Reference Based Pricing In Action


“This illustrates how PPOs have failed to control Hospital Claims Costs for plan sponsors, and how this model is your best resource in preserving your client base and employer sponsored health plans.”

– Magellan Risk Management


Reference Based Pricing in Action

December 7, 2013,   ERISAHealthcare

This illustrates how PPOs have failed to control Hospital Claims Costs for plan sponsors, and how this model is your best resource in preserving your client base and employer sponsored health plans.

Not too long ago, I have the opportunity to work on a large Facility claim that resulted from an automobile accident in California.  The member was covered on a self-funded employer plan and the PPO network was one of the Big Four.  All things being considered, the expectations were the PPO would do a great job in re-pricing our claims and we would receive a “better discount” than we had previously obtained ……or so we thought.

First….why did we think they would do a better job?  Reference screen shot 1 below…..this is performance data obtained from the new network provider and was used to base stop-loss pricing on when setting up a new group health captive program.  When compared to a traditional leased network option we had been using successfully for many years, (screen shot 2), it made sense that we could expect an additional 10-12% discount beyond what we had been accustomed to receiving.  In this case, we’re seeing the discount factors for the 953 zip code in California.

Our new PPO Network provider


Our previous PPO Network


A short time after a new employer group came onboard as a client, an employee was involved in a terrible automobile accident in northern CA and his initial hospital claim was $852,981.  Side-note:  we did not find out about the event until he had been in-patient for 3-weeks but that’s another story….

Reference the screen shot below….this is part of a typical UB-04 (old UB92) Facility Reimbursement claim.  It outlines Revenue Codes, Description of Services provided, Service Dates, # of Units / Services and Total Charges.  When a large claim such as this is received, it is general practice for the MGU to audit the claim and request for an Itemized bill (not shown here).


From this original inpatient bill, the PPO discount was $127,947…..which works out to be a 15% discount. Where’s this great 60.6% discount indicated above?  The TPA worked with a Third Party auditor that negotiated an additional 10% savings with the Hospital……based on a prompt pay discount. Now we have a 25% discount that must be paid in 3-4 Business days.  That still did not sit right…………. 

Magellan Risk

At this point, the TPA had indicated they had processed the claim according to the PPO contract terms and we needed to pay the claim.  Not yet…….let’s dig a little deeper.  We requested and received a copy of the PPO contract signed with the TPA and made note how the TPA (referred to as the Company in this contract) is prevented from applying ANY UNBUNDLING OR CLINICAL EDITING LOGIC to Facility claims (screen shot below).  With physicians, no problem but not with Facility claims.  So let me get this straight, the Hospital can bill whatever they want and we can’t have ANY mechanism for auditing or determining Usual & Customary on these facility claims?  As long as we get some type of discount, we have to pay the bill.  Not a bad deal for the Hospital, right?


But now what?  I’ve never seen a claim so egregious.  Contract or not, are we really going to have to pay this?

After consulting with some long-time colleagues, we had the claim re-priced according to a Reference Based pricing model.  In this approach, rather than getting a Discount of Billed Charges (as we have above), pricing is based on a % of Medicare, or the actual cost of services rendered by the facility, plus a fair markup.

Reviewing the screen shot below, you can see how each Revenue Code of “this claim” is re-priced according to the higher of these two values, and then aggregated to determine a total reimbursement to the facility, which in this case is $209,595.


Now that is much more in-line with what we were expecting to begin with and from the risk-side of the business, we were happy with the result. But………

  • How do you get the Hospital to accept $209k as payment in full instead of $639k?
  • How do you keep them from balance billing the employee, or the plan sponsor? 
  • How can you do this without it becoming a total mess for the employer and their HR department?
  • How do you prevent the TPA from liability, from becoming a fiduciary?

With a well thought out plan and the right business partners…..


Editor’s Note: Careful consideration of the “right business partners” is critical to long term goals. There are now many firms active in the market, each adopting various forms of reference based pricing models and services. We are familiar with almost all the players – our market intelligence is current, accurate and continuously updated. It is a plan sponsor’s interest to consider quality, adaptability, innovation including the ability to provide actionable input with a willing provider open to change.



riskmanagerqqq is a specialty company in the benefits market that, while not an insurance company, works directly with health entities, medical providers, and businesses to identify and develop cost effective benefits packages, emphasizing transparency and fairness in direct reimbursement compensation methods.

The shared vision of and clients who retain our services is to establish and maintain a comprehensive employee health and welfare plan, identify cost areas that may be improved without cost shifting to any significant degree, and ensure a superior and sustained partnership with a claim administrator responsive to members needs on a level consistent with prudent business practices.

Plan costs, in all areas including fixed expenses and claims are open for review on a continuing basis. Cost effective plan administration and equitable benefit payment to providers are paramount to fulfilling our mutual fiduciary duties. As we proactively monitor and manage an entire benefit program we are open to any suggestions members may make or the dynamic health benefit market may warrant in order to accomplish these goals.

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