According to the Agency forHealthcare Research and Quality, the average annual family premiumfor a small employer health plan (under 100 lives) is more than$17,000. Facing prices like these, more employers are looking forinnovative ways — such as reference-based pricing — to reducehealth benefit plan expenses.

For those who haven't heard of reference-based pricing, it is apayment methodology whereby providers are paid for coveredtreatments and services using a "reasonable fee" based on areference point, such as a Medicare fee schedule. And, it's aconcept that's gaining traction across the U.S.

Related: How to enable reference-based pricing withoutfreaking out clients and employees

Given its increasing popularity, and the fact that it can saveyour smaller-sized clients valuable bottom-line health caredollars, let's take a look at what you need to know aboutreference-based pricing before suggesting this payment methodologyto clients:

Pricing Plans with reference-based pricing areable to provide coverage with much leaner margins than plans withan affiliated network (PPO), and are good alternatives to an HMO.That means they are more affordable for businesses to provide. And,since the health plan is typically using a Medicare fee schedule asa reference point, many doctors and hospitals will accept this typeof reimbursement.  For example, a benefit plan may choose150 percent of Medicare fees to calculate amounts payable forcovered services under the plan.

Flexibility Unlike HMO plans, which havesmaller networks, plans that use reference-based pricing do notrestrict the consumers' ability to choose between physicians andspecialists for most services. Each patient is given a largerchoice and the opportunity to find a health care provider who suitstheir unique needs.

Support If you're interested in learning moreabout reference-based pricing options, there are plenty ofresources available. Seek out carriers/TPAs who provide proactivesupport in finding providers that accept this type of reimbursementor help identify potential issues with acceptance. For instance,some providers may say, "we don't accept plans without a network,"or "your plan is not on our list of acceptable networks, so wewon't see you unless you pay upfront for your services." The rightcarrier/TPA will work to provide solutions to these common issuesand questions. 

Balance bill protection When providers' billsaren't paid in full by the plan, or when they are not subject to anetwork contracted reimbursement rate, the provider may pass thebalance of the provider bill directly to the patient. This is knownas a balance bill. Through balance bill protection, third-partyvendors will negotiate to reduce costs when they exceed establishedreasonable fees. Plans that provide balance bill protection mayhave the power of a third-party vendor who helps to negotiate a reimbursement payment withproviders/hospitals for covered services exceeding the amountinitially paid by the plan.

However, be cautious of plan designs that bundle balance billprotection with reference-based pricing under a qualified highdeductible health plan (QHDHP) used with a health savings account(HSA), as these plan designs can negatively impact both employersand employees. Employees may be exposed to excise taxes whilesimultaneously becoming disqualified from tax deductions oncontributions made to the HSA during the period the employee wasnot covered under a QHDHP. And if your client, the employer,contributes to the employee's HSA while the employee was notcovered under a QHDHP, they may be subject to penalties under taxwithholding laws.

When approached strategically, reference-based pricing can be anexcellent, low-cost and flexible way for your smaller clients toprovide health coverage to their employees. Seek out the rightresources and partners and talk with your clients about howreference-based pricing could benefit them. Doing so can save yourclient and their employees quite a bit of money eachyear. 

Dale Kumpula, regional sales manager with Trustmark's SmallBusiness Benefits line of business in Lake Forest, IL, has morethan 21 years of group health insurance experience, including thesmall, mid- and large-size group markets.