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

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

Related: How to enable reference-based pricing without freaking out clients and employees

Given its increasing popularity, and the fact that it can save your smaller-sized clients valuable bottom-line health care dollars, let's take a look at what you need to know about reference-based pricing before suggesting this payment methodology to clients:

Pricing Plans with reference-based pricing are able to provide coverage with much leaner margins than plans with an 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 as a reference point, many doctors and hospitals will accept this type of reimbursement.  For example, a benefit plan may choose 150 percent of Medicare fees to calculate amounts payable for covered services under the plan.

Flexibility Unlike HMO plans, which have smaller networks, plans that use reference-based pricing do not restrict the consumers' ability to choose between physicians and specialists for most services. Each patient is given a larger choice and the opportunity to find a health care provider who suits their unique needs.

Support If you're interested in learning more about reference-based pricing options, there are plenty of resources available. Seek out carriers/TPAs who provide proactive support in finding providers that accept this type of reimbursement or 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 we won't see you unless you pay upfront for your services." The right carrier/TPA will work to provide solutions to these common issues and questions. 

Balance bill protection When providers' bills aren't paid in full by the plan, or when they are not subject to a network contracted reimbursement rate, the provider may pass the balance of the provider bill directly to the patient. This is known as a balance bill. Through balance bill protection, third-party vendors will negotiate to reduce costs when they exceed established reasonable fees. Plans that provide balance bill protection may have the power of a third-party vendor who helps to negotiate a reimbursement payment with providers/hospitals for covered services exceeding the amount initially paid by the plan.

However, be cautious of plan designs that bundle balance bill protection with reference-based pricing under a qualified high deductible health plan (QHDHP) used with a health savings account (HSA), as these plan designs can negatively impact both employers and employees. Employees may be exposed to excise taxes while simultaneously becoming disqualified from tax deductions on contributions made to the HSA during the period the employee was not covered under a QHDHP. And if your client, the employer, contributes to the employee's HSA while the employee was not covered under a QHDHP, they may be subject to penalties under tax withholding laws.

When approached strategically, reference-based pricing can be an excellent, low-cost and flexible way for your smaller clients to provide health coverage to their employees. Seek out the right resources and partners and talk with your clients about how reference-based pricing could benefit them. Doing so can save your client and their employees quite a bit of money each year. 

Dale Kumpula, regional sales manager with Trustmark's Small Business Benefits line of business in Lake Forest, IL, has more than 21 years of group health insurance experience, including the small, mid- and large-size group markets.