Most of you have heard me speakabout reference-based pricing by now.  It's no secret toanyone who follows me on professional social media platforms that Iam a fan. While the spotlight on this subject is getting warmer bythe day, the controversial opinions of followers often feel alittle cold. It's not the challenge toward this pricing methodologythat prompted me to write this, but instead the misconception thatit doesn't work or can't work. It does, and it can, in the hands ofa consultant who knows how to align the components to maximize itssuccess.

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So this article is for everyone; the nay-sayers and theheck-yayers. Let's break down the why and the how and dispel someof the most common myths along the way.

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Defense of reference-based pricing comes in all forms; inarguments of excess balance billing, and even legislativebills questioning the future of this method. This type of plandesign is still heavily considered “innovative” and thus, mostadvisors just don't know how to manage the model. And frankly, manyare too stuck in their comfort zone to try to figure it out. But ifyou're a consultant who works for your client, it is yourresponsibility to learn and adapt as the market and environmentchanges. And, if you hesitate to at least take on the knowledge ofthese out-of-the-box solutions, you may be doing an immensedisservice to your clients. We're forming the health carerevolution here; come aboard!

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Let's talk through what reference-based pricing really is.Simply put, it's an alternative way of paying health care claims.Think of how it works traditionally. You go see a provider and theysend a bill over to your insurance carrier with a “billed charge”for the price of services. Figuring out where this billed chargecomes from is about as easy as finding that pot of gold at the endof an Irish rainbow. It's usually a dollar amount many times morethan what would be considered reasonable for the service, andgenerally cannot be itemized in a way that would actually justifythe cost. But don't you worry! That's where your PPO network popsin. See, your carrier has gone out and held the providers feet tothe fire: “If you want us to send you patients, you have toshave the top off your billed charge'.

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A piece of paper is born and claims are then processed and paidbased on a contract between your insurance carrier and your doctor.Perhaps your doctor agreed to take 40 percent off that billedcharge, which sounds pretty impressive if you're a bargain shopper,right? But if you don't know what the starting price is or shouldbe, then what is the actual value of the discount?

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Let's think about this logically for a second. If you need tomake $250 for every office visit you conduct and you've agreed to a40 percent discount with a carrier, what is your starting pricegoing to be? You would actually need to mark it up over 60 percentto leave you with the $250 after the

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discount. But why not mark it up even more? Even something onsale still generates a profit and if it didn't, many of us wouldn'tbe in business at all.

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Reference-based pricing works in reverse. We take the provider'sreported cost and margin for a procedure and we mark it up a littleto give some extra profit and then we pay the claim. For example,if a provider bills $250 for an office visit and Medicare (which isthe most commonly used reference for health care pricing) says thatthe cost for that procedure code is actually a hundred bucks, wemight pay the provider 150 percent of the reported cost, or$150.

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Now, the balance bill argument has some merit here, so let'swalk through that, too. Most consultants balk at the fact thatproviders in this model have a right to balance bill a patient forwhat they didn't get paid, and this is absolutely true. When yourprovider “negotiates” with an insurance carrier on a PPO contract,they must agree to write off the difference between billed and paidwith a promise not to bill the member for anything aside from whattheir plan design holds them responsible for, i.e. deductible andcoinsurance.

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Related: Reference-based pricing reimbursements: When tonegotiate

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How does a provider know what the difference in carrier paymentand member responsibility is? It's not the PPO contract that theysigned! It's the explanation of benefits that gets sent to both themember and the doctor, generated by the insurance company. Why?Because if you're a doctor with a different contract for everycarrier network you participate in, how would you ever keeptrack?

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So yes, balance billing can happen; however, it actually happensin less than 1 percent of cases in a reference-based pricing modelthat is structured fairly for providers. Would you be surprised tolearn that balance billing happens just as often, and evensometimes more frequently, in a PPO arrangement? That protection inthe contract holding the member harmless only applies to in-networkservices, so if one of your members ends up incurring anout-of-network service, a balance bill is born. The difference,though, is a balance bill in the PPO arrangement won't have anysupport or advocacy behind it. Your BUCAH does not care about your out-of-networkliability. This is where the litigation versus negotiation modelscome into play.

