Throw the increasing use of telemedicine into the mix, and it becomes clear that estimating this mid-year will be difficult, and we will need to wait for the numbers to come out. But looming even larger is the economic downturn resulting from the pandemic, which is affecting many employers far more than the COVID-19 virus.

COVID-19 is not the biggest factor

U.S. health care costs have been increasing for decades due to a lack of pricing transparency and provider accountability. The U.S. Department of Labor estimates that private employers spend $2.60 for health care for every $18.05 in wages, almost 15% of median wages. Even with furloughs and layoffs decreasing employee numbers, the portion of revenue going to health care remains a challenge to running a business profitably. Now, with a recession on the horizon and revenues down, employers and self-insured organizations are reassessing their benefit plans and looking to reduce the cost and improve the purchasing process for health care services.

Even if COVID-19 does not affect an employer's health benefits expense directly the recession accentuates the need to gain control of health care expenses and heightens the demand for innovative approaches to cost containment. Employers should seek out benefit providers that offer clear solutions for cost containment at a fixed cost making health care expenses predictable.

Health care cost containment for employers

Cutting through the broken U.S. health care system and introducing the ability for employees to compare providers and care options, while adding transparency to costs and expenses, is a critical step in reducing the cost overall. In the absence of price transparency, negotiating rates directly with providers and using a savvy service provider who is able to negotiate effectively and provide a platform that delivers much-needed data to employees is a necessary step in reducing health care expenses overall.

Reference-based pricing (RBP) is a concept that was introduced to establish fair and reasonable rates for health care provider payments. Self-funded employers have the ability to create a program to meet their specific needs instead of taking the 'off-the-shelf' options that fully insured and traditional PPOs typically provide. Many self-funded employer health plans have elected to adopt an RBP approach and strategy to their self-funded health plan.

RBP has "flipped the script" on the traditional approach of the PPO model of arbitrary billed charges with a discount, and instead leverages provider cost data from sources like Medicare to establish fair and reasonable payments based on a 'cost-plus' model. The results are a 'win-win-win' for all participants in the medical service transaction; significant savings and predictable costs for the employer, employees, members and patients are able to explore and shop for the most appropriate medical provider bases on cost and quality before services are provided, and providers receive a reasonable and often generous profit margin for services rendered.

Starting with provider costs is the rational approach for payment of medical care; a Kaiser Family Foundation review of studies on the topic found that private insurers on average pay nearly double Medicare rates for hospital services (199%) and often 2.5 times as much (249%) for the same services. RBP industry leader HST often sees traditional PPO payments that range anywhere from two to fifteen times cost depending on where you are in the US.

Organizations needed a way to combine the RBP strategy with quality data to allow for provider selection to be based on not just cost, but quality of care as well. Adding the quality dimension is an important improvement of RBP called value-based payments (VBP). VBP is the next generation of this strategy designed to help inform health care buyers to make good provider decisions.

How RBP and VBP work

Reference-based pricing (RBP) was a market disruptor, value-based payments (VBP) is a market innovator. RBP and VBP have become not just a viable alternative to health plans, but for many self-funded plans, the preferred approach. Transparency has been a topic discussed in the health care and benefits industry for years. The VBP approach really allows both employers and employees to access cost and quality data, often for the first time.

Not all medical procedures are elective, but for those that are, employees and patients can shop in a meaningful way to make decisions most appropriate for them. For procedures like emergency visits where "shopping" is not possible, VBP plans still hold providers accountable based on costs.

This is in sharp contrast to traditional health plans where patients have no idea what the cost or quality of the provider is before, during and after services are rendered. Most patients receive a bill after care is rendered and are required to pay as presented. This makes no sense and is unlike any other purchase we make in the rest of our lives.

Is a VBP strategy the right approach for your business?

Despite more employers becoming aware of this option, adoption of RBP and VBP plans had been slow but has gained traction in the past two years. Early adopters include jumbo group market participants like Walmart, Boeing and Lowes that are using it effectively to control benefit costs. More recently, Haven, a joint venture of Amazon, JPMorgan Chase & Co and Berkshire Hathaway that represents 1.2 million lives, embarked on a similar partnership that aims to improve member satisfaction and reduce health cost with tools that add transparency and more data for patients to make better decisions.

Even amidst the uncertainty of evolving diseases like COVID-19, VBP plans can help employers of all sizes make health care expenses a predictable cost, instead of the variable and growing costs they have been historically. Further and more importantly, VBP plans can save self-funded employers between 20% and 30%. In an economic environment where many companies have revenue challenges, this can be a critical lifeline.

Most employers were troubled by rising health care expenses prior to the advent of COVID-19. But amidst today's economic climate, these expenses are of even more concern, and employers need to find new tools to manage expenses. Employers clearly cannot continue to absorb rising costs, and employee contributions are maxed out in most cases. VBP based programs can ensure employees have access to data that allows them to select high quality, lower-cost services resulting in an effective strategy for controlling health care expenses. Putting in place an approach to keep costs stable in the long term is a benefit to employers, employees and health care providers.

Ryan Day is president of HST and a seasoned executive with expertise in developing innovative technology solutions for both financial services and health care markets. He started his career with a boutique Wall Street firm specializing in investments and employee benefits for nonprofit and hospital systems. Ryan oversees operations and product development, bringing to HST an extensive background in finance, technology and strategy.

Read more: 

• How to successfully implement RBP: Litigation or negotiation?
• Taking a fresh look at value-based insurance design
• Why health care should not 'return to normal' post COVID