Will Reference Based Pricing Plans Survive In Their Present Form?

By Molly Mulebriar

In one of the most far reaching edicts issued by Congress and promulgated by faceless bureaucrats in Washington, the American health care delivery system is about to enter a new era bringing fundamental change to the way health care is financed and delivered in this country.

The Consolidated Appropriations Act (CAA) was enacted by Congress on December 27, 2020. The Act includes provisions impacting employers, benefit brokers, consultants, insurance companies, plan sponsors and medical health care providers.

The Act is intended to bring transparency to health care pricing and delivery, something most will agree is a good thing. However, there are some in the health care delivery food chain who, for good reasons of their own, are against the Act for a variety of reasons to which, so far, they have not prevailed in stopping.

There are 15 basic points addressed in the CAA. I will not address each here, but instead will focus on the CAA’s impact on Reference Based Pricing which will likely soon become a passing memory as “the things that once were” in health care.

The CAA requires a baseball type arbitration process when providers are paid less than what they expect and demand more. Balance billing becomes a problem to be resolved between the provider of care and the health plan providing the benefits, leaving the patient out of the dispute entirely. Balance billing occurs when there is no contract between the provider of services and the health plan paying for those services. Providers in this instance are referred as “Out-of-Network” providers.

Although the CAA addresses emergency care and air ambulance encounters, an increasingly common assumption is that the same mandates apply to any balance bill from any provider, not just for emergency care.

Reference Based Pricing plans do not rely on provider networks per se. These plans pay for health care services utilizing certain benchmarks such as Medicare reimbursement rates. For example, a plan sponsor may set 120% of Medicare allowable rates as the plan’s payment to most providers. A Reference Based Pricing plan may also use a professional only PPO rental network as well as enter into direct provider agreements. Thus these plans have established a de facto dual option plan employing “In-Network providers and Out-of-Network providers.”

Balance billing issues arise when a Reference Based Pricing plan pays providers much less than what they bill for services. Although some plans use rental PPO networks for professional providers, few use these networks for hospital encounters. The plans we manage do not use any PPO networks whatsoever, however all of our Reference Based Pricing clients have developed direct agreements with professional providers including a limited number of hospital direct agreements.

In addition to claim repricing most Reference Based Pricing plan vendors offer patient advocacy and legal representation. When a hospital balance bills a patient, these vendors step in between the provider and the plan member to attempt to resolve the dispute utilizing one of three methods: 1. No negotiation and hope the balance billing dispute will disappear over time, 2. Attempt to negotiate within certain pre-defined parameters, and 3. Throw as much money as needed as quickly as possible to make the balance bill disappear.

This will all change in 2021. Congress has created an independent dispute resolution process that is mandatory when providers and insurers can’t reach agreement on payment for out-of-network services from providers who are not under contract with the insurer.

Balance billing disputes will no longer go through the processes we rely upon today. Vendors providing these services will no longer be needed. Instead, an Independent Dispute Resolution process will decide balance bill settlement issues.

Out-of-Network providers may utilize this resolution process to try to obtain higher reimbursement over and above what a Reference Based Pricing plan allows. Each side states the amount they are willing to pay / accept. Once stated the arbitrator picks one over the other binding both parties.

What is significant and will have a profound impact on Reference Based Pricing plans is a recent ruling by Federal regulators. In a September 30, 2021 ruling Federal regulators have directed arbiters under independent dispute resolution to assume that the median in-network rate is the proper out-of-network rate and limiting when and how other factors come into play (AHA and AMA File Lawsuit Over No Surprises Act | Healthcare Innovation (hcinnovationgroup.com).

This ruling means that disputed balance bills will likely be settled based on the average in-network managed care rates a provider has historically received from managed care plans.

Here’s a real example of the financial impact this can have on plan assets:

We repriced claims for large Texas school district (4,500 employees) over a 16 month period and benchmarked paid claims to Medicare rates. The district utilized a rental PPO network. We found the average billed charge was 554% of Medicare and the average allowed PPO charge was 337%. Under the CAA’s Independent Resolution Dispute process it is very likely a Reference Based Plan allowing 120% of Medicare will end up paying +300% of Medicare under the arbitration process.

You can be sure hospitals will seek arbitration resolution every time they receive payment from Reference Based Pricing plans. You can be sure hospitals will seek to renegotiate their managed care contracts in an effort to increase their median in-network rates too.

Reference Based Pricing vendors will necessarily need to change their business model. They will no longer be needed for legal representation or defense or balance bill representation. That’s all gone now. Gone are the lucrative days of charging a plan sponsor a percentage of billed charges or savings in return for balance billing representation and defense.

Changing business models is evident among a few forward thinking Reference Based Pricing vendors. Some are expanding into the PBM side of the business. Others are building narrow managed care networks. Still others are expanding into the stop loss insurance business.