One of the most strategic decisions an employer will make is choosing an insurance plan for its employees, which is challenging due to the range of options available to them. An initial decision can be choosing between a fully insured or self-insured health plan.

Fully insured plans are more traditional. Under this arrangement, the employer will pay a premium to an insurance carrier for a pre-determined health plan. It is found that these premiums rise annually by significant percentages despite whether or not the business has had a high level of claims. It is common for employers to see a minimum of 20% on their annual premium increase to their current health plan.

A self-insured plan, also known as a self-funded health plan, allows employers to operate their own health plan whereby they are responsible for the financial risk. It allows for employers to have more control over their finances and adjust the health plan benefits as they desire. Reference based pricing (RBP) is one of the methods found within a self-insured plan.

What is reference based pricing (RBP)?

RBP is a form of cost containment that acts to stabilise and/or reduce the cost of claims within an employer health plan. The strategy uses parameters for pricing, such as Medicare, to determine a reasonable and customary cost for the services an employee has received.

How does it work?

Preferred provider organisation (PPO) networks are infamous for discounts and prices that are hidden, unknown and inconsistent.

As Medicare rates are fair, well-established, reliable and commonly accepted by most providers, RBP uses Medicare to establish a reference point for pricing. Using this reference point, RBP can negotiate directly with providers or physicians to pay a percentage of the Medicare rate. These percentages usually range between 120%-170% percent.

If an employer is successful in capping the costs at an established percentage of Medicare, then it will save considerable costs. In comparison, PPO plans roughly bill at 350% of Medicare rates.

Who does RBP benefit?

Alongside the benefit of significantly reducing costs, RBP offers additional advantages to the employer, employees and providers or physicians.

The employer can control rising healthcare costs from physicians and/or facilities. Those costs will become clear and concise. Driving down employee healthcare costs allows for businesses to save money and expand with ease.

Employees and health plan members will not be restricted to a provider network and will have free reign over which medical facilities they wish to visit.

Physicians and facilities benefit from RBP as they will receive higher percentages of the payments compared to traditional methods. Often third-party healthcare providers reimburse physicians and facilities at a lower rate than Medicare.

What are the risks of RBP?

Like all strategies, there are risks involved.

For example, not all healthcare providers accept RBP, so it is important for employers to be transparent with their employees, informing them that this may be the case. Where hospitals pushback or deny the strategy, employees may find themselves with an unexpected or surprise bill and/or be liable for costs that are not covered under their healthcare plan.

Employees, wherever possible, need to ensure that their chosen healthcare providers and physicians will accept the employer’s RBP plan.

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