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An Extensive Look at the Ins and Outs of Reference-Based Pricing

Reference-based pricing can help employers attract the right talent, save time and money, and mitigate risk. Reference-based pricing can partially replace — or even bolster — a traditional network health plan. Let’s look at how this approach works and why it’s so valuable.

Stethoscope on a billing statement

There’s a lack of price transparency in the U.S. regarding the cost of medical services. This can make healthcare plan options overwhelming for consumers and employers. You want the best for your team’s health and well-being — including their financial wellness.

It’s a given that employers want healthy and stress-free staff members, but it’s less obvious how to provide the best option for employees when nobody is sure what costs might be coming down the road. A clear understanding of benefits and costs is essential for everyone’s peace of mind.

Most of us are familiar with the way medical billing works in the U.S. today: You visit a specialist for a scheduled procedure or go to the emergency room for treatment. While there, you pay your copay and/or a percentage of the estimated cost for services. Regardless of whether you have traditional health insurance, you likely have no idea how much you’ll end up paying for care until days or weeks later, once you receive a final bill after your insurer has negotiated and paid its portion. And as an employer, you may face additional costs if your contract is exceeded during a plan year.

Understandably, this can lead to a lot of stress and frustration for those left playing a guessing game with their finances. Below is a quick overview of some relevant information regarding employee financial well-being. This is where reference-based pricing (RBP) can come in. Read on to learn how this approach to health insurance can make life easier for you and your team.

Employee Finances

What Is Reference-Based Pricing in Healthcare?

Reference-based pricing is an employer-sponsored healthcare option that allows for direct payment to medical providers at a percentage of an established benchmark rate. In many cases, employers can set rates by working directly with physicians, laboratories, and hospitals. And these rates aren’t subject to the fluctuations of price negotiation or hidden costs.

Let’s use medical testing as an example. A standard blood test, like a metabolic panel, can vary in cost depending on location and provider from less than $20 to close to several hundred dollars for the same test. There are a lot of factors that go into this phenomenon, but let’s focus on how RPB can remove some of this uncertainty in billing.

Reference-based rates can be set by examining the local market and looking at established Medicare pricing for various services. These rates might fall somewhere between 120% and 300% of Medicare rates for a given service in your area.

You might begin to explore reference-based pricing health insurance by researching the rates that multiple labs or hospitals charge for a given procedure — we can return to our metabolic panel example — in your area. You could also look into the percentages of these rates that Medicare and health insurers typically pay. Then you could use this information as a baseline to negotiate a rate that falls far below the high end of this scale but high enough that it satisfies the provider’s needs: Perhaps a $50 flat rate for every standard metabolic panel at providers in your plan’s contract.

How Does Reference-Based Pricing Work?

Reference-based pricing can help employers, consumers, and providers contain skyrocketing medical costs while making information about healthcare rates more transparent for everyone involved. Many employers opt to contract with third-party administrators to handle the small details because the implementation and maintenance of a reference-based pricing plan can be complex and time-consuming.

In effect, this puts control of pricing in the hands of employers and providers rather than leaving everything up to traditional insurance carriers. And with reference-based pricing health insurance, you won’t be hit with unexpected extra costs if your team’s medical needs suddenly increase.

These plans are quite effective at containing costs for employers and members alike, helping everyone from the good people at your local clinic to Sandra in accounting breathe a little bit easier. The expectations for pricing are clear and set ahead of time, so there aren’t nearly as many surprises.

It’s important to remember that reference-based pricing plans are only one part of an employer’s overall healthcare options, and this approach isn’t meant to replace traditional health coverage entirely. You might consider combining this option with other employer-funded or third-party services based on your coverage needs; you could even choose RBP as an option to fill the gaps in your traditional insurance plan.

For instance, a benefit like Paytient can take some of the stress out of those times when your team members are on the hook for large medical bills. Paytient empowers our members to meet a wide array of healthcare needs — including everything from medical tests and prescription medications to dental check-ups — without having to worry about any interest or fees.

Why Is Reference-Based Pricing Important?

RBP can seem complex and difficult to establish — especially at first — but it is a strong option that helps employers overcome some of the roadblocks between their team and receiving great medical care at an affordable rate.

Network-based plans are a model in which carriers contract with providers and negotiate significant discounts on procedures. After the discount is negotiated, the plan and the participant both pay a portion of the costs. The participant’s share of responsibility generally increases when they receive care from out-of-network providers.

The practice of balance billing, or surprise billing, can increase a participant’s financial vulnerability. RBP options and payment solutions — like those offered by Paytient — can help fill the gaps in some unpaid claims.

With network-based health coverage, you don’t always know what you’re getting. You probably don’t have access to all of the pricing information from providers, and you can’t easily access the rates your plan might negotiate with in- or out-of-network providers when your employees need care. There can be some hidden out-of-pocket costs, making it hard to predict what your team members might have to pay in the aftermath of a catastrophic event.

Reference-based pricing health insurance provides you with clarity when it comes to costs and payments. Everyone can rest a little bit easier because you and your employees will know what to expect in terms of procedures and providers in your area. You can tailor your options to ensure your team is protected from the unexpected stress of surprise billing and the cost of catastrophic medical events.

When an employee faces a hefty out-of-pocket expense, especially if it’s unexpected, it may increase the likelihood of bad debt. The chronic problems caused by bad debt in hospital systems create stress for medical providers, who frequently struggle to recoup costs after providing care. In turn, this can hamper their ability to serve their communities. Here are a few quick facts about America's bad medical debt problem.

Providers appreciate RBP because they know to expect a set rate for certain procedures. They can spend less time negotiating payments and collecting debt, which leaves more time for keeping the people they serve healthy and happy. Paytient can help, too.

We are an employee health payment platform that employers, health plans, or TPAs incorporate into their benefits offerings. Paytient empowers employees to pay out-of-pocket medical, dental, pharmacy, vision, or even veterinary bills over time, without any interest or fees. Providers are paid today, employees can better access and afford care, and employers can increase participation in lower-cost health plan designs, including high-deductible health plans.

Reference-based pricing strategies are a great way to provide stability and security for your company, your team, and local medical providers. And when there’s a way to keep the constantly rising costs of healthcare in check, everyone wins.

How You Can Implement Reference-Based Pricing

First, you’ll probably want to identify and work with a third-party administrator or vendor to keep things easy for you — and well-crafted for your team. The vendor can help negotiate rates that work for you while making sense in your local healthcare market. Once this is done, it's time to explain reference-based pricing to your team.

You can start that process by sharing information about this new approach with your team. Recognize that reference-based pricing is likely a new concept for them, so you’ll want to take whatever time is necessary to explain how the model works, how it benefits them, and how they can use it to receive the best possible care at the best possible value. You’ll also want to designate a point person to answer more complicated questions that come up during the year.

When an employee seeks medical care through the plan, the third-party administrator you’ve partnered with will pay the provider based on the price established in your contract — no need to negotiate rates on the fly like traditional insurance companies do. If the provider needs to recoup costs beyond this rate, they can then bill the patient directly.

Alternatively, your administrator might negotiate a spectrum of options for you that includes full coverage or a hybrid approach for pricing. The options all depend on the needs of your team, the size of your company, and your local healthcare marketplace.

Remember that no network or employer-funded option is entirely perfect as a standalone plan. You’ll want to do plenty of research, work with a reputable vendor, and tailor your company’s healthcare options to ensure all gaps are covered and your team continues to thrive.

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