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As consultants, we have options when it comes to vendors, and ifyou're part of this health care revolution, I urge you to chooseyour partners thoughtfully. More importantly, be sure they're inalignment with the values you communicate as an advisor. You couldchoose a vendor who reimburses a low percentage of the Medicareallowable on all claims, which is bound to increase your rate ofbalance billing if your doctors and hospitals feel fleeced whenit's time to pay.

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You'll want to seek out a partner that will consistently repriceclaims just a bit higher. We're talking around that 140 percent to150 percent sweet spot. Paying a fair price to a provider willdrive your rate of balance billing way down, which will preventover half of the usual member disruption (the other half comes fromsimply understanding how to navigate a health plan without a PPOnetwork).

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A repricer that doesn't pay a provider an adequate amount forservices will build additional revenue into their fees to cover thedisputes that are more likely to occur as a result of theunderpayment. That's the litigation model. That means that yourclient will pay more in fees to the repricer for the potential of alegal interaction between a facility and a health plan. And,because it is so rare that any of these bills actually goto a true legal dispute, the fees are often a wasted andunnecessary expense to a health plan.

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Most balance bills are settled with the repricer or, to befrank, the provider gives up the good fight and writes off thebalance. Doctors have better things to do, like deliver medicalcare to patients! Most often, and this is important, a repricer whobuilds in defense fees also assesses their fees as a percentage of…something. Most often, a percentage of the claim savingsor, and I cringe to say this, a percentage of the billedcharge.

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Think about that for a moment. Imagine marketing your company asa cost containment strategy against the outrageous cost of healthcare but then taking revenue based on the very same egregiousbilled charge that we're all fighting against as unreasonable.What's good for the goose is good for the gander, then? Can you sayconflict?

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Furthermore, think about that cost impact on a large claim.Let's say there's a million-dollar claim passing through therepricing system and maybe the Medicare allowable for the billedcodes ends up being $200,000. Your repricer might take 10 percentof the billed charge as their fee, so while we could arguethat even at a total of $300,000 you've saved 70 percent, you couldhave saved 80 percent and not paid a hundred grand to have onesingle claim adjudicated. This means that 30 percent of your finalcost went to your vendor. Add this up over time, and the amount youpay the repricer has the potential to outweigh the money yourhealth plan is paying to actual health care providers who aretaking care of your members. We can all come up with cost savingsolutions, but shouldn't they align with our mission to drive downthe overpaying of incentives that contribute to the biggerproblem?

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But hey, we all need to get paid. I'm not suggesting any of uswork for free, but if we expect our providers to bring down theirpricing to what we consider “reasonable,” then isn't it fair tohold our partners, and ourselves, accountable to the samestandards?

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Find the negotiation model. Find the partner that canaggregate their costs into a reasonable per employee per month feeand don't pay fees for services that don't actually surface, likelegal fees. Find a partner who sets their reimbursement amountfairly to begin with and then buffer up to a maximum reimbursementthat the health plan is willing to shell out on a single claim.This gives the vendor an opportunity to settle a claim or balancebill up to the maximum allowed in the plan document at theirdiscretion and drastically reduces the level of member disruption.And I don't want to hear the nay-sayers who will tell me theirhealth plans won't save as much if the reimbursement amount ishigher. Take what you're saving in inflated “fees” with the otherguys and throw that into your overall wins for the year. I promiseyou that a plan structured to pay providers fairly will lower thebalance billing risk while keeping doctors and employees happyand still saves a boat load of money for a self-fundedemployer health plans when pitted against any litigation model.

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While we're here, let's talk briefly about stop loss. Most stoploss carriers will give a better rate for a reference-based plan,but be sure to look for the pitfalls. There are two thingsimportant to note: First, you'll get a better rate from a stop losscarrier if you pitch the litigation model. Why? Well, if you pay120 percent of Medicare on every claim, that's easy to underwriteon a couple of years of prior claims data. However, the negotiationmodel operates within a delta that it a little harder to predict.For example, if you implement a plan that starts with 140 percentof Medicare for all claims, but allows discretion to settle toughclaims at 180 percent if needed, then the numbers

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become a little more variable. However, a good stop loss carriercan still underwrite the risk conservatively by using an amountcloser to the maximum for the first year and continue to assess ateach renewal.

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The second thing to watch for is more important. Reference-basedpricing vendors in the litigation model will sometimes have theirfees (which, remember, are a percentage of the actual claim)covered under the stop loss policy. This is often to justifycovering a fee that is much higher than a PEPM model would be; butanyone with an actuarial heart will agree that this is simply costshifting. The fees still need to be paid, and an advisor who claimsthat the client won't have to pay it because it can go through stoploss perhaps doesn't understand who pays the stop loss premium;spoiler alert: it's the client. And, be aware that those additionalamounts being absorbed by the carrier will have an impact on yourrenewal and the premium increase. Remember, stop loss coverage isunderwritten on claims, and if your fees get dumped in with yourclaims spend, your policy will be underwritten accordingly.

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So, what are the components to implement a truly successfulreference-based plan that will actually slash your client's costsin half? Start with your reference-based pricing partner and makesure they have invested well in a robust member advocacy team. Whenbalance bills occur (and they will), you want a team prepped andready to take the member out of the equation as quickly aspossible. Always, always ask what is in place for membersupport!

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Next, take a look at the last couple of years of claimsexperience — billed and paid. Can you find an average within bothof those categories? This will help you with the temperature ofyour RBP porridge. What is the right percentage of Medicare foryour client in your state? This can be found inboth the client's prior data and with the help of the vendor youchoose to reprice the claims. Keep your reimbursement at adigestible level for providers. We don't want doctors getting paidpoorly for their work. That is not the intention or function ofRBP. Take the time to find the right number for the least amount ofdisruption.

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Also: It's time for transparency in healthcare

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And while we're talking disruption, make your open enrollmentmeetings mandatory for this style of plan. It is imperative thatplan members understand how to navigate in a no-networkenvironment. While we don't expect members to manage their own planentirely, they will need to know what conversations to have at thepoint of service. The most frequent push back from a provider is,“Sorry, we aren't in-network!”

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Doctors are very accustomed to having their wrists tied to a PPOcontract, so billing to a health plan that has no network contractat all is likely going to be a new experience for them. We all needa little comfort for new, big, scary things. Provide it.

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And finally, choose your people wisely! Your third-partyadministrator and your RBP vendor should be good buddies. Theyshould know each other well and integrate their systemsefficiently. They'll likely have overlap in theirofferings, like member advocacy and direct contracting services onboth sides. Utilize both at every opportunity! Review the feestructures for everyone involved. Know where the money is going andwhy. Is your TPA throwing in an extra fee here and there for areference-based plan model? If so, what's it for?

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Keep in mind that there's still work to be done. Reference-basedpricing cannot fix the health care system, because the issue is notso narrow in nature. While we all agree the cost of

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health care has spiraled out of control, we still need to tacklethe quality of care issue, which is an entirely differentsubject altogether. Cost and quality go hand in hand and cannegatively contribute to one another in an unmanaged environment.Be aware that the art of reference-based pricing only touches thefinances of a health plan and not always the health outcomes of themembers enrolled in the plan. However, with the barrier of anetwork removed, we can embark on strategies like directcontracting to really start steering the quality of care in theright direction alongside the finances.

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In order to find the magic pill that incorporates both, you'llhave to partner your reference-based pricing solution withstrategies that supports increased quality, like direct primarycare or redirection of care into a proven, data driven, higherquality environment. If you're lucky, you might come across arepricer that has the ability to do both.

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