Pros and Cons of Using Reference-based Pricing


“Traditional models rely on a non-transparent contracting process in which insurance companies negotiate discounts off of over-inflated charges.”


Jun 8, 2015 in Industry News | 0 comments

As employers continue to search for opportunities to save on healthcare costs, a primary point of focus is directed at eliminating high-cost providers from their networks.  This process, known as narrowing networks, is making a name for itself in the self-funded benefits community and among accountable care organizations.  The most aggressive trend that achieves the savings gained through narrowing networks is reference-based pricing.  This strategy all but eliminates the traditional “network,” driving savings by avoiding “big insurance” and network contracts.

Traditional models rely on a non-transparent contracting process in which insurance companies negotiate discounts off of over-inflated charges.  To illustrate this trend, Medicare recently released a massive data set of charges and Modern Healthcare has created a searchable database to show the discrepancy between charge amounts and what Medicare pays.  For example, the average charge for a major joint replacement at a hospital in North Carolina is $59,622. Typical big insurance discounts will slash that price by 50 percent to around $30,000. Sounds like a good deal until you see that Medicare only pays $9,264.  Medicare often reimburses at cost, leaving no margin for the facility and providers.  Reference-based pricing plans have addressed this issue by adding on to Medicare reimbursements to account for the profit margin, which is sometimes more than 100 percent higher.

In the example above, by avoiding big insurance and network contracts, and using a reference-based pricing model, the reimbursement to the hospital would result in a savings of 38 percent.  In every medical service delivered, the reimbursement is less than traditional network discounted prices.

There are other advantages as well.


  •  Revolutionary strategy
    •    No credentialing
    •    No discount negotiations
    •    Produces administrative efficiencies
    •    Lowers overall costs to the employer

There are, however, pitfalls to this aggressive strategy.  Many employers who have implemented reference-based pricing plans do not see the desired results because certain considerations we not made.


  •  Potentially increases costs to the employees through balance billing
    •    Limited experience of vendors
    •    Lack of established markets; safe haven hospitals
    •    Disruption from non-participating providers
    •    Lack of leverage for small employers

Considerations for implementation

When implementing a refence-based pricing plan, choose a vendor with experience, as well as clear, transparent processes and safeguards in place to protect your employees.  Make sure that proper planning is conducted up front—such as holding conversations with highly utilized providers—to minimize potential disruptions.

Interested in reference-based pricing?  Find out more about the promise and pitfalls of this cost containment strategy and alternative healthcare plan options that are available to fit your specific needs.