare prices, while other states (Florida, West Virginia, and South Carolina) had relative prices that were at or above 310% of Medicare prices.

To reduce health care spending with RBP, the plan's reference price should be lower than the average price the plan had been paying for the service but high enough so that a reasonable number of qualified providers in the area will accept it as full payment.

A study by the American Academy of Actuaries from 2018 estimates that RBP could reduce spending for shoppable health care services by as much as 28%, depending on an employer's specific scenario. "Shoppable" health care services are those for which individuals are in a position to select (or shop for) a provider based, in part, on price.

To achieve significant cost savings with RBP:

• A sufficient number of quality health care providers must agree to lower their prices;
• Information about provider quality and cost must be available to employees; and
• Employees must choose to receive care from lower-priced providers

The potential for RBP to reduce health care costs also largely depends on how much prices for particular health care services vary within geographic areas. The wider the variation, the greater the potential for savings, as providers become motivated by competition to lower their prices. Accordingly, employers with employees who are mostly based in rural areas or areas where access to quality health care is otherwise limited may not see significant cost savings with RBP.

Employers who realize cost savings with RBP can share some of those savings with employees by decreasing the health plan's premiums, lowering cost sharing (for example, deductibles) or enhancing other employee benefits. Sharing the cost savings can help offset employee dissatisfaction with RBP and the risk of balance billing.

Design Options

RBP can be incorporated into a self-funded plan in different ways; employers should keep in mind that it is not an "all-or-nothing" approach for paying claims. Employers who move to RBP do not typically use this payment strategy for all covered services and providers. In practice, RBP only works well with "shoppable" services—those where employees can select a provider based, in part, on price. It doesn't make sense to use it for other services, such as emergency room care or care that is so specialized there is only one provider available.

Most often, employers use RBP just for certain high-cost procedures or providers—for example, joint replacements, hospital inpatient procedures and lab services—and use a traditional payment approach for all other health care claims. Another popular approach is for an employer to keep its network system of providers and only use RBP for out-of-network claims.

Employers who are interested in implementing reference-based pricing for their self-insured health plan have three main options to consider:

1. Use RBP for all covered services where employees have an opportunity to consider price when choosing a provider.
2. Use RBP only for health care services provided by out-of-network providers.
3. Use RBP only for certain high-cost procedures or providers.

In addition, rather than replacing their current health plan, employers who want to broadly utilize RBP may decide to give employees a choice between the current plan and a lower-cost RBP plan. Providing different options, including a traditional network plan and a lower-cost RBP plan, can appeal to both prospective and current employees and serve as a talent strategy. Employers who are introducing an RBP option and keeping a traditional network plan should clearly communicate the differences between the plans to employees so they can make an informed choice.

Risk for Balance Billing

Because RBP reduces the amount health plans pay providers for covered services, providers may not accept these reimbursements as full payment. The primary obstacle employers face with adopting RBP is the potential for balance billing.

With RBP, balance billing occurs when a health care provider does not accept the plan's reference price as full payment and sends the employee a bill for the difference between the provider's charge and the plan's payment. These bills are sometimes called "surprise medical bills" due to their unexpected nature. Although there are state and federal laws that limit surprise medical bills in certain situations (for example, emergency services), there are no overall prohibitions on balance billing.

Receiving a balance bill can be surprising and stressful for employees and lead to tension and frustration between the employer and its employees. However, a carefully designed and executed approach to RBP can reduce the risk of balance billing. Key components include identifying quality providers who accept the plan's reference price as full payment and encouraging employees to use these providers. Also, employers should use a vendor with RBP experience and a proven record for cost savings and employee satisfaction. Vendors that provide RBP are often authorized to negotiate directly with providers and offer higher payments to settle payment disputes.

How to Minimize Risk for Balance Billing

• Use an RBP vendor that negotiates with providers in advance to accept the plan's reference price.
• Help employees identify quality providers that will accept the plan's reference price.
• Educate employees about the importance of using these lower-priced providers.
• Instruct employees about what to do if they receive a balance bill (for example, contact HR or the RBP vendor).
• Use an RBP vendor that will intervene on an employee's behalf when there is a balance bill to negotiate a lower payment with the provider.
• Be willing to pay more than the reference price to settle payment disputes after negotiations.
• Consider applying the plan's out-of-pocket maximum limit to balance bills to protect employees against catastrophic medical bills.

ACA Compliance Issue—Out-of-Pocket Maximum

The Affordable Care Act (ACA) requires health plans to include an overall annual limit on participants' cost sharing (or out-of-pocket maximum) for in-network costs for essential health benefits. Once an individual reaches the out-of-pocket maximum limit, the plan must pay 100% of covered costs. For plan years beginning in 2022, the out-of-pocket maximum limit is $8,700 for self-only coverage and $17,400 for family coverage. For 2023 plan years, these limits increase to $9,100 and $18,200, respectively.

Federal agencies issued guidance to ensure that health plans without traditional provider networks, such as plans that use RBP, cannot avoid the ACA's out-of-pocket maximum limit. According to this guidance, for purposes of the out-of-pocket maximum limit, a plan that utilizes RBP can treat providers who accept the reference-based price as in-network providers and all other providers as out-of-network as long the plan uses a reasonable method for ensuring that participants have adequate access to quality providers at the reference price. The following factors are used to determine whether the plan provides access to quality health care providers at the reference price:

• Types of health care services subject to RBP —In general, services that are subject to RBP should only be those where participants have enough time to make an informed choice about the provider. For example, RBP does not typically work for emergency services since the employees do not have an opportunity to shop for a provider.
• Reasonable access to providers —An adequate number of providers who accept the reference price should be available to participants. This can be a difficult standard to meet when employees are located in rural areas and have access to a limited number of providers.
• Quality of providers —An adequate number of providers accepting the reference price should meet reasonable quality standards.
• Exceptions process —Plans should have an easily accessible exceptions process for special circumstances that allows out-of-pocket costs for services rendered by providers who do not accept the reference price to be applied to the out-of-pocket maximum limit.
• Disclosures —Plans should provide disclosures regarding RBP to plan participants free of charge, including information regarding the pricing structure and a list of services to which the pricing structure applies and the exceptions process, and a list of providers who will accept the reference price for each service.

Before adopting RBP, employers should confirm that their employees will have access to quality providers at the plan's reference price, using the factors listed above. If not, all providers of health care services subject to RBP must be treated as in-network for purposes of applying the ACA's out-of-pocket maximum limit. Note that some employers may decide to voluntarily apply balance bills to the plan's out-of-pocket maximum limit to protect employees from catastrophic medical bills.

Comparison With Traditional Payment Strategy

To understand how using RBP can result in lower health plan spending, consider the differences between the traditional payment strategy and RBP.

Traditional Payment

The traditional payment strategy is often referred to as a "top-down approach" because it starts with the amount billed by health care providers.

• In-network providers → For in-network care, the provider first submits its billed charge to the plan’s third-party administrator (TPA). The TPA then applies its negotiated discount for in-network providers (usually 40%-60% of the billed charge). While the plan’s negotiated discount can be substantial, this strategy does not prevent providers from inflating their billed charges, which is why providers’ costs can vary so significantly even within a geographic location.
• Out-of-network providers → For out-of-network care, plans typically limit their payments to the usual, customary and reasonable (UCR) rate for the service, which is generally determined by looking at what health care providers in the area charge for the service. If the provider’s charge is greater than the plan’s payment, the provider will usually bill the employee for the difference (that is, the balance bill).

Reference-based Pricing

RBP is often referred to as a "bottom-up approach" because it starts with how much the plan will pay for a specific health care service. The plan's payment is based on an established benchmark—often Medicare's payment rate—with a profit margin added. This strategy can reduce an employer's health care costs because provider payments are linked to an objective reference point instead of the provider's charge, which can be arbitrary and inflated. However, there is a risk for balance billing if a health care provider does not accept the plan's payment and bills the employee for the difference.

Example

The example below highlights how RBP ("bottom-up approach") can be used to gain control over health care spending, as compared to a traditional payment strategy ("top-down approach"). Keep in mind that the dollar amounts are cost estimates for illustrative purposes only and that actual costs and payment rates for procedures can vary based on a number of factors, including location.

Two patients have the same type of outpatient surgery (gallbladder removal). Patient A has a health plan that uses a traditional payment strategy, while Patient B's health plan applies RBP to the procedure.

Traditional Payment (Patient A)

• In-network Provider Bill = $15,000
• In-network Preferred Provider Organization Discount = 40%
• Plan Payment = $9,000

Reference-based Pricing (Patient B)

• Medicare Payment Rate = $4,700
• Additional Payment Percentage = 140%
• Plan Payment = $6,580

In this example, Patient B's plan offered to pay the hospital $6,580, which is $2,420 less than the reimbursement from Patient A's plan. The risk with RBP is whether the health care provider will accept the lower payment or bill the patient for the balance owed. However, even if Patient B's plan had to negotiate a higher percentage with the hospital (for example, 170% of Medicare), the plan would still save over $1,000.

Pros and Cons

Employers with self-insured health plans who are interested in RBP should consider the following advantages and disadvantages of this payment approach.

Advantages of RBP

Lower Health Care Costs

Lowering health care spending is the primary reason why self-insured employers consider adopting RBP. An employer's actual savings will depend on a variety of factors, including:

• RBP's incorporation into the plan. For example, does it apply to all "shoppable" covered services, only out-of-network providers or only certain high-cost procedures/providers?
• The plan's reference price for paying claims (for example, 140% of Medicare). Is it lower than what most providers in the area charge for their services?
• The number of quality providers in the area who accept the plan's reference price (or is the employer—through its RBP vendor—regularly negotiating higher payment amounts with providers)?

More Control Over Health Care Spending

With RBP, self-insured employers can gain back some control over their health care spending because payments are linked to the plan's reference price and not a provider's billed charge. In addition, by using RBP, self-insured employers may be able to budget more accurately for their future health care spending because they can anticipate how much they will spend for the common claims subject to RBP.

Benefits for Employees

Although the primary reason employers adopt RBP is to lower their own health care spending, employees may also benefit from this payment strategy. Employers who reduce their health care costs with RBP may share some of the savings with their employees by reducing employees' health plan premiums, lowering cost sharing (such as deductibles) or making improvements to other employee benefits.

Additionally, employers who are controlling health plan costs from year to year may no longer need to shift costs to their employees by increasing premiums or deductibles. In a tight labor market, access to lower-cost health plan coverage can give employees a reason to join or stay with an employer.

Disadvantages of RBP

Balance Billing

The main drawback to RBP is the increased risk for balance billing. Balance billing occurs after an employee receives health care services and the provider refuses to accept the plan's reference price as payment in full. To collect the unpaid amount, the provider often sends a bill to the employee for the difference between the plan's payment and the provider's billed charge.

Receiving an unexpected or surprise medical bill is upsetting and stressful for employees. If balance billing occurs regularly, it will create tension in the workplace and likely have a negative effect on overall employee satisfaction and retention.

To reduce the likelihood of balance billing and minimize its impact on employees, employers implementing RBP should consider the following steps:

• Select an RBP vendor that has experience with addressing balance billing issues and successfully negotiating disputes with providers. Some RBP vendors even negotiate the plan's reference price with providers in advance of employees receiving care.
• Encourage employees to use lower-priced providers (or providers who have been identified as willing to accept the plan's reference price as payment in full).
• Inform employees, as a key part of the RBP rollout, about the possibility of balance billing and instruct them on what steps to take if they receive this type of bill—for example, promptly contact the RBP vendor so it can help them resolve the issue.

Access to Quality Health Care

Depending on where employees live, they may not have access to many high-quality providers who will accept the plan's reference price as full payment. Using RBP in this type of setting will have a negative impact on employee relations, as employees will have to choose between seeing a lower-quality provider and receiving a balance bill from a provider who provides better care. It can also wear away at an employer's potential cost savings if the RBP vendor is regularly negotiating higher payment amounts with providers to avoid balance bills.

Complexity

Because RBP is not a traditional payment strategy for health plans, employers may be unfamiliar with some of the details surrounding this approach. Each RBP vendor will have its own implementation approach and contract terms, including its established benchmark for paying providers and ways to address balance billing. Many of these concepts and contract terms may be unfamiliar to most employers. Employers who are interested in RBP should work with their advisors to review these arrangements carefully before signing the contract or communicating the terms to employees.

Determining if RBP Is Right for You

Employers with self-insured plans may be interested in RBP as a way to control their health plan spending. RBP is not for all employers, but it may be especially useful for those whose health plan costs are rising rapidly and not responding to other cost containment strategies. Keep in mind that employers often use RBP only for certain high-cost procedures or providers (or for out-of-network services) and use traditional provider networks for all other health care claims.

When considering if RBP is right for your organization, ask the following key questions:

1. What is the age makeup of your organization? Whether RBP will lower health plan expenses for an employer depends, in large part, on how its employees use their health care benefits. Companies with young and healthy employees may not see significant cost savings with RBP because there will be fewer large claims to generate those savings. However, companies with employees who are older or who tend to have major medical procedures (for example, joint replacements), may be able to considerably lower their health plan spending by adopting RBP.
2. Do your employees live in an area where providers' charges vary widely for similar services and tend to be more than the plan's reference price? There is wide variation in the amount health care providers charge for the same service throughout the United States and even within the same geographic area. Companies with employees who live in areas where health care costs are generally high and there is significant price variation for the same services are more likely to save money with RBP.
3. Do your employees live in an area with an adequate number of quality providers who will accept RBP as full payment? In general, RBP is not appropriate for employees who live in communities without a sufficient number of high-quality providers who accept the reference price as full payment. A main component of RBP is encouraging employees to choose (or shop for) lower-priced providers to save on costs and avoid balance bills while also receiving high-quality health care. When this is not possible, RBP does not make sense.
4. How will your employees react to RBP, including the possibility of balance billing? RBP is fundamentally different than the traditional payment strategy that is familiar to most employees. Some employee groups may view the switch to RBP more negatively than others, especially because it puts the responsibility on them to find providers who will accept the plan's reference price and increases the risk for balance billing. A key component of a successful RBP program is a strong education and support program for employees. It is critical that employers invest the time and resources to educate employees about how RBP works, help employees locate lower-priced providers and provide support to help resolve balance billing issues. An experienced RBP vendor should be able to help employers through this process.

Conclusion

RBP is a cost-containment strategy that may be useful for employers with self-insured health plans who are struggling with rising health care costs. Depending on how RBP is implemented, it has the potential to generate significant cost savings because it protects employers from arbitrary or inflated providers' charges for specific health care services. However, this approach has some significant drawbacks, namely the increased risk for balance billing and the resulting strain on employee relations.

Employers with self-insured plans should consider a number of factors to determine if RBP is the right fit for them. These factors include:

• The cost of health care where employees are based
• Employees' accessibility to an adequate number of quality health care providers who will accept the plan's reference price as full payment
• The impact of the switch to RBP on employee relations, including the tension created by the increased risk for balance billing

Employers who are interested in using RBP should work with an experienced vendor that can guide them through the implementation process, including determining the reference price and the type of RBP design. The vendor should also be able to help employees identify lower-priced providers and resolve balance billing disputes.

The most important step to ensure a company makes the best choice is to have an experienced professional aid in the decision-making process. ThinkTank Insurance Partners welcomes the opportunity to help your organization examine its plan designs and make recommendations for improvement.

Appendix

The resources included in this section are for employers to print and use as they see fit. Speak with ThinkTank Insurance Partners if you have any questions about these resources.

Note that some of the content may require customization.

Reference-based Pricing Implementation Checklist

Employers with self-insured health plans who are interested in RBP should consider the following key steps for reference-based pricing (RBP) implementation:

Determine if RBP is the right fit for your company.

• [ ] Determine if RBP is the right fit for your company. Consider your employee demographics, including how your employees use their health care benefits and where they live. It's key that your employees live in an area where there are a sufficient number of quality health care providers who will accept the plan's reference price as full payment.
• [ ] Decide how to incorporate RBP into your plan. Will you use RB only for certain high-cost procedures or providers, for all out-network providers or for all "shoppable" health care services? Consider whether you will keep a traditional network plan and offer an RB plan as a lower-cost option.
• [ ] Select an experienced RBP vendor. Choose a vendor with a proven track record for cost savings and employee satisfaction. Your RBP vendor will determine the reference price, help you select an RBP design for your plan, communicate and negotiate with providers and provide support to employees who receive balance bills.
• [ ] Implement a robust employee education and support plan. It is critical to explain to your employees how RBP works and its impact on them. You'll want to address how employees should find providers who accept reference pricing without balance billing and what steps they should take if they receive a balance bill (for example, reach out to HR or the RB vendor).
• [ ] Update your health plan's documents. Plan documents, including summary plan descriptions (SPDs), should be updated to include the plan's RBP rules, including the plan's established benchmark for paying claims that are subject to RBP (for example, 140% of Medicare).
• [ ] Consult with your stop-loss carrier. Before adopting RBP, you should consult with your plan's stop-loss carrier. Even when plans utilize RBP, claims may still reach specific and aggregate attachment points, and it is important to know how the carrier will treat those claims when the time comes.

Key Questions for Selecting a Reference-based Pricing Vendor

Employers who want to use reference-based pricing (RBP) should select an experienced vendor with a proven track record for cost savings and client satisfaction. Because RBP is different from the traditional payment approach, the different options presented by vendors may be unfamiliar, and employers may not know what questions to ask. Your ThinkTank Insurance Partners representative has experience with RBP and can help you with this process.

Consider asking potential RB vendors the following questions:

• How many clients do you have, and what is your client retention rate?
• What is your established benchmark (or reference price) for paying claims?
• What design options do you offer for services and providers covered by RBP?
• What is the average cost savings for your clients?
• How are your fees calculated (for example, percentage of billed charges or per-employee fee)?
• Do you negotiate with providers in advance of employees receiving care?
• If so, how do you make sure providers adhere to the negotiated amounts?
• What types of support are available for employees who receive balance bills?
• What is your average response time for employees who reach out with balance billing questions?
• What percentage of claims under RBP result in a balance bill?
• What is your limit on negotiations with providers over balance bills?
• How do you identify lower-priced providers for employees to use?
• What resources do you provide for employees to locate providers who will accept the plan's reference price?