Here's what you need to know about reference-based pricing.

PPOs were built off the early successes of HMOs. They sought to take the savings created by HMOs and expand provider bases to allow more choice for patients. As the PPOs started to build larger networks and attempted to bring costs down, they met resistance from key providers. Rather than hold the line and set reasonable prices, the PPOs acquiesced and agreed to pay providers—especially hospitals—pretty much anything they wanted using a discount-off-the-billed-charges model.

The problem was that there were no regulations on what hospitals could bill for services, so the PPO shell game of “discounting” went into effect. Today, the average for-profit hospital charges more than 700 percent of what Medicare would pay for services, while non-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. Since the discounting levels from the PPOs are a tightly guarded secret, employers are unaware that they are paying three times what the largest payer in the country has deemed to be fair reimbursement.

The overpayment problem

The Accountable Care Act turned a spotlight on the employer-pays health care system, and a variety of companies started to publish data outing the PPO industry and the ridiculous “discount” reimbursement model. In reality, hospitals readily accept 130 percent to 150 percent of what Medicare would pay (sometimes less) for those willing to make cash-based payments. Intelligent employers started asking about ways to close the gap between the 300 percent of Medicare most are paying via the PPO models and what hospitals accept from cash-based payers.