The RAND Corporation, an independent think tank, found in 2019 that prices paid to hospitals by private health plans averaged 241 percent of what Medicare would have paid. This reinforces the buyer beware nature of medical markets as a younger, healthier population is paying on average 140%, more than those over 65 with co-morbid conditions. Based on these findings, researchers suggested employers design coverage using "contracts based on a multiple of Medicare or other prospective case rates."

According to David Massey, Senior Vice President at Brown & Brown, "employers benefit options are limited; they can't continue to absorb the increasing cost of benefits, passing costs on to their employees has run its course, paring down benefits is actively being considered or do they stop offering health benefits all together?" Reference-based pricing (RBP), once considered a non-traditional option, is seriously being entertained given the economic downturn accompanied by declining revenues and profits.

Reference-based pricing is a market disruptor. It is a viable alternative to carrier-sponsored health plans where providers are paid on a Medicare Plus basis. For the first time, transparency allows consumers to price medical services prior to care being rendered. It also introduces provider accountability. Patients can access quality metrics and performance outcomes before scheduling appointments. This is in sharp contrast to traditional health plans where patients are billed after care is rendered and required to pay as presented. Employers are motivated to consider RBP plan alternatives since carrier plan assurances, over several decades have not contained cost nor managed care.

Using a cost-up pricing approach, RBP optimizes provider payments for medical services based on publicly available cost, pricing and quality data. It establishes fair pricing for medical services by geography to ensure equitable provider payments by market. In stark contrast to PPO health plans. RBP controls cost while managing medical inflation because it is tied to Medicare's medical trend not arbitrary pricing. Critically important for RBP plans is enhanced patient/member satisfaction and improved outcomes as medical care is based on value and provider performance.

While more employers are becoming aware of RBP plan options, adoption remains limited. The jumbo group market are the early adopters with companies like Wal Mart, Boeing, Lowes etc. using it to control benefit costs, one of their top expenses. More recently, Haven, a venture of Amazon, JPMorgan Chase & Co and Berkshire Hathaway, representing 1.2 million lives, embarked to improve member satisfaction and reduce health cost using transparency and technology.

The mid-market can be characterized as bookends: on the one hand, early RBP adopters had their backs against the wall and their choice was to adopt RBP or cancel benefits; at the other end of the spectrum were the thought leaders guided by erudite brokers and consultants. The small group market and the segment that needs to control cost the most have implemented RBP thru TPAs, captives and pooling arrangements. Plans across the group spectrum generally realize 20% savings compared to standard health plans.

A study in the February issue of the Journal of Managed Care found that, while some employers are using RBP benefit designs, there is broad awareness of its potential for delivering savings. The Harvard University and Boston's Beth Israel Deaconess Medical Center researchers found that employers had concerns about implementing RBP designs. These included plan complexity, fear of catastrophic out-of-pocket costs and worries that RBP could hurt employee recruitment.

Member balance billing and collections is one of the key concerns employers have with RBP. While it generally accounts for less than 5% of the claim's transactions, it is widely viewed as a key impediment by HR whose resources are already taxed. There are a host of remediation strategies for balance billing for RBP plans. Sophisticated buyers can reduce transactional friction to less than 2%. State laws on surprise billings and cost and value correlations are passing regulations to reduce the incidence of balance billing.

Legal precedents imposed by the courts are also requiring that medical billing reflect the reasonable cost and value of medical services. In Children's Hospital Central California v. Blue Cross of California, the Fifth District Court of Appeals ruled that California hospitals can no longer expect to get reimbursement from health plans in amounts well in excess of the actual value of services provided to plan members. Payments should reflect the "reasonable value" of services not the highest prices in hospital charge masters.

"Employers balance billing concerns are real and should not be discounted. There are a host of balance bill mitigation tactics to reduce the frequency and plan noise. Provider pushback also needs to be counterbalanced with the plans mandate to preserve plan assets. Every day we see medical bills that are anywhere from three to fifteen times the Medicare price. Do you sacrifice the plan's financials performance for a marginal volume of balance bills? The reality is traditional health plans also encounter balance bills through non-participating providers at PPO contracted facilities," says Ryan Day, President of HST, an RBP service provider.

Recalibrating the benefits procurement process, while focusing on value, is not a casual undertaking. Employers' concerns regarding plan complexity are legitimate. The key to addressing the challenges of moving to Medicare Plus provider reimbursements are brokers and consultants (B&C) that are versed in RBP. Shifting from a PPO trust me you have the best discounts approach to cost up accountable care are significant changes that must be planned. Employee expectations must be managed, and ongoing plan communications is essential. The quarterback (i.e. B&C facilitating the transition) is pivotal to ensuring execution, ongoing plan management and financial performance including stop-loss pricing and provisions.

Payors also expressed their concerns that absent provider contracts, members may not be seen by providers. Contracts need to be negotiated with physician practices and hospitals need to accept RBP Medicare Plus payments for this to work. Once again, these concerns can be addressed with a comprehensive RBP strategy. Provider contracts provide a false sense of security. The lack of pushback should set off alarms about overpayments benefiting providers and carrier health plans, at the expense of employers funding these arrangements.

While RBP has historically focused on medical services, drug cost is the fastest-growing benefits expense and another area RBP plans can mitigate. An August 2017 study in the New England Journal of Medicine looked at The RETA Trust, a national association that purchases health care for employees at 55 Catholic organizations. When the trust adopted an Rx RBP program for prescription drugs in which payment was limited to the price of the least-costly drug in each therapeutic category, it saved 12.2% on drug spending after the first year and 18.7% during the second year.

"Plans have been looking at alternatives due to ever-increasing benefits cost. Recent events will accelerate the search for options. Employers are willing to explore possibilities that were not previously palatable. Tough decisions will have to be made regardless of a firm's financial conditions. It is trade-off between benefits and jobs, Budgeting for benefits with high predictability will be mission critical as will sustainable plan designs. Reference pricing will get a second look due to cost reductions and plan noise tolerances will increase as financial flexibility to changing market conditions will overtake employee retention and recruitment,", says Brian Ball, National Vice President of Employee Benefit Strategy & Solutions, USI Chicago.

The dysfunctional health care market is broken! Prices are only increasing instead of following the natural ebbs and flows of functioning markets. A few dominant health plan oligopolies control most of the market and account for roughly 30-35% of each dollar spent on health care yet they do not provide medical care. Reference pricing is a market alternative to Medicare for All. RBP transparency and accountability will help rationalize the marketplace for benefits. The transition from PPOs to RBP will be challenging as is the case with any disruptive technologies. However, results will be efficient and sustainable markets and empowered consumers, that are not financially devastated by medical expenses.

Edward Day is CEO of HST. Since 2009, HST has been at the forefront of delivering value-based payments that reduce health care costs while establishing sustainable benefit plans. 

Read more: 

• Hospital pricing: A conversation starter for brokers
• Reference-based pricing in a COVID-19 world
• Reference-based pricing: 4 factors to consider