“Accountable care organizations and narrow networks are two of the options that are becoming more attractive to employers, however, many employers are looking for an even more impactful cost savings strategy. Enter reference-based pricing plans.” – www.healthgram.com
Creative strategies are the norm for 2014 as companies attempt to mitigate continually rising healthcare costs. While the measures have been muted in the past, several new options have come to the forefront in response to recent studies showing that cost is a more important factor than choice to most employees.
Accountable care organizations and narrow networks are two of the options that are becoming more attractive to employers, however, many employers are looking for an even more impactful cost savings strategy. Enter reference-based pricing plans. These plans have been around for years, but Medicare is probably the best known example. The government sets pricing for all services and that’s all providers can expect as compensation for their services. While these government reimbursements might not be as profitable to hospitals and other providers, it is a baseline that establishes where prices should be.
Reference-based pricing plans use government set pricing as a basis and multiply it to establish a reasonable level of pricing for all hospitals and other providers. This method of establishing reimbursement levels results in a substantial cost savings to employers. To illustrate how this works, check out this example of pricing for knee surgery:
MS-DRG = 470: Major joint replacement or reattachment of lower extremity w/o MC
- Medicare reimbursement: $13,398
- Example reference-based pricing reimbursement: $18,758
- Retail billed charges: $43,150
- Plan payment at 40% discount: $25,890
In this instance, reference-based pricing provides a savings of over $7,132, but this is not an isolated case. There is a substantial savings on every claim paid.
How does it work?
Surprisingly, a reference-based pricing plan is easier to administer, which immediately lowers administrative costs. Some of the administrative savings comes from the fact that there is no network to manage. Hospitals and doctors are not contracted with the plan, which saves a tremendous amount of unnecessary time and paperwork.
Clients who have implemented this approach have had major successes as well as some challenges. Success comes immediately with substantial cost savings on every claim your employees incur. Administrators such as Healthgram have had great success securing partnerships with hospitals and providers that accept the reimbursement defined by the plan.
Challenges arise when an employee seeks services from a non-cooperative hospital, which expects its rack rates to be reimbursed. To minimize the occurrence of such disputes, Healthgram provides patient concierge services to help employees make better utilization decisions up front. We also have resources and tools in place to handle the occasional balance bill.
In addition to saving money for employers, reference-based pricing plans deliver an important message to the healthcare market. It drives home the point to hospitals and providers that it is reasonable for them to make a profit, but puts a cap on what they can receive for specific services.
Editor’s Note: The Wright Brother’s claim to be the first in powered flight is in the history books. But it was Gustav Weisskopf (Whitehead), a German immigrant to the United States who first achieved the feat. As Weisskopf is to aviation history, JP Farley is to Cost Plus Insurance – Reference Based Pricing. Well before Reference Based Pricing became a driving market force, JP Farley was quietly administering and marketing the concept for over a decade.