As the rising cost of traditional health care continues to be a concern for organizations and its employees across the country, more are turning to alternative options to curb costs. One option that has been discussed recently is reference-based pricing. Although this model has been around for quite some time, it is now gaining more popularity in light of the current state of health care.

With reference-based pricing, an employer agrees to pay a fixed amount or reimbursement for a defined medical service, rather than using a traditional insurance carrier to negotiate discounts from the provider. In this case, an employer partners with an administrator that targets reimbursement rates based on a percentage of what Medicare would pay the provider for this same service, which is typically lower than the discounted rate negotiated by the insurance carrier. Because this allows the organization to set and better control costs, there are several financial benefits associated with reference-based pricing. However, in order to reap those benefits, there are a few things to keep in mind.

1. Regional variation: It's important to note first that health insurance is regional, and where you are located impacts the cost of Medicare, and therefore the amount of savings reference-based pricing can provide. For example, one state may have a Medicare reimbursement of 260 percent, while another state may be 180 percent. Organizations in both states will have cost savings, but those in the state reimbursing 260 percent will ultimately save more.

Further, there is variance between companies in the same region, commonly ranging between 10 to 40 percent savings over a traditional PPO. When considering switching to reference-based pricing, organizations will need to determine if the savings is worth the disruption it will cause to existing insurance policies.

2. Billing issues: Another key item to keep in mind, when considering reference-based pricing, is the impact on the organization's employees as it relates to balance billing issues. With this new model, employees may be required to cover the difference of medical bills if the cost from the healthcare provider exceeds the amount agreed upon by the employer. The organization will need to provide education on the front end to empower its employees to make informed health care decisions. A reference-based pricing administrator will be helpful to walk through the process and be an ongoing resource to answer questions as they emerge.

3. Pick the right vendor: When it comes to selecting a reference-based pricing administrator, understanding the specifics of what the vendor is providing is key, as each have respective pros and cons in terms of cost savings related in this new model. One may not be as aggressive on Medicare pricing but have less chance of balance billing issues down the line, while another may have better pricing but have hidden fees and a greater likelihood for balance billing issues.

Strategy must come into play here: As an organization, do you want to pay more with less noise and have the ability to make decisions or pay less with more turbulence? Opting for the option that appears the most cost-effective upfront will not necessarily result in accumulating the most cost savings as time goes on.

4. Customer support: How engaged the administrator is also important. Should a balance billing issue arise, is the administrator going to fight on the organization and employee's behalf to get it waived? While reference-based pricing does streamline healthcare, it also adds a level of complexity, so having an administrator that will make the process easier will help with overall employee satisfaction.

Ultimately, the cost savings for reference-based pricing is evident, which is why this model is gaining attention with organizations across the country. However, when considering a move to this new model, employers should go through a thorough vetting process with the organization's insurance broker to determine if the switch is worthwhile.

Dan Jordon is employee benefits managing director at Graham Company.

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4 things to consider before switching to reference-based pricing

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