PPOs were built off the early successes of HMOs. They sought totake the savings created by HMOs and expand provider bases to allowmore choice for patients. As the PPOs started to build largernetworks and attempted to bring costs down, they met resistancefrom key providers. Rather than hold the line and set reasonableprices, the PPOs acquiesced and agreed to pay providers—especiallyhospitals—pretty much anything they wanted using adiscount-off-the-billed-charges model.

The problem was that there were no regulations on what hospitalscould bill for services, so the PPO shell game of “discounting”went into effect. Today, the average for-profit hospital chargesmore than 700 percent of what Medicare would pay for services, whilenon-profit hospitals charge approximately 550 percent of Medicare.After the traditional 50 percent “discount” provided by the PPOs,employers often pay 300 percent of Medicare—often much more. Sincethe discounting levels from the PPOs are a tightly guarded secret,employers are unaware that they are paying three times what the largest payerin the country has deemed to be fair reimbursement.

The overpayment problem

The Accountable Care Act turned a spotlight on the employer-payshealth care system, and a variety of companies started to publishdata outing the PPO industry and the ridiculous “discount”reimbursement model. In reality, hospitals readily accept 130percent to 150 percent of what Medicare would pay (sometimes less)for those willing to make cash-based payments. Intelligentemployers started asking about ways to close the gap between the300 percent of Medicare most are paying via the PPO models and whathospitals accept from cash-based payers.

Related: Patients being pushed to pay up before hospitalcare

America's overpayment model is two to five times what otherdeveloped countries pay for health care services. Everyone in thehealth care financing industry is well aware that insured consumerslack objectivity when seeking health care services. America'semployer-paid health insurance system does not typically requirethat employees consider the cost of services. Employee/members makea small copay to accompany the reimbursement by the employer orinsurance company.

As there is typically no transparency in fees for servicescharged by providers, patients simply seek health care with noregard for cost whatsoever and—just as bad—no idea of theproviders’ historical quality of delivery. The provider industry(hospitals and doctors) is aware of this flaw in the purchasingsystem and takes full advantage through what many would suggest areegregious overcharges for services, and often even limits anemployer's ability to audit or confirm payments and the accuracy ofthose payments.

What's fair?

Reference-based pricing (RBP) offers two remedies to thisinflated, unfair system by using a defined-contribution model ofhealth care benefit financing. First, an employer or sponsor of agroup health plan determines a fair and just reimbursement for amedical service and defines such in its agreement with itsmembership (employees). A plan might define within its benefitmodel, for example, that it will reimburse up to $20,000 for atypical knee-replacement service.

While many providers may indeed bill and accept $20,000 for thatservice, some may not, so the defined-contribution model forcesthose seeking the service to decide what provider they want to workwith relative to the overall value of the service to them. This isthe consumerism we have talked about in the industry for years buthave never fully implemented.

Defined contribution allows the member/user of services todecide for him or herself if the 70 percent of providers that willaccept the defined payment amount will suffice, or if they chooseto pay more out of their own pockets to seek a provider from theother 30 percent.

CALPERS put this model on the health care map a half dozen yearsago in an attempt to control its own health care expenses. Theyquickly found that providers would readily accept reasonablepayments for services in order to retain their business. Incontrast, the PPO industry that most employers utilize todayguarantees overpayment for services in almost all scenarios throughtheir opaque contracting models, especially for hospitalservices.

How it works

While there are a number of delivery models for RBP, they allprovide logical, fair and transparent reimbursement for medicalservices. RBP models fall into three categories:

• A hard line-defined contribution model: “This is all we willpay.”

• A pure negotiations model requiring that all claims benegotiated to mutual satisfaction.

• A hybrid model that limits payments but uses multiple referencepoints to confirm reasonable reimbursements.

In most RRP-defined contribution models, employers targetpayment levels to hospitals of 120 percent to 160 percent ofMedicare, which creates a savings of 50 percent to 60 percentrelative to PPO payment levels. Since hospital charges typicallyequate to about 40 percent of overall health care costs for anemployer-sponsored plan, this piece alone can provide overallsavings of 20 percent to 25 percent or more for an employer, allother costs being equal.

Since RBP plans are exclusively administered by independentthird-party administrators (TPAs) at this time, there are typicallyadditional savings in administrative fees and the elimination ofPPO access costs as well.

RBP programs can be quite effective in a “naked” state—meaningthat no contracting of any kind is used for provider relationships,especially if the service provider offers member assistance withconcierge steerage services. As with hotel concierges, a medicalconcierge steers users to the type of service they want andtypically to a receptive provider.

Some RBP delivery models offer a hybrid solution of narrow- orhigh-value networking contracts. The best RBP plans remain true toform, make all providers available to patients at pre-determinedreimbursement levels and use the direct contracted providers as“safe harbors” for members. Higher-quality RBP vendors will offeremployers a variety of options relative to safe harborrelationships, as well as concierge steering mechanisms.

The bottom line

RBP programs are gaining in popularity due to their significantcost savings to both the employer and their employee/members. Thesesavings often exceed 30 percent compared to the PPOs.

There remain some problems within the brokerage consultantindustry, since many are tied financially to the old PPO programsand the BUCA (Blue, United, Cigna, Aetna) carriers, and alsobecause many brokers are content with the status quo and notprepared to learn about new options.

Employers should seek advice from consultants who are not onlyfamiliar with RBP plans, but those who have detailed RBP to theirclients historically—better yet, those that have alreadyimplemented RBP plans. RBP plans are not the perfect tool for allemployers at this time, but recent upgrades in service options makethem reasonable for at least 50 percent of the employerpopulation.

Currently, none of the large BUCA carriers have an RBPapplication, so implementing a plan will require an employer towork with an independent TPA company. There are additional benefitsto working with an independent TPA, including best-of-breedancillary service choices for things like PBM, UR/UM, and diseasemanagement that are not always available with the PPO models wherecarriers require use of their in-house service options.

One potential downside of RBP models is when a non-directcontracted provider is utilized and a provider bills beyond what ahealth plan has decided to allocate for a particular service. Thisissue is called balance billing. For the most part, hospitals usebalance billing as a form of health care extortion to try and forceemployer sponsors of health care plans to pay more than fair andreasonable reimbursement for services.

RBP vendors have a variety of ways of dealing with thiscat-and-mouse game played by the hospitals. Some pay more toappease the hospital, while others draw a harder line to maintainthe integrity of the employer-sponsored plan. Regardless, the issueof balance billing is mostly fabricated by the large PPOorganizations and brokers who are still allied with themfinancially.

Due diligence

Most employees now take on 30 percent or more of an employer'shealth care costs, totaling thousands per year, when in the past,employers typically paid 95 percent of the plan costs themselves.So now employees are also affected by the excess overcharges thatplague the current PPO system. Self-funded employers have afiduciary responsibility to protect the co-mingled funds withintheir health care plans, and the current PPO payment system hasmost employers breaching this obligation.

Employers are seldom aware that in order to ingratiatethemselves with providers, mostly hospitals, that the large PPOpayers seldom do any reasonable due-diligence on hospital invoicesbefore making payment. A review of more than 400,000 hospital billsover the last 15 years shows conclusively that this lack ofdiligence by the PPO payer is costing employers about 7 percent inovercharges and mistakes that are not caught in the claimsadjudication process.

RBR and defined-contribution health care delivery will changethe face of employer-sponsored health care plans by creating ameeting of the minds between those who offer health care servicesand those who utilize those services, and fair and reasonablepayment levels will arise on both sides of the equation. Employersthat utilize such plans will see an immediate reduction in theirhealth care spend of 20 percent to 30 percent, and their memberemployees can finally start to see some relief—not only in theircontribution rates, but also in their out-of-pocket costs